William Leonard
Hey everyone! Welcome back to the Atlanta Startup Podcast. University Growth Fund is the largest education-based private equity fund in the country. Firm principal Rakesh Nankani in new Atlanta transplant joins me on a podcast to break down, what is the largest education-based PE fund practically means. He’ll also talk about the unique story behind the firm’s origins, and why they saw Atlanta as the perfect city to expand the university Growth Fund Student Program, which places undergrads into private equity, investment banking, and venture capital roles, post-graduation. Rakesh, thanks for joining me today, man.
Rakesh Nankani
Welcome. Thanks for having me and excited to be on the podcast.
William Leonard
For sure, man, and really grateful for the time that you dedicated last week to helping judge and assess startups at Startup Runway. Really appreciate your time there as well.
Rakesh Nankani
Of course. It was a great event and glad you thought of me for that. That was a fun group, for sure.
William Leonard
Certainly, man. Well, I want to dive into this conversation a bit because if you look at your website, UGF is described as the largest education-based private equity fund in the country. I would love for you to educate our listeners on what that practically means. Give us a quick overview of UGF and things like that.
Rakesh Nankani
Happy to. University Growth Fund, the way it started was there a group of students in Utah that wanted to gain experience conducting due diligence on venture-backed companies. They went around to different funds and said, “Hey, we’ll sign an NDA and take a look at some of your companies and do some due diligence for you.” And those students had great success doing that. One of their advisors ultimately said, why don’t you guys go raise a fund around this, and then that way, these conversations you’re having with entrepreneurs and other funds, you have a little more weight behind the things that you’re asking for and you can actually find results or create value out of the work that you’re doing. They raised a fund around it and started investing in a lot of startup companies that they were doing due diligence thing. A lot of that was based on co-investing with some of the top funds around Utah which is where the fund originated. Fast forward to 2022, University Growth Fund is investing out of its second fund of about $54 million. Our first fund is about $33 million. The real kind of core thing that we do is that we train students on how to look at venture deals. We’re often taking students from state schools and other private universities that do not really target schools and giving them the opportunity to look at startup companies to determine whether or not we make anywhere up to a $2 million investment in these companies. What’s really cool is your first day on the job as an intern, you’re gonna get put on a live deal team. And that deal team is led by other students so it’s just really hands-on and robust experience in which you are doing the work that you’ll be doing, whether that’s in investment banking, private equity, or venture capital your first couple of years out of school. The way that we set up our program actually mimics a lot of different levels of working in venture and these other investment roles. What we’ve heard from students that are a little bit further in their careers now, seven-plus years in, is that not only did the internship help them land a job out of undergrad, but it also prepares them for their second job after that, the VP and principal or maybe partner roles after that. Our senior associates, the ones that are leading these deals, leading the calls with entrepreneurs, leading the calls with the other funds that we invest alongside so it becomes this really rich and hands-on experience for students to really learn what it takes to invest in venture companies. We know we give our students a lot of autonomy. We took what I would say, are the most boring parts of venture capital for the partners and myself to handle all that. That’s fundraising sourcing deals, and the students really get to just roll up their sleeves, and then do due diligence on these companies and tell us whether or not we should invest in them. Having gone through it as a student, was the most valuable experience for the student.
William Leonard
That’s so so fascinating. What started out as an idea of a couple of students wanting to just dig into VC a bit and understand diligence has now turned into an entire program that is now nationwide. You’re investing out of your second fund of $54 million. You’ve got students going through this pipeline that UGF has created and it’s really, really amazing what you all are doing, and we’re certainly going to dive into that a bit more later in the conversation but always like to have our listeners understand who we’re talking to, as well. What’s the Rakesh story? What’s your background and how did you get here today?
Rakesh Nankani
It’s so funny when I give students my background or just other people in general because when we’re going to these schools and recruiting, we’re looking for some of the top students at these schools, which is funny because I was a terrible student and undergrad. I studied mechanical engineering. I guess in my last year, I realized it wasn’t what I wanted to do. I graduated with a degree in engineering but was still a little bit lost. Ultimately, I ended up starting a company where we would implement utility companies and their energy efficiency measures for commercial buildings. We would go in and recommend lighting, HVAC upgrades, and things like that to help reduce their energy expenditure. We work with utility companies and their implementation measures and incentives and things like that. I did that for about six years and then realized, one, that I developed a huge empathy and respect for what founders go through in starting businesses. I wanted to take that experience and then kind of go back to the quant side of my engineering background. As I looked around for the next step, venture capital was sort of the thing that kept on popping up to the top there. I Went to business school in San Diego and heard about University Growth Fund from three different people as I talked to everyone about getting into VC and applied my first week,k got in, and really haven’t looked back since. I’ve been at the fund for about two and a half years now. Full-time for about a year, although as a student, probably be putting in full-time hours as well.
