Ivan Nikkhoo is my guest today. I think a lot of the LA Venture ecosystem will know Ivan already. Ivan runs a family office, N3 Capital, as well as Navigate Ventures, a B2B fund that invests after Series A and usually before Series B. I'm sure he'll tell us about it. Ivan has been a business executive for many years, is the chair of the YPO Venture Capital Group.He teaches at USC, and of course, he regularly hosts these fabulous tech ecosystem dinners. Ivan, welcome to the show. great to see you. Thanks for coming on the pod.

Thank you. Likewise. Glad to be here.

Ivan, I've come to a lot of your dinners, I love them. They were actually my introduction to LA Venture.

Well, yeah, you've been a key part of it, and thanks to you, I've met a lot of other people as well. You're the first call I make every time we schedule these dinners.

I love it. And then you asked me, like, bring some friends. I was like, all right, we'll have dinner at the Jonathan Club.

There we go.

But I just recently met your lovely wife. And your wife said, oh, you got to ask him about growing up, being on his own starting at age 14, and I'd love to get, you know, some of your history, some of your background.

Well, it's not as exciting as you can imagine, but I was born in Iran. We are a Persian Jewish family. When the revolution hit, I had to, kind of flee the country and I ended up for a variety of reasons in Iowa city, Iowa at age 14. I lived alone and I went to high school by myself, and I washed dishes for 3 dollars and 25 cents an hour to support myself. So, I finished high school when I was 16, at which point I went to Montreal, I attended McGill, uh, and I started working as a, um, software executive immediately.

And then I came to the US, where I became the youngest senior member of technical staff at Xerox of history, if you remember that company, and I did my MBA simultaneously. Once I finished my MBA, I moved to France and I headed up the European division of an American software company. And I was there for four or five years. And I came back to the U S and started a series of software companies and software consulting firms and so on and so forth, and then got into investment banking and then investing.

So in this area, your parents just saw what was coming down the pipe in Iran and sent you off to live in Iowa?

Well, uh, you didn't have to have tunnel vision to see it because there was tanks on the street and they were saying death to the Jews on the street. Kind of how they're doing it at Berkeley these days, by the way, which is really odd. But, it happened that my brother happened to be at University of Iowa for a semester or two. And they sent me for him to receive me. So he received me, he was with me for a while. Then he went off to Montreal himself to go to McGill. So that's how it happened.

Wow. And then again, I'm, picking off Eric Pakravan's brain a little bit. He said that he remembers you at, is it Seamer and Associates?

Yeah. So, after Wells Fargo, I was running the tech practice at Wells Fargo's investment banking it merged with Wachovia, if you recall. And then the merged entity wanted to do a lot more balance sheet products. So, they wanted to sell bonds and they didn't want to deal with entrepreneurs. They didn't want to do small scale advisory work. Like I was doing, I did a lot of capital raising and M&A, but they wanted to do other things. So, I left, and
I met David Simmer and we set up a practice together and I was there for a while.

Okay. So, so you were working with Tech Venture, even at Wells Fargo.

Yeah, I was, at that point, I specialized in raising growth capital, which is what I continue to do at Simmer as well. And which is how we came up with whole thesis of Navigate Ventures. Yeah, because what we noticed over the years was a couple of interesting things. Number one is most companies that came to us that we're looking for growth capital were just a little too early, and part of it has to do with the fact that the average round, usually is about 18 to 20 months. But from the A round to growth round, the current average is about 33 months. So most entrepreneurs fall short. they're in need of a little bit more capital, a little bit more runway a little bit more time so that they already they have right unit economics for proper growth rounds.

The second thing was outside of Silicon Valley. The failure rate of companies that have raised their seed in Syria is extremely high. It's well over 50%. And the number one reason for that is lack of access to growth capital. By the way, the number two is no product market fit. And number three is essentially team issues. If you have proven product market fit, if you have a good team, if you have a repeatable sales model and good unit economics, capital should be a commodity. Why isn't it? So, we set out with navigate ventures to solve that problem.

Wow. so to go from a series A to a series B is 33 months, is that what you were saying?

The current average is about 33 months.

And a lot of times when people are raising, they're raising enough for 24 months of growth, something like that.

That's correct. So that's why they fall short.

So when you're talking about growth rounds, you're really talking about like a Series B round.

B round. Yeah. So 25 to 75 million

Yeah. So you have to have very solid metrics to be raising, you know, a 50 Series B.

