Sunil Nagaraj of Ubiquity Ventures on the journey of a solo-GP, The Importance of Authenticity, and Navigating Hype Cycles

0:00Welcome back to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Kaji, and on this week's show, I'm thrilled to be joined by Sunil Nagaraj, founder of Ubiquiti Ventures. Sunil started Ubiquiti in 2017 to focus on backing technical founders at the pre-seed and seed stages around a thesis he calls nerdy and early. Before starting Ubiquiti, Sunil spent just over six years at Bessemer Venture Partners, and before that was a founder of a startup company, with so many solo GP firms having emerged over the last decade, it was great to have Sunil take us through his lens of what it means to be a solo GP and how he has built and grown ubiquity over the last six and a half years.

0:42This was a very insightful conversation, and I really think you'll enjoy it. So let's get right into it. I'm absolutely thrilled to have this week's show sponsored by Frank Remmerman, who serve as home for over 500 VC firms for their tax and audit needs. They're also one of the largest providers of services for the emerging manager community. And as somebody that's worked with them for over 10 years, I can attest to the early commitment they made to MicroVC when it was first getting started. If you're a venture firm in the market for audit and tax, be sure to give them a call. Samir Kaji is the CEO and co-founder of Allocate.

1:18Allocate and Venture Unlocked are independent of each other. Any statements or references made by Samir or his guests regarding third parties, investments, or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or Allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties, or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Sunil, it's so great to see you and thanks for being on the show.

1:53Hi, Samir. Happy to be here. There's so much we have to unpack during this conversation, but I want to go back a little bit. You've had so many experiences in management consulting. You've been an entrepreneur leading a company. You went into venture at a traditional organization, then started your own firm. Talk a little bit about your journey into tech and venture, and then what led up to starting Ubiquity almost six years ago. As many folks who know me will say, I'm a nerd through and through, and that's been true since I was a little kid. My dad was an engineer. I've always been tinkering with technology, coding, fiddling with gadgets, and that continues through to today.

2:29You touched on a few pieces of the puzzle. Going to college, I studied computer science, started the computer science club, loved bringing technical folks together, loved learning out of the newest technologies. And then I did good management consulting. I went to Bain & Company, which is a bit of a left turn. I'll tell you, I did that because I had interned at Microsoft one summer. And somewhere along the way of being in a technical internship at Microsoft, I heard from one of the leaders, Steve Sanofsky. He was talking about how he and Bill Gates had split the company into four P &Ls. And I remember being just stupefied by what the heck was a P &L?

3:02How was somebody technical and important using a word I had that was way over my head? When I went back to school, I immediately accepted an offer to go to Bain & Company Management Consulting. And beefed up on the business skills, beefed up on communication and framing. That was useful. But honestly, nights and weekends, I was coding. I was working on a bunch of different technical projects. This goes back to 2004, 2005, and tried to stay sharp along the way. I went to business school at Harvard. And even there, I was president of the Tech Club, ran the Tech Conference. So just immersing myself in tech and people has always been a big part of the puzzle.

3:33Later, you'll see with Ubiquiti, that's sort of the formula to success on the new venture fund. But back to business school, I moved out in 2009 to the Bay Area. I started an online dating company, as you referenced, being an entrepreneur for a little bit. I wanted to use tech to understand what makes people tick. So I did that for two years, had some backing from Trinity Ventures to bring to market this idea that what you do is more important than what you say. So could you build a dating site that triangulates on who Samir really is? If I had access with your permission to your Facebook, Netflix, Twitter, I could build a picture of who you really are and use machine learning to find you matches.

4:11So did that for two years. Lots of zigs and zags. We can go into that if we want to. But suffice it to say, running a seed stage ML company got me a lot of great experiences and helps me understand my founders that I back today. About half of what I do is back seed stage ML founders. That was ultimately unsuccessful. So failed with Triangulate also helps me understand another important part of the entrepreneurial journey. And it was at that point that I joined Bessemer, the big VC firm in 2011. So you were at Bessemer for, I believe, a little over six years and then decided to branch off to start Ubiquity.

