Meet Murat Abdrakhmanov, one of the largest business angels in Central Asia
Murat left the VC firm to invest independently; now he enjoys it more
Read more...Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed! While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Dean Rosenberg is co-Fund Manager at NuFund
Rosenberg has been active in the Southern California startup ecosystem for over 30 years - initially as entrepreneur and then as investor. His own ventures have spanned industries - from launching the world's first online restaurant ordering site in the mid-90's to "PortVision", a global SaaS-based ship tracking platform he sold to a public company in 2014.
On the investment front, Rosenberg has personally invested in over 30 early stage companies, often taking a role as hands-on, engaged board director. He led the transformation of NuFund Venture Group from a traditional "angel group" to a modern, 300-member fund-first venture capital model investsing over $10M per year in software, hard-tech, and life science ventures.
VatorNews: Let’s start with the high level and you're all about. Where do you like to invest? What's your methodology or your philosophy on investing? Basically give me the story of NuFund.
Dean Rosenberg: NuFund is really the next generation of an angel group in San Diego. There's a large angel network in San Diego called Tech Coast Angels, we were the San Diego chapter of that group for many years, but we always operated independently and our cultures were not always aligned. We were looking to really take some big steps to move angel investment groups from what we call the old white guy supper club into something that made sense in 2024, that would attract the best teams. We were investing a lot of money when we were involved in TCA, as an entire group we invested about $20 million a year and our San Diego group within TCA was doing $12 of that $20 million, which for an angel group is a reasonably big number. We just realized that the angel group process was really structurally set up to turn away the best teams and the best founders, because the best founders had a Rolodex that they can go to for investment, the best founders were not going to tolerate a process where they were put through a bunch of gauntlets, never quite knowing when it was going to be over, never quite knowing how much money they were going to get at the end of the process.
When we became NuFund several years ago we created an annual fund, and messaging and culture around that that said, “when we meet you as a founder, if you inspire us in less than 30 days you'll get a $500,000 check, plus individual checks from our members if you want to dig into the individual checks as well." So, we changed the narrative from this open ended, weird gladiator thing where you go present to people while they're eating dinner and clicking their dishes to something where we had a very, very fine tuned due diligence process, where 80% of due diligence was done in a single two hour meeting, and a fund that was all locked and loaded ready to make a wire transfer if you inspire the team. That's how we move forward today.
NuFund as an organization is a 501(c)(6) trade association of individual investors. We have over 300 investing members and, unlike traditional angel groups, effectively all of our members are actively investing in companies, either through our annual fund or writing checks themselves as small angel investors or super angels. And so, from the outside, we look almost more like a venture group or a VC firm than we do an angel group because of the structure: we have professional management in the group and, again, we have this fund LLC process in which we're a separate fund entity that’s being essentially stood up every year and has a 10 year life. Each individual Annual Fund invests approximately out of the fund itself, approximately $5 to $10 million in 15 to 20 companies during a roughly 12 month period, and that doesn't include the side investments made by our individual members as well.
VN: Where are you investing in terms of spaces and verticals? Do you have specific types of companies that you'd like to invest in or are you more agnostic about that?
DR: We gravitate to the deals where we have subject matter expertise and where we're most comfortable. Broadly, that's tech and life sciences; San Diego is a very hot area for life sciences and biotech and so we have some amazing investor members in our group that are former C-level execs from biotech, they’re PhD and MD types. Now, over 50% of our investments are made in biotech, pharma, med devices, and healthtech.
The remainder is invested across a lot of different areas but our sweet spots are SaaS software. We have a big Qualcomm ecosystem, a wireless chip ecosystem in San Diego; in fact, probably 25 or 30 of our members we affectionately refer to as the Qualcomm Mafia, they’re former high level positions at Qualcomm, so when we see a chip deal or a wireless deal, it goes their way. And we like hardtech, we like the harder sciences where there's clear IP; it might be a university scientist or PhD that maybe doesn't know how to spin out that tech and turn it into a business and we're there to provide some heavy lifting in addition to the funding. We've invested in all sorts of other things where, arguably, we probably didn't have the subject matter expertise that we should have.
VN: It'd be great to hear what you think is exciting right now in biotech and healthtech. It's a very interesting time for that space post-pandemic: the things that were hot during that time are starting to fade now and the companies that went public saw the bubble pop. So where do you see what's exciting now in that space?