On the on the lower end, let's say 25 to 35 million, you got to have at least 10 to 12 million ARR. You have a growth rate of 50 to a hundred percent year over year, very strong unit economics. And you have to demonstrate product market fit and for B2B enterprise SAS, which is our area, the way you do it is number one, you have to have five to 10 brand name clients that have paid for your software and are using it live in production for a mission critical application and they are referenceable. Then you must show a declining sales cycle, a declining onboarding period, and a revenue increase per existing client per period. So, if those unit economics are there, you have low churn, low burn, you're capital efficient. The market historically has been about 8 to 12 times ARR, once the company hits scale.

Even if they're growing, you know, what was your range? 50 to a hundred percent. If they're doubling, tripling year over year, they might command a higher revenue multiple?

20x ARR yes. But you know, some of these people are going for 50-75x because that kind of growth rate for most companies is not sustainable for some, maybe, those are the outliers, not the norm. You know, our investment thesis is highly, highly disciplined, and we have to look at the norms historically and we stick to it, so that's what we do.

The other changes in the market that are very important is number one, over a third of all unicorns are enterprise SaaS companies, which has led many, many early stage companies to focus on, you know, funding enterprise SaaS companies, which has increased the demand. And the other thing is 10 years ago, if you sold your company to Vista equity, their exit would normally come from a sale to a strategic and Microsoft and Oracle or someone, because if you are an investor in both funds and they trade with each other, you're essentially paying double fees for the same underlying asset. But since 2018, the vast majority of the transactions are among private equity groups. So it's essentially sponsor sponsor dealing.

So you're saying if you first sell to a PE

If you sell your company to a PE, their exit should normally would have come to a strategic versus to the sponsor because, you know, double fees, if you think about it if the two sponsors have the same LPs, those LPs are paying double fees. but now the majority of the transactions are among these groups that has created a very liquid environment for enterprise software companies at scale. And which is why we really focus in this environment because we know downstream the demand is there and they continue to raise very large funds. They're sitting on an enormous amount of dry powder. And that's where we want to go with our portfolio companies.
Right. So, this is Navigate Ventures, but you're doing it with an eye to what the growth investors want, but you're not, you're not investing when it's, you're not doing the 25 to 75 million round. you're bridging them. And so their metrics might not be all of what you said yet, but you're helping them get there.

So, when we get involved, we want to identify the best B2B enterprise SaaS companies outside of Silicon Valley that have raised their seed and Series A from institutional VCs. So, these are companies that are raised from really good funds like yourselves. Like we've invested in some of your companies, I think two or three of them already. So, these are companies that have now shown some level of proven product market fit. They have strong unit economics. They have strong investors behind them. They're doing two, three, four million ARR, and they need to extend their rounds so that they can get to 10, 11, 12 million ARR. That's where we come in between the A round and the B round.

Do you think other things in today's, you know, nearly 2024 has been different? I mean, I think you and I have talked about the focus on burn has really increased.

Yes, the investors do not want to see high burns. They want to see capital efficiency. They want to see a view to potentially break even or even potentially profitability at some point down the future. Small burns are okay, but those days of burning a million a month in hope of becoming a unicorn are gone.

What are burn multiples that you're seeing? Or can you explain?

I would like to see a burn to MRR of less than one.

It's hard when you're growing fast, right?

Correct. But you know, we have portfolio companies that are growing 100 percent year over year and they're burning very, very little. So, the question is the ability to acquire customers efficiently, effectively, and that comes with a very laser focus on who is really your customer and being able to go after it. So, I think we’re seeing significantly longer due diligence periods, on the investor side, when they're looking at the companies, which is very, very healthy in my opinion. So those are some of the things we were saying. So tell me, what are you seeing at TenOneTen?
Yeah, I mean, I think the thing that concerns me sometimes for portfolio companies is the longer due diligence sometimes is not even quite diligence so much as tracking, and so there isn't the urgency. There's a, let's give it a few months because there are just fewer players in the market at the Series B.

And that's healthy because you could see how they communicate, how they manage expectation. If they say they're going to do something, if they get there. So, we take you usually three to six months. part of it has to do to, but as you said, tracking, and meanwhile, we run a lot of tests, background tests, and you know, even personality tests. We have a portfolio company called pharma.io. They do the most extensive background test on companies you can imagine a lot of private equity groups use them, by the way.

And then how do you exit? Like, are you waiting until these companies exit?