William Leonard
Nice. You were at the University of San Diego, and you wanted to kind of leverage some more experience and kind of break into a new aspect of business, and you found out about UGF. And now, you’re a principal, you worked your way up from associate to senior associate to now principal. UGF has a couple of offices. I think the home base is in Salt Lake City, is that correct?
Rakesh Nankani
That’s correct. I work out of the San Diego office and then Atlanta, we opened in June of last year, so almost a one-year anniversary.
William Leonard
I love that. You all were primarily situated on the west coast but what was the vision for expanding eastward? Why was Atlanta really at the top of the list for you all?
Rakesh Nankani
I’d say if you look around at the different cities, one of the big things that we’re looking for in the cities that we are considering expanding to is one, the student population. The student program is core to what we do and Atlanta just has so many great colleges and universities where there are almost a quarter-million students in the Atlanta metro area. That was a big reason. Secondly, Atlanta is just a really blossoming and booming tech ecosystem right now. Thirdly, and probably most important, venture capital is generally a pretty nondiverse space. After everything that happened in 2020, we wanted to sort of the effective change in ways that we could with our program. The partners looked around and saw that Atlanta is the perfect place for the reasons I just described to open up a new office. That’s the goal of us coming out here. We recruit heavily from HBCUs from Georgia State, in addition to the other schools around Atlanta.
William Leonard
I love that. As you think about UGF right now, you all are investing out of your second fund. What is the thesis? What types of companies are getting you all excited? Are you all leading? Are you all following? What’s kind of the core thesis around the second fund?
Rakesh Nankani
That’s a great question. We are pretty agnostic, both in stage and industry. We’ll invest anywhere from seed or pre-IPO. We’ll do anywhere from consumer tech, consumer products, enterprise, and SaaS, we’ve done a lot of FinTech and InsurTech lately, so we’re kind of all over the place. The reason for that is because it gives students the opportunity to gain exposure, both on different stages and the lenses that you look at for these different stages of companies, but also different industries as well. Oftentimes, we’re placing our students directly into investment banking. They’ll have that experience or they’ll at least know what coverage group they want to go into because they’ve worked on several deals in that space and we give them the opportunity to sort of specializing as they progress through our program.
William Leonard
Got it. You said the majority of students who are going through the UGF pipeline are going into IB and so is the purpose to push them to various areas of private equity or the finance realm? Or is it more so just like IB, PE, or VC?
Rakesh Nankani
I’d say that the goal ultimately is to give our students a competitive or at least to give them a strong position when they go to interview at the top banks or private equity funds or even management consulting, sometimes we’ll place students there so that they’re competitive with your Ivy League or your tier one schools. We’re hoping that the experience gives them the opportunity to be really competitive. It just so happens that a lot of our students want to place in IB, but then ultimately, we find them going back to VC or private equity after their two to three years in investment banking. I think what’s really cool is that we actually do place a handful of students directly into venture coming out of undergrad which is pretty rare.
William Leonard
That’s awesome. I want to transition the conversation a bit here. Something that kind of just came to mind for me, you’ve been on this within UGF from associate to senior associate to now principal and along with increasing your workload in the company, you also have to learn how to manage people under you, right? I’m sure you have probably several associates and senior associates under you, what are some tips that you can provide other maybe senior associates or principals around managing junior analysts and junior team members as well?
Rakesh Nankani
That’s a great question. It’s been a fun journey for me to transition from the student side to being on the management side of things. For me, working with students, I take a very hands-on approach to their development. Last summer, when I came on full-time, I spent, I’d say, over 60% of my time working one on one with students to get them up the learning curve and to take a special interest in their success. Especially with our students that come in, and maybe they don’t know how to do market size, or even like what a TAM SAM SOM analysis is, right? It’s just like walking through that with them step by step and then kind of giving them examples but ultimately, I think we kind of take this servant leadership approach where my job is just to make this enjoyable and create a learning experience for you. I just do all the things that I can to make sure that those things happen. What we find is, if you do that, and then you give them a lot of autonomy, they take that opportunity and really run with it. We’re able to have students leave these deals and we really don’t have to do a lot of real hands-on work. We train you how to do it, go ahead and run with it. We’ll guide you along the way but show us what you got. That’s kind of the approach that we’ve taken.