DR: What's exciting to us, because of our crossover of software and biotech, is the AI convergence in those businesses. I say that with a recognition that there's also a lot of cliche goofiness going on with that, but it's definitely an area that's getting our attention and we've made some recent investments in that convergence.
We're also big on genomics because of the ecosystem in San Diego as well, so the convergence of genomics and AI and such. We've had some recent reasonable exits that are more traditional such as DTx Pharma, an oligonucleotides platform that just exited in a $1 billion dollar transaction with half a billion of initial consideration, that was a deal that we led early on. Echo Labs, which rebranded to Discover Echo, is a microscope company; I describe that as if Apple or Tesla built a microscope, it would be the Echo Scope. They took out the eyepiece and replaced it with an iPad with really cool functionality and a very exciting venture. We led several rounds, including co-leading a Series A with Dolby Ventures and that was a nine figure exit, so it was a successful exit for the group. But, yeah, we're drawn to some AI plays right now in the space as well.
VN: It seems like you’re more B2B than B2C.
DR: Definitely more B2B than B2C. I would even go as far as to say B2C is a bit of a blind spot for us. We have no rules so if our if our members are inspired a company would get through, but we're much more likely to invest in a B2B deal that a consumer mobile app
VN: Is that just because of your background and your expertise?
DR: We just don't have that level. Back in the TCA days, even the entertainment deals and such would go to the LA group because we were limited.
VN: If you were to define the macro trend you're betting on, what would you do? How would you define that?
DR: The macro trend on the tech side is clearly AI disintermediating and changing everything. We're trying to separate the early adopter, the “oh, wow, gee whiz” applications, from the truly transformational applications.
To give an example of that, I'm not going to describe this well but there's a meme going around on LinkedIn where it's like a Scooby Doo scene and they just caught the bad guy and they pulled the mask off. They thought it was an innovative startup, but what it really was was a company just using Chat-GPT. So, we've got some really strong people in the space, we've got members in NuFund who are Amazon people, who are Google people and it's blowing us away when we engage with a founding team with a super good pedigree, super excited about what they're doing, and then they they hit us with the venture and it's AI natural language listening in the examination room with the doctor so I could get can transcribe the visit and do the pharma scripts. They actually don't realize that we've heard six other pitches with exactly the same thing.
VN: I've covered like three or four companies that do that, at least.
DR: It doesn't mean that it's not an important thing and it doesn't mean that that's not going to be the way we have a medical visit in the future, but we're really trying to identify the true, hard part of AI and machine learning and design as well. Not to say that there aren't deals where a founding team has unique access to an industry and if they're first with a simple Gen AI solution that they won't win just based on being first to market, and we'll certainly explore those, but we're really looking for durable competitive advantage in the difficulty and the novelty of what a team’s solution is.
VN: AI obviously has become a bit of a buzzword: Rock Health recently put out their Q1 report and they said that 40% of the healthcare companies that raised funding had AI somewhere in their solution. So, nearly half of the companies that raised said that they were using AI but there's no way that there's that many companies who have a great solution.
DR: Those of us with gray hair, we saw that happen in 1998. It was the most boring company that suddenly became an internet company just to get the funding, and then obviously Pets.com and that kind of stuff happened. Back then I remember my first home grocer order and I said, “man, this service is amazing, I'm going to keep using them until they go out of business,” because they were losing like twice as much money on every deal but they still got the $1 billion dollar valuation until they went out of business. Obviously, years later, the model now mostly works.
VN: What is the vetting process to make sure that they're not just using Chat-GPT, not just like slapping AI onto their product?
DR: Our vetting process at NuFund is designed to be thorough and fast. The short version of that is, when a deal comes to us, preferably through referral, but over the transom is fine as well, we identify two to four subject matter experts to vet that deal. That's typically an initial meeting with the team that’s 30 to 60 minutes, and if they get inspired they start a formal due diligence process as circulated amongst the group. Again, 80% of the due diligence process is a kickoff meeting where the company provides meaningful materials in advance of that meeting. Then, at the end of that meeting, there's a decision on whether to move forward or not. If we end up moving forward, we're basically making a provisional commitment to fund the company subject to checking whatever remaining boxes need to be checked in the diligence process. It's very tangible: these are the four things we have to do. One might be a freedom to operate review, an informal one from our internal member attorneys, if we have a concern about the path to navigate around their IP. If it's an AI ideal, there might be a product demo or there might be further review of training data and methodology around that; we find that with a lot of AI deals, the company does not pass even the initial discussion where you find out the training data is garbage. My Texas friends have the expression, “big hat, no cattle.” And so, we really pride ourselves in actually digging in and understanding the tech.