No, we exit at the growth round. So, when the growth investor comes in, we exit into, we secondary out in that round. So, Vista Equity comes and says, Minnie, we love your company. We're going to put in 30 million 120 pre. However, we need to deploy 40 or 50 million, the additional 10 or 20. We're going to secondary out some existing investors or founders, whoever the case may be.

How often is that easy to do? Because it doesn't it sort of assume that there's an oversubscribed round?

If you think about the bigger funds that come in to write these checks, most of them over a billion dollars, their minimum check sizes are usually 25 and over. and a lot of them prefer to do some secondary for two reasons. Number one allows them to deploy more, but number two, there is no dilution as they do it.

So, imagine if they're doing a $50 million check, 30 as primary, you're issuing additional shares. So, 30 on one 20 that that's a 20% dilution, and then the additional 20 million if it's buying a existing share. So, they get to own more of the company without additional dilutions for themselves or anybody else. And because this is our thesis, it's not a one off. There's no negative signaling. So, everybody knows that's our thesis. We get in as an extension and we get out at growth.

Like, what sort of multiple are you looking to have on your investment? It's short term, right?

Short term, three to four years, three to five X. So short term, call it three on three.

Yeah. years, three X. You're near the end of fund one.

We have few minutes left, by the way, send me anything you got,

Okay. that's, good. I've seen your updates. So, I have been reading a lot of the content on your website, and a lot of the stuff that you post and put out there. So, I want to pick up on some of the things you, talk about you talk some about. Hearing a pitch and what are the questions you're trying to get at? tell me about like, what you're trying to dig into.

If you remember, you were kind enough to come to one of my classes when I taught at USC. And I had the good fortune of having, probably a few hundred people like you over the nine years, come and speak in my classes and I learned certain things and develop certain patterns. So, what we look for first and foremost is people that were in an industry, noticed a very big problem in the industry that they're from and decided to solve that problem versus people that said, Oh, if I go do that, I can make money.

And the second thing we want to know is that they are really understanding the basic unit economics, those are basic steps. I think if they're able to do that, everything else follows the most phenomenal thing for me, which is shocking is every time I talk to this entrepreneur, nine times out of ten, they start talking about what the solution does. And I keep saying, what is the problem you're solving for? And they keep telling me, well, our company does data aggregation. I'm like, and then you get frustrated and then you say, thank you. And goodbye.

I want to ask a couple more questions about sort of the, the, the structure of your fund. I think you said that you don't do flat rounds or don't do down rounds.

I don't like to do flat rounds and down rounds, not because of the mechanics behind it, or because it's very easy to do because it shows poor judgment on the part of the team. So, you've seen it. A lot of these younger entrepreneurs, in particular, are very fixated on getting the highest valuation because they're not going to be diluted, and it's going to feel better when they talk. It shows that the team, as well as the board and the investors, are not thinking properly about the next round. The moment you raise one round, you need to think to yourself, are we properly set up to be able to raise the next round. And if that question is not being asked, that's not the right deal for us.

Well, but the market also changed. there were, there were a lot of rounds where they were well set up to do a series A, and then the series A goalpost moved,

Yeah, but a company doing about a million a year. And getting a 60 million pre-valuation is not reasonable, especially if the growth rate is not 10x and the growth rate is like 2x. There's no reason for that.

What do you think of the market today?

I think it's reasonable. I mean, I mean, there's Silicon Valley is their own bubble. I still got a guy there. He's doing 1.7 million ARR and he has 110 million pre and he's certain that that kind of nonsense is not acceptable to me. But I think, I'm not looking for the bottom. I'm just not noticing that most investors and most entrepreneurs are a little bit more reasonable. I think some of the investors are pushing a little bit too hard down now. I think a good enterprise software company growing 100 percent year over year with unique economics at 10, 12, 13 million deserves to be eight to fifteen times, depending on your economics, not four to six.

Okay, so you think regression to the norm, Series Bs are getting done for the good companies.

Yes.

I feel like, I think you posted this on your website. There are fewer seed deals that got done in 2023

Yes, but that changed in Q4. So in the beginning of the year, there was a bit of a tightening as significant but now this quarter, the numbers are coming back and, uh, a lot of these are being done and I think next year we're going to see somewhat of a more normal back to perhaps the 2020 or 19. Part of it is this also Minnie, in order for a fund manager to raise the next fund, they have to be 75 percent deployed. So, a lot of people are sitting on dry powder, and they need to deploy it. So, for example, we had told all our portfolio companies that we will continue to support. You don't go to market this year for any additional funding. We'll just take care of it internally with all the other investors. , but now we are telling them Q1, all the ones that are at 10, 11, 12 million ARR, we are telling them, okay, Q1, it's time.