William Leonard
That’s smart, you’re kind of helping them in the early stages, a lot of hand-holding, but then you’re giving them the autonomy to go operate in such an ambiguous industry like private equity, investment banking, and VC as well. It’s really interesting. You mentioned that you all are investing from seed to IPO. You’re seeing kind of the effects of the macro economic state of the economy right now probably impacting some of your investment strategies and pieces and things like that. We’ll be curious to how you see things like inflation, the capital markets, and the stagnation of global supply chains really impacting startups at the early stage if you do see any impact?
Rakesh Nankani
Absolutely. I mean, we’re seeing it top to bottom. We had a handful of portfolio companies go public last year and at the end of that six-month lockup period, it just was not a friendly place for that stock to be in the market. That’s one area that’s been tough on us. We’re kind of waiting to see what happens there with our pre-IPO companies. We’re taking a really long and hard look at those to see whether or not it would be good to invest now or just to kind of wait until things correct even more. There are some great companies that I would love to be in but it’s just if they’re going to kind of raise your next round and down round, we really don’t want to take that hit, right? Honestly, what we’ve seen is or what we’ve been doing, it’s just moving a lot earlier in our investing early in the company’s lifecycle and doing a lot more seed-stage investing just because they’re on a longer time horizon. They’re less impacted by public markets. Now, I think what we’re seeing in the public markets is an interesting experience, right? Capital, generally speaking, is becoming more expensive. In the public markets, you’re just seeing investors transition from, let’s look at these great tech companies that are high growth. The unit economics maybe don’t work out now but we think that they can in the future, and money is super cheap anyway so let’s go ahead and make that bet. But now it’s like, alright, so money’s a little more expensive and you’re seeing investors kind of transition back towards the more solid and developed business models. But it’s all cyclical, right? We’re hoping it all comes back, especially for some of the tech companies in our portfolio.
William Leonard
Certainly, I think everybody is hopeful for that kind of bounce back. It’s interesting, I think valuations are probably at the later stage or just have been slashed in parallel to capital markets. Word on the street is what I’m hearing those markets are just about that. You all are kind of moving upstream a bit to kind of the seed stage/pre-seed round. I think that is probably the area where there remains some of the most opportunity right now for investors, right? I think there are a lot of new funds into the market, micro funds, and lots of angels but the companies that are going to win are going to be the ones that have the strong growth metrics, and demonstrated capital efficiency, and I think those things are more prevalent than other ever as investors are evaluating a startup. I can certainly agree with that assessment, they’re willing to move a bit earlier.
Rakesh Nankani
I’m curious to get your take on this. I’ve seen this happen a handful of times already typically, venture lagged a little bit from the public markets, but I’m actually starting to see how some companies in that growth stage that are going out at valuations similar to what you saw in 2021 but now you’re starting to see investors say, we’re not getting any value here. We’re not going to invest at this price point. I’m curious to see if you’re seeing something similar.
William Leonard
Certainly. We’re more so situated like strictly at the seed level, but the founders that are going to go out there, they’re going to be fine. I’m sure we’re gonna go raise at these elevated valuations that were the norm in 2020 and 2021 but I think investors now are being more disciplined in their capital allocation as LPs become more disciplined and kind of hold on to their capital a bit tighter. I think that that’s the trickle-down effect that’s going to kind of reverberate down from LPs down to Series B investors down to seed investors and even pre-seed funds, as well as kind of this back to back to Earth reckoning of valuations being more stabilized. Because oftentimes, I’m sure you saw this as well, companies were raising at 100 million dollar valuations with maybe not even a product in the market on an idea or things like that. I think capital efficiency is the name of the game for companies that want to emerge on the other side of this capital market correction unscathed. Oftentimes, I’ve spoken with a couple of founders recently who were at this pre-seed and seed-stage, and one thing they weren’t doing was charging customers upfront or even charging some of their early beta or pilot customers as well. I think that is a practice that needs to become more mainstream, I’d say it is charging half price or 75% of full price, but something is better than nothing we think about the capital that can be injected back into the business to help keep this ship afloat. That’s my take on it as well.
Rakesh Nankani
No, I think you’re right. The music is sort of slowing down and growth at all costs is no longer the tune that everyone’s singing so I think you’re right that there needs to be a bit of a change there at least in the near future.
William Leonard
For sure. And you along with your team of associates and senior associates are probably speaking with dozens of founders on a weekly basis, right? What do you like in a pitch and what you don’t like and some of the things that kind of immediately turn you off in a pitch? We’d be curious to hear your perspective on what are two or three characteristics of a solid pitch from an investor standpoint, and maybe two or three characteristics of a pitch that needs some work or some type of refinement to be more to be better received I’d say?