4:41Tell us a little bit about what inspired the shift to running your own firm and also going down the solo route, because I think about all the things up to that point, whether it be at Bain, whether it be at Bessemer, you always had colleagues and partners to work with. why did you decide to go down the solo path? The first part of your question, why would I decide to leave Bessemer? I think it's a similar answer to anyone that starts anything. There's three components. Number one is you actually have learned how to do the job, right? You actually know what you're doing. This could apply to a lemonade stand.

5:12It can apply to starting a venture capital firm, but you've learned how to do the practice. Number two, you have external credibility. You can convince other people you know how to do it. Now, those two sound like that would be sufficient, but with every single person I know that started anything, There's always a third component. And that is a straw that breaks the camel's back. One day you say, I'm sick of this. I'm going to break off. There needs to be some catalyzing moment. For me at Bessemer, I had been working with David Cowan and other senior partners there, had learned the craft, had learned the practice over six years.

5:41I had external credibility because some of my investments had started to do really well. And then at some point I said, you know what? I want to do this a different way. I want to do it my way, which gets to the second part of your question. You know, when I think about Ubiquiti, I think about bringing along the best of Bessemer, but leaving behind the rest. And for me, the shift was to continue being nerdy and in-depth. At Bessemer, we talk about roadmaps. At Ubiquiti, I have exactly one roadmap. But immersing myself in a sector, getting to know everyone and everything about the sector. And that's true for Bessemer with regard to the specific roadmaps.

6:12The parts that I left behind were that Bessemer was multi-office, multi-sector, multi-stage, multi-billion, multi-multi-multi. And I believe that being a jack of all trades is a losing proposition. I think jack of all trades, master of none. And for me and the way that I wanted to perform venture capital and the way I think you can do it most lucratively for my investors, generate the most return, is to go super deep in one area. So one sector, software beyond the screen, we may talk about that in the future here. One stage, right at the beginnings of companies, zero to 12 month old, brand new companies.

6:45And then one person really focused and everything in the Ubiquiti ecosystem goes through one brain. So the number of synergies and learnings and lessons and the speed and agility is really unparalleled compared to a large firm. So there are tradeoffs, big firm, small firm, but I've gone completely the other end with regard to the swinging pendulum. Well, let's talk a little bit about the solo side for a second, because we have seen so many firms over the last decade start off as solo. And then over time, they add partners in some cases as they scale. You've kept to being a solo partnership. And now, you know, you have three funds under your belt.

7:18Tell us some of those trade-offs between working in a partnership and being solo, both from the standpoint of advantages to be able to make decisions more nimbly. That's the one that really stands out to me. But maybe some of the considerations for anyone that's thinking about starting either a career in venture, joining a firm, starting their own. What are some of the things that are challenges of being a solo GP? with regard to starting a new firm you often don't get the opportunity to start a new firm with the big bank for almost anyone starting something new you have to start small and i'm leaving that word vague on purpose you start small and if you want to you grow big over time so what that often means if somebody was doing series b investing at a large firm the nature of raising a new fund is you might have to start with a small fund doing seed not because you want to or because you're good at it because that's just a smaller amount of capital and your investors may be dipping their toe in with you to get going.

8:15So that person who did Series A or Series B who starts a new fund will have to grow into a new fund of their own doing Series A and B, but they start with seed. That is a respectable model. It makes sense. That's not at all what I was doing. Within Bessemer, I was focused on seed. I was the most active seed investor at Bessemer. And I knew when I left, I wanted to start a nimble, nerdy and early seed firm. I call Ubiquity and nerdy and early venture capital firm. And I mean every word of that. What that means, contrary to many, many comments I get on a regular basis, I'm not just starting a fund to eventually grow bigger or eventually become an institution or eventually get there one day.

8:54I'm doing exactly what I want to do right now. I apologize if that sounds sanctimonious, but like on day one, I was doing nerdy and early investing out of a$30 million fund. And that's what I want to continue to do. So my intention was never to grow a team, hire assistants, have a fancy office, build an institution, build an asset manager. I wanted to do exactly this. So the funny part of these two paths here is they both start the same. The first year or two or first fund looked like a small, relatively small fund. But I wanted to stay small. For me, it's very important to be able to invest a million dollars a day of incorporation.