We typically focus on seed and pre-seed, not always but mostly, and there are founders that have done a really great job of putting on a good smile at the country club and raising half a million dollars or more; in the Bay Area you can do more with the right country club and the right smile. One of the struggles that those founders have with us is we enjoy the smile but we're actually digging in at a technical level, and that really is our core competence, to actually understand what we're investing in.
VN: Pre-seed and seed is obviously pretty early on, so do you need to see any traction from them at that point? Do you need to see any minimum number of customers, minimum revenue or anything like that to invest? I'm assuming seed, maybe they're a little bit further along, but especially at pre-seed, what do you need to see from them at that point?
DR: Again, there's no hard rules. Obviously, for R&D heavy companies in hardtech and life sciences, we certainly don't expect any of that; what we expect is some non-dilutive financing, we expect some ability to fund the progress of the company without our money; maybe it's university lab, maybe it's a strategic partnership with with pharma.
For traditional software and mobile deals, we do typically want to see an MVP in the market with some evidence of product market fit. It doesn't have to be significant: in the case of niche B2B SaaS, it might be one customer, and we want that customer to not be the brother in law of the founder. We tend to know those tricks as former founders and entrepreneurs ourselves; I've been investing for the last 10 years, but I was a founder for 20 years or 25 years before that and I know that when we're talking to a team and they say, “we're talking to Sony,” I know that means they've sent an email, but they haven't gotten a reply yet. And so, for SaaS software and mobile, we want to see a technical founder so that progress can be made on the product without our money. We always talk about Bill Gates, Larry, and Sergey, Spiegel, Uber: if you look at all of those deals, they created immense value, multimillion dollar value, before they took meaningful additional funding, just by having technical members of the team that were pulling all nighters in coding, so we want to see that. We're less excited about industry subject matter experts that are hiring an offshore team, meaning two real estate guys who are experts in real estate, they have a great idea for transformation; another cliche is “we're transforming the multiple listings process, and we're disrupting,” and we've seen like 80 of those. And so, for SaaS software, we want to see progress at some meaningful level. Mobile, we're actually much more discriminating because maybe 96% of mobile apps die or some crazy number and so we want to see meaningful things, daily activities or monthly activities on a business model that's based on a mobile app. SaaS software is different.
VN: It sounds like on the software side you won't invest pre-product.
DR: It's all a handicapping risk, so we will be happy to invest pre-product at a low valuation in a founder we believe in. It's just not our sweet spot.
VN: At the early stages, you're investing in a person and a team and an entrepreneur. How do you vet that person? What do you want to see from their founding team to make you want to invest in the company?
DR: What's interesting is with 350 members everybody has their different criteria. We had a very engaged dialogue a couple of years ago where we had turned down a founder who was a bit arrogant and the discussion was, “we really want our founders to be more nice and low key and coachable.” In that meeting, I was losing my patience and blurted out, “if you think about the early days, Gates was an asshole, Larry Ellison was an asshole, Elon was an asshole, you can go down the list. If you want to invest in coachable, nice founders, you're picking the wrong attribute. Maybe we should be investing in arrogant, not so nice people, but who have the integrity to protect our investment, who actually care about us as investors, and allow us to go on for the ride.”
I'm the fund manager at NuFund but I'm also technically only one member. Personally, I’m looking for somebody who shows they understand the journey they're on, which is incredibly important. By the journey, I mean a Chutes and Ladders game where you make the right decisions you move up, and then you make the wrong decision and you drop down; it could be in cost or time, it could be, “oops, wrong decision $50 grand,” or, “oops, wrong decision, a year of lifecycle.” So, when I'm interacting with a founder or CEO, I want to be able to visualize that they know the journey they're on, having been on the journey myself with a number of deals, most of which were failures. That's an intangible.