Okay. Interesting. Okay. So, I'm expecting more activity in Q1.

Yes,

You post a lot of stuff like market insight stuff. You read anything interesting lately?

Well, every morning I start by reading for about two hours. What is interesting is number one, there's a lot of big funds still being raised, which is fascinating to me. Dry powder is significant, so there's a lot of capital sitting on the sidelines that needs to be deployed. I actually think the AI valuation hype that's also going to come back to the norm. I think there was a lot of companies that were funded that probably didn't deserve the valuations they had. I think the IPO markets are going to start opening up a little bit allowing for a little bit more activity there. There is a lot of, what we're seeing uh, debt funds and secondary funds.

I think that has commoditized. There is a factor that people are forgetting the Silicon Valley bank and signatory bank are no longer. Therefore, every time we used to raise it around, we used to have venture debt on top of it at very, very attractive prices.In absence of that. a lot of these startups are going to find that they're going to be in need of some sort of an extension because let's say you had a 6 million round and then you had another 2 million on top of it or ventured debt, but in absence of that 2 million, what are you going to do now? So we're going to see a continuation of demand for extension rounds across stages like bullpen does exactly what we do between Seed and A. So we're going to see a continuation of that. But I think, you're going to see increased optimism in 24 for venture capital overall.

That's great. What? On the debt side, do you have thoughts, you said it's kind of commoditized and yet we've lost SVB, so do you counsel companies to raise venture debt if they can? How do you think about that?

Well, we counsel them not to raise the debt from these funds that are very, very expensive. You know, they call it non-dilutive financing, which is nonsense. If you're paying 20 percent on the money that you raise, it's very, very expensive. And if it's a large portion, it's a big chunk of money on your cap table. it's going to make your next round very, very difficult. I am very much against that in the earlier stages of a company's life cycle, so the whole Silicon Valley bank team moved to Stifel. So, if you're able to, let's say you were doing a 6 million, 8 million dollar round and if you're able to do venture debt for another two to three, take it. 100%. That is okay that they venture that from a bank, not from a fund, in my opinion.
What is market rates nowadays from a Stifel, a PacWest, one of these credible bank lenders for venture debt?
High single digits.

High single digits. Good,

But they're well recourse, they're very covenant light, and they're very friendly.

Yes, exactly. The terms make a difference. Other things to talk about, Navigate, I have questions for you about, you know, hosting dinners and other things in the ecosystem.

Go ahead.

Well, , you host these amazing dinners. One question I have is in hosting events, like what have you learned that works really well? What makes for an especially good dinner?

Well, you're there.

Well, of course, Ivan, that makes it so much more fun.

It's not just fun, the energy that you bring to the room is phenomenal. When I started doing these dinners, it started with 12 people. In fact, my very first dinner, Gil was sitting next to me. And that goes back a very, very long time. So, the point that I'm trying to make at these dinners is we have a small ecosystem, we need to know each other, we need to work with each other, we need to be able to do deal flow and help each other's portfolio companies, so on and so forth. And that's the only point. And if you notice, I never even talk about navigate at the dinners. I want to make sure everybody else gets to know each other, and I send all the contact information that they after for everybody. And I'm trying to go out of my way for everyone to get to know each other. And it's very important, and I always believed in it and I still do. And I'll continue to do it, and I want to make sure that we're doing it while we have fun, while we have a few laughs and while, you know, it's not all serious. I think it's proven to be very, very helpful. People come to me and say, I met so and so and we did X. And so it's been very, very helpful over the years.

It has been extremely helpful to me. I've gotten to know so many people at your dinners. But yes, I would say you do have that particular style, and I was wondering how you convey it. Because, you know, a bunch of VCs at the Jonathan Club could be a pretty stiff affair.

So this came about because in YPO and I've been a member for a very long time, we have this concept of getting to know each other. Although way you do it in YPO is lot more structured, a lot more confidential, but if you and I have only talked about business and I don't know anything about you personally, it's not the same versus you and I now have a couple of drinks and you tell me something about yourself that I will remember. And over the years, as we get to know each other better and better, the relationship gets so tight and the trust builds so that when we discuss something, I don't ever have to question that trust. And that's what's so important with knowing someone over a period of time, knowing things about them that normally you wouldn't trust is built.