9:29That's about half of what I do. And I love that model and I love that stage. And if I grew too big on dollars or grew too big on team, that would actually get in the way of that. One of the things that often comes up, and I think some of this has gone away over the years, is LPs being, in some ways, a little bit circumspect of backing a solo GP, historically at least. And I think some of that changed as people saw some great solo GPs not only grow and scale themselves, but also produce incredible returns, you know, the upper core teletapid returns. But maybe you can go back to that first fundraise back in 2017.

10:08You were in a unique spot leaving a branded firm that had been known, that had done extraordinarily well. So that gave you a little bit of a tailwind. But tell us a little bit about that fundraise. How did it go? Were there things that surprised you along the way? Summer of 2017, I had been at Bessemer for a little over six years, made the decision, as we talked about with those criteria of kind of knowing what I'm doing, thinking I can convince others and then having a straw to break the camel's back, you know, a kick in the pants. And I decided to launch Ubiquity. I had never in my life met an LP before.

10:41I didn't know how LPs looked or talked. Did they wear sandals or suits? I had no clue. But just like every entrepreneur, I sort of jumped off the cliff and decided to build the airplane on the way down and happy to share that the airplane was constructed. But that first fund took somewhere in the order of 18 to 24 months to raise. It was very tricky to raise this. And this is with a top venture capital track record with the support of my partners from Bessemer, all the partners in my office were LPs on my fund to get me off the ground. It's still just a tricky animal raising a new fund. And I'll tell you about two of the biggest mistakes that I made.

11:18Number one was looking at this fundraise of a new fund the same way that an entrepreneur looks at the fundraise for a startup. So I'll tell you, having been a founder of a startup triangulate and interacting with founders, often the way you raise money is to present a compelling value proposition and then put a lot of pressure on it. Hey, I'm getting a term sheet on Friday. Are you in or out? Hey, I just got my lead. Are you in or out? Now I can tell you're smiling at this because this is the complete opposite of how LPs work. Now for a long time, I thought it's just because LPs could take their time that they do take their time.

11:54Because just to be clear, with an LP, you might be building a relationship for six months, a year, or multiple years in order to unlock an LP commitment into your fund. I've come to appreciate that the reason why it takes so long to unlock LP capital and why a relationship is so important is that limited partners are really much further removed from a fund than a VC is from a startup. So with the startups I backed, we now have about 35 companies in the Ubiquiti portfolio, we're involved constantly with all the key decisions. Every week or month, we're getting an update immersed in the operations.

12:27With an LP that invests in a GP, all of that homework is kind of pushed up front. Once an LP commits to a fund, then there's no more decisions. There's no more changing your mind. There's no more evaluating whether the investments are good or not. You have to keep wiring the money per the 100-page limited partner agreement. And that changes dramatically how the whole investment diligence process works. With a startup, again, I might invest in the seed, do some homework, work with the company. And then I make another decision at the Series A and another decision at the Series B. With an LP, it doesn't work like that.

13:00It's sort of all up front. And so it changes the game. And my initial strategy of putting a lot of pressure on LPs that I was closing next week was somewhere between silly and totally laughable. But it was because I had been immersed with entrepreneurs that I thought it worked the same way. Did you have a certain strategy? I mean, with$30 million, institutional capital may not be a great fit given the size of LP check they have to write. And of course, their processes are longer because in many cases, they're not making a single fund decision, but a multi-fund decision up front. So taking what you said and even extending it, if I'm a big institution and endowment and I invest in fund one, it's because I intend on investing in fund two and probably fund three.

13:39What did you learn about the different types of LPs? Coming into this, completely fresh, having never talked to an LP before, institutions versus family offices. And I think there's a lesson for entrepreneurs in here as well. So as a general partner, as a manager, someone running a fund, I hadn't met any LPs. And so I reached out to any LP I had heard about. And often I would hear about LPs if they were on stage at a conference or if they gave a workshop. Now, those sorts of LPs love venture. That sounds great. But they're full with venture, which was the irony of the whole thing. So I would dive bomb on someone right after a conference and say, I have this fund because this LP just spoke about all the great parts of venture.