For tech deals, I want to see a team that knows how to extract cash or a credit card or a check from a customer. I want to see that they know how to have commercial relationships, that they're passionate about that, and that that's a big part of how they're going to be successful moving forward. So many teams will focus on the product and you ask them what their growth hack is going to be to get to the numbers that they put in their hockey stick and it's, “I'm going to hire a sales guy.” They have no idea what that part of the journey is. So, we want to see that.
One company I'm very involved in, which I even took an operating role in, was a company that was doing less than $1 million dollars in sales when we found them, and last year did over $300 million in sales. It was because of the sales genetics of the founder and how that pervaded every aspect of the company culture.
VN: The way I've heard it described from other VCs that I've spoken to is that they want founders who are flexible but have a vision. They want founders who will fight for what they believe in, but also are willing to change when they need to change.
DR: I think that's fair. And then also a little bit cliched, but are you familiar with the Stockdale paradox?
VN: No, I’ve never heard of that.
DR: Admiral Stockdale was a Vietnam prisoner of war and he managed to survive in captivity much longer than his comrades who unfortunately perished. When he was finally repatriated and people asked, "How did you survive so long?" he said, “I was able to have unwavering confidence and optimism that I would prevail in the end, while also understanding the brutal reality of my current situation, whatever it may be.” I've now transferred that into entrepreneurship; I'm not the only one, you can Google it and there's a lot of people talking about it, but the idea is that failure is not an option, I know my path forward, I'm going to get there, but I also get that if I don't reduce my spending by 40% I'll probably be out of business in 90 days. It's not a check the box thing, it's a tangible sense that you have when you meet these teams, do they understand the journey ahead of them? Can they have unwavering optimism and also understand the brutal reality of their current situation, whatever it is? Are they going to take good care of you as an investor? There's lots of opportunities, particularly in this environment, to get screwed as an investor in a company that, ultimately, can be successful.
VN: Let's talk about the current market, especially when it comes to healthtech and what's been happening in that space, especially in the last couple of years after the pandemic highs. We saw every single digital health company turn into a telehealth company overnight and virtual care could raise so much money without even doing anything and then it all popped when the pandemic faded. Where do you see the market now? Where are evaluations compared to where they were a couple of years ago? And what does that mean for the companies that are raising funding?
DR: Where we sit, which is pretty much at the beginning, innings one or two of the game, to use the baseball analogy, we're not seeing valuations come down that much. It's actually quite frustrating as an investor, we're seeing deals come to us in pre-seed at $4 to $8 million pre or cap or whatever instrument they're using, and then we're seeing a more mature company that has its first customers coming to us at $5 to $10 million. It seems like anybody with an idea now is now coming to market with this rubber stamp. “Okay, this is a $6 million pre or an $8 million” with no proof of performance, maybe a step above the idea on a napkin. And so, we struggle with that a lot. We're certainly seeing repricing into Series B and Series C and beyond, but that's not really where we play as early stage investors.
In the last 60 days, we've been involved in four pay to plays, which is unusual, where there’s meaningful recapitalisation of companies, a few of which are doing everything right, other than their ability to fundraise in this environment. We have one company, in particular, which is a medical device: they’re in the clinic, they've done four clinical trials on patients, incredible results, and are out of money. That is a little bit of new territory for us, especially with a fund model where we have an annual fund that invests for a single year, and it's a little bit more complicated than worth discussing now but follow-on REITs go to the then current Fund, which could have different members in it, so the previous one that made the investment could actually be significantly impaired by a cramdown or via an adverse follow-on financing.
VN: You would think that valuations would be dropping? Why do you think that they're not?
DR: I don't have good data to prove a thesis. I will say that there are a lot more places now to seek seed and pre-seed investment, like non-accredited crowdfunding is becoming more popular. The company I mentioned that's now doing $300 million in revenue, they raised $8 million in crowdfunding; they never took institutional capital. And then you have micro VC: in San Diego, in particular, we have a whole ecosystem now in Southern California of what I would call micro VC, which are these $10 million funds or $50 million funds, and they're investing in $300,000 pieces. That's a supply and demand thing, if you have money from limited partners, and you need to put it to work, and there's more demand than supply, the numbers are going to go up.
VN: Tell me about your fund, and your differentiation. Usually, I ask about your differentiation to LPs, but do you have LPs in your structure?