And I think there's a ton of that in the L. A. ecosystem. I think a lot of people know each other from your dinners and otherwise, like, how do you think of the L. A. ecosystem and your role in it, both?

My role in it is very, very small. I think our ecosystem is filled with people like you that are just phenomenal, they mean well, they go out of their way to help each other, we have very, very smart people. We don't have enough capital, uh, in Southern California. That's part of the issue.
When you're helping your companies get to the next round, are there LA firms you're talking to?

I can count on one hand how many LA firms there are.

B-Capital, March Anthos, 3L

And they're only sort of LA now. There you go.

There's probably one or two that we're missing right now. That's it.

I know. And who's Fred? Fred's your partner.

Correct. Fred Thiel. He's, we've known each other from YPO since 2005

What's the short version of his background?

Kind of like me he was an operator, he was a CEO, he was an investment banker, he was in private equity. Kind of like me, he’s a Swedish guy, phenomenal, love him to death.

When you're teaching at USC,

By the way, I'm no longer teaching there.

Okay, when you did, what was sort of the message? How are you hoping to help your students?

So there was two reasons I love teaching. Number one is we all have our community give back, some people, you know, I used to sit on boards of all sorts of non profits and all that, but then I realized teaching is probably the biggest give back you do. You don't really get paid teaching at these schools, but, and the time it takes is just enormous. But I cannot tell you how many times I had students coming to me and saying Professor Nikkhoo, you changed my life, and that is the most wonderful thing anybody can ever tell you. So, I helped create the entire Venture Capital curriculum, I helped bring in people like you over and over again. Through my classes and such introductions, we started placing my students into these funds everywhere, so there was a lot of, I've got jobs. The message was number one, this is an important industry, but you need to really take it seriously, you need to understand what it takes to get there. But the problem is, getting into venture capital and private equity is very hard if you don't know the right people. So, through these classes and meeting all these people, a lot of those introductions were made you can see the results. A lot of people that are placed in these funds were my students.

Who are a couple of your students that I might know?

Actually, there's quite a, I get I could be going anywhere in LA, and somebody comes and says, Oh, Professor Nikkhoo. I'm like, I'm sorry, I don't remember. So, you know, you have 150 students per semester for nine years, that’s a lot, I don't remember all of them.
I love that. It comes through, your care for the give back comes through in knowing you, but in reading your website, you also, you talk a lot about ESG on your website.

Yeah, I am a huge supporter of, especially on the environment, and that has to do with my, it's a very personal thing. I am a scuba diver, and over the years, I am seeing a decline in what's happening in the oceans. You know, what used to be a great dive site is dead. So, if you see that coral is the most depressing thing you can possibly imagine. When coral dies, it turns white. And when the weather is not so good, it's actually a grayish, it looks like death. It's sad. It takes 20 years for coral to grow, but it takes a few minutes for it to die. Plastic is doing enormous damage.
So, if I had all the wealth in the world, I would focus on two areas, number one, reforestation. I don't understand why they're cutting down all these forests where we can use cement instead of wood for building. And number two would be cleaning the oceans.
Mm. I like that. That it comes from in knowing you and talking to you. And then on your website you've got all of your sailing pictures.

Yep. Oceans are the most important thing,

Wow. I love it. You and I share that. Ivan, how would your friends describe you?

Before or after a few drinks?

Oh, good. Let's do, let's do a before and an after. I like that.

What you see is what you get.You've known me long enough to know that's exactly the case.

Mm I really like that. I mean, other thoughts on sort of how you live your life, life philosophy from Ivan.

You know, uh, about three years ago, I lost one of my very close friends at a young age to cancer. In fact, that same year, we lost two other friends to cancer as well and one of them was one of my very close friends that who taught at USC. When you lose close friends to cancer at a young age, uh, it kind of resets you a little bit.

So I, went through this whole thought process of, Hmm, I have young kids. I want to spend a lot of time with them. Otherwise. So, you, the focus is now on living healthy, giving back, uh, making sure we learn to let go. It's not get, get, get, you know, it's give, give, give whatever it is. It is, whatever's going to happen is going to happen. We just do our best, live a balanced life and surround ourselves with people that we love and care for. And that's it.

It's such a lovely note to end on. Ivan, I do feel like I get to know people better through the course of recording a podcast and I have loved getting to know you a little bit better and I love your approach to life, so thanks for coming on the pod.

Minnie, you're a jewel. I thank you for everything that you do all the time.