14:23But it turns out the nature of LPs, most of them have a certain allocation. And if they love venture, they filled up their one or two or five or 10 slots, these larger LPs. So that was part of the problem. And this could apply to an entrepreneur pitching a VC. If they love a sector, they may have already made their bets in that sector. So you really got to find a very particular phase of LP. So there's the LPs that love venture and they're full. Then on the other end of the spectrum, there's the LPs who don't have any venture. And that's on purpose. They hate venture. Where I found the most success, and I was lucky to have some institutional LPs in Fund One, were the LPs who were activating a program, building a program.

14:58These are keywords. Just like startup salespeople have keywords they listen for in a sales conversation. If you told me you had an LP idea for me, I would ask, are they building their program? Are they growing their program? Shifts in allocation are really helpful for a manager trying to raise money, especially a new manager. So in my first closing of FundOne, I was able to have two institutional LPs, Invesco Calsters and Grids Capital join. Later in my fundraising process, Oklahoma State University joined. And all of these LPs were either growing their allocation or had a dedicated allocation for exactly what I was, which was a spin-out manager doing deep tech.

15:34There's another lesson in there about using the right vernacular, the right words. Same for entrepreneurs. You can describe yourself as a platform company changing the world. But instead, if you say you're a SaaS company with CAC, LTV, Payback, that's the way VCs talk about startups. LPs would talk about a manager not as a technical VC who's got a great track record. They would say he's a spin-out manager from a pedigreed fund that with a new strategy that's sector-specific. That vernacular is not something that was available to me in 2017. Now it's a lot easier to raise money because I can think like LPs.

16:06There's this great quote, you know, think like your boss's boss. I think that applies to almost everyone anywhere. And if you can do that, you can unlock a lot more capital. So in many ways, I was able to pigeonhole my strategy into what LPs were looking for and present it with the right terminology. Let's talk a little bit about the vernacular. You know, you mentioned earlier being this nerd all your life. I'll use that because that's how you described yourself. Your tagline for the firm is nerdy and early or beyond the screen. what does that actually mean in respect to the type of companies you're backing?

16:39And I just heard you say deep tech too. Tell us a little bit about what is the actual strategy? How do you look at companies at the pre-seed level that are highly technical in nature, but may not have any real product market fit, just given the stage you're investing in? Ubiquiti is a nerdy and early venture capital firm investing in software beyond the screen. That's about 10 words, and I've selected every single word on purpose. None of it is just lip service. So nerdy and early, let's dissect that for a second. Nerdy means that I code, the people I back can code, they're technical founders.

17:11I have a nerd crew of 50 helpers called the Ubiquity Extended Team. I have nerd events. We had 100 people learning how to solve Rubik's Cubes. We had a different event where 60 folks were listening to how AlphaGo beat the world's best Go player. So everything about Ubiquity always turns to nerd wherever possible. And I have a blog post about nerd, just to be clear. nerd is someone who's obsessed with something to the point of losing track of time and has to evangelize it. You can be a sailing nerd. You can be a piano nerd. You can be a coding nerd. I mean, it's just somebody with incredible depth is really the key there.

17:39So nerdy and then early. Early means that a third of the companies I back are day of incorporation. Most of the companies I back are one or two employees total, almost always pre-revenue, sometimes pre-product. This is the pre-seed seed stage. So nerdy and early venture capital. And then the second part of my tagline here is software beyond the screen. Now, this is a phrase that I say about 100 times a day. I think it's the single biggest area of the world that is underinvested in right now, rife with opportunity. And I would encourage everyone listening to dig into this area. Let me define it for a second.

18:11Software was on a computer that includes anything from CD-ROMs to SAS. Then software moved, it jumped into our pockets on a small mobile phone with a smaller screen. New companies were made, Facebook, Instagram, et cetera. And now there's been another jump. And the key is if you miss a jump, you lose out a lot of opportunity. So it jumped from the computer to the phone, smaller screen. Now it can jump off of the screen. And I mean that very literally, literally take it off your computer and it lands somewhere. These are all real ubiquity portfolio companies. Software can run on the neck of a dairy cow, in a hospital hallway, in space, in your ears.

18:47So this word ubiquity hopefully makes a lot more sense. It's about ubiquitous software. And for software to run in the real world, navigate, perceive, understand the real world, it usually needs a little bit of smart hardware or a little bit of machine learning. So that's the focus of Ubiquity. My whole world revolves around this idea of bringing software to solve real world physical problems using smart hardware and machine learning. Deep tech is a very quick moniker. It means a lot of things to a lot of people. So I don't use deep tech too often. It often also means kind of an obsession with the technology as opposed to the business case.

19:17So if you leave it up to me, I'd say software beyond the screen is the best title. So you did some of this type of investing at Bessemer. That's where you honed your thesis in terms of the type of entrepreneurs that you gravitated toward, you wanted to back. You had some great successes incredibly early on. Maybe you can tell us a little bit about what did you learn from some of those successes in the type of DNA a founder has to have? You mentioned they have to code. They're building something that's really unique in nature. But is there anything different about somebody that's a beyond the screen entrepreneur versus traditional enterprise or consumer entrepreneur that you found?

19:54Let's take the example of Rocket Lab. This was a space investment that my colleague David Cowan and I led in late 2014. Now, there's a few components to that investment that are generalizable here. Number one is that a lot of deep tech areas, many people think are stupid or are a waste of time or the game's already played out. So many deep tech areas are contrarian. I can't tell you how many people patted me on the head and said, Sunil, that's a cute investment. You probably don't remember Iridium from the 90s where$5 billion was lost. Space is hard. Elon says space is hard, et cetera, et cetera.

20:32As a nerd, I hate generalizations. I want to go down to first principles. And with Rocket Lab, there was a first principle that a lot of their engine actually used an electric motor and C++. So it was a software beyond the screen engine, if you want to say that. I can go into more if you're curious. But the key is you want to go past broad, cliche statements and get to the core of it. Because if you do what everyone else does, you're going to be another kid chasing the soccer ball and not make any money. So deep tech is kind of predicated on being comfortable being different and being able to go deeper.

20:58Now, with the example of Rocket Lab, we had found a founder when we met Peter Beck that was deeply immersed in this field for a decade. And that's true for a lot of deep tech founders. It's relatively rare for a successful deep tech company to have an opportunistic entrepreneur sort of jump onto a sector and figure it out. Most of the founders are immersed because they have a great network in the sector. They understand what's been done, what doesn't work. They built up the skills. And with Peter Beck, he'd been doing this for 10 years, building rockets, suborbital sounding rockets that didn't quite go to orbit around the Earth.

21:33So that's true for most of my founders, actually, that they have five years plus of experience in this specific sector. At the same time, there's a watch out that if somebody is too immersed, maybe let me say if someone's too enamored with the technology, they won't be able to come out of the lab and think about the business. So it's a delicate balance between the two. But Rocket Lab is a great example of that. And that was a company that is now a$4 billion public company. And it was, in my opinion, heavily driven by Peter Beck's deep background and this notion of moving it into the software domain.

22:03Throughout this conversation, we've talked about a number of things that it's very clear you've benefited from being a student of the game, continuously learning. You learned how LPs think. You learned what makes for a successful, let's call it beyond the screen entrepreneur. But the longer you're in venture, you're also going to make a lot of mistakes. You're going to make mistakes on investments. Biases are created over time, whether it's a function of the firm you're with or just what you're seeing. Maybe you can describe a little bit about what you've learned in your 12 years as a VC, more specifically, companies that you've learned either what not to do or what to do, really looking at your biggest misses and biggest wins and what you extracted from those.

22:50If I think back to one of the first investments I made at Bessemer, I was, I think, one year into the job, and I found an incredibly interesting theme, had met a company, coincidentally, that was right on track with that theme. So I got very excited. I pushed on the technical depth of the team, three co-founders. Really quickly, we pushed through an investment, and we invested in this company. I'll leave it a little vague on purpose here. The piece that was on track was there was a little bit of a waiting list. The product worked. It was technical. the founders really knew the sector the piece i didn't spend any time on was the team dynamic and the chemistry of how they work together and little by little over the ensuing years the team broke apart that was one of the earlier lessons and bigger lessons was to be incredibly attuned to team dynamics the way that plays out today i'll give you an example i'll meet somewhere between 500 and a thousand companies a year for about 30 minutes.