Rakesh Nankani
I think I would think back to this one founder, and I just love his pitch and his presentation, he spends almost 12 slides on his deck just explaining how severe the pain point is for this business. I absolutely love that because it’s like you really hammer that point that there is a huge need in the market to the point where, in your mind, I don’t even need to see that you’re finding product-market fit. I know that you’ll find it because there’s such a huge gap in the market, right? If you can, really understand the pain point and when you come in with your value proposition and explain how you can solve that, I think is just incredibly valuable. That’s one side of it. And then I would say, another thing that I love to see is if you’re a consumer or customer-facing business, you’ve done a ton of due diligence on the customers and gotten their feedback, right? That ton of customer discovery just really demonstrates that you understand the market and you understand how to navigate it as you grow your business. I don’t know if, maybe I’m not remembering, but identifying a specific event or specific points that will immediately turn me off but I’d say the one thing is, if we can only get 5% of the market, then we’ll be at blah, blah, blah, valuation. Well, that’s fair, but I hope you’re really gonna dive into the dynamics of that market and how difficult or easy it is to get that 5%. If you’re in a huge market but there are a ton of competitors, it’s not going to be as easy as you think.
William Leonard
Cool. Those are all helpful. I think there’s no perfect pitch but I think there is room for iteration and areas of improvement that everybody can find within their respective pitch, especially as you talk to different investors. You should tailor your pitch a bit to the specific investor that you’re talking to, in a sense as well.
Rakesh Nankani
I think also when you get founders that are just so focused on the hard sell and they forget that this is a very relationship-driven business and you have to build rapport with that investor, that’s another big piece of it. I think that sometimes founders can overlook.
William Leonard
I mean, the heart of venture is relationships. It’s kind of your word and it has to bond, as they say. As we wrap up the conversation here, Rakesh, you’ve lived in several emerging startup ecosystems. In Salt Lake City, I know a few friends who have moved out there and have bragged about how that ecosystem is certainly gonna come up. San Diego’s another one that I’ve heard good things about, as well, and now you’re here in Atlanta. What are some of the differences that you see being situated here in Atlanta and what makes you bullish on this city and this region as a whole?
Rakesh Nankani
Definitely. I actually never lived in Utah. I just have ties there because that’s where our fund was started but I’d say Utah is a lot further along. I remember the first time I went there, it’s kind of crazy driving up and down the highway and seeing some of the companies that we’d invested in there, like billboards are all over the place, or you see the names on the buildings, and I thought that was like really interesting. It’s like very Silicon Valley. San Diego was great. They’re really big in life sciences, biopharma, and all that, and that was never a space that I was very well versed in. But what I love about Atlanta is it it’s just like a booming tech hub, right? Where I think it’s at in terms of lifecycle oftentimes what you see with a developing ecosystem is you’ve got a handful of founders, right? They start companies, they have huge exits. And then they keep that money within the ecosystem, either by launching their own venture funds or by launching your businesses. As that success breeds more and more success, you’ll see more startup companies that people will look to you as an example, as sort of inspiration like oh, cool, okay, I can go and do that for this business and be really successful with it. I think we’re probably in like the second or third iteration of that. David Cummings had Pardot and then now he’s got Atlanta Ventures and all the great companies that came out of Atlanta Ventures, right? You got the guys over at Overline. They’ve got Cloud Sherpas as a company, right? And then now they’ve got their own venture fund. Paul Judge at Panoramic Ventures. You’re seeing this ecosystem develop and you’re seeing a lot of the money stay within the ecosystem. That’s what’s really exciting for me. You couple that with the huge student and university ecosystem that’s now getting more and more woven into startups in the venture and tech ecosystem. It’s just right for a really strong tech hub.
William Leonard
I agree. I think that’s the right word and the right way to describe it is that Atlanta is ripe for innovation right now. Many companies are moving here. Many people are moving here and the cost of living is relatively lower than in California, but it’s still, Atlanta is not cheap. I will say that. Atlanta has become a bit more expensive, but it’s all in the name of people moving here, companies realizing the network effects that being in this region can have on a business. I’m excited about Atlanta. I’m glad you’re here. I’m glad UGF has expanded and put roots down here and excited to hear about what city may be next on the radar for you all. Really appreciate you joining me here today, Rakesh. I learned a lot about UGF and the interesting model that you all have to really get students exposure to private equity and finance roles at such an early stage and how you prepare them to go be the best versions of themselves immediately after graduation. Really excited about that and looking forward to hopefully collaborating on the deal soon, man.
Rakesh Nankani
I love that. Thank you so much for having me. It’s always great to get the word out there about what we’re doing here, especially as a newer program in town. Thank you so much for having me and it was really great getting to chat with you here.
William Leonard
Awesome. Cheers. Take care.
Lisa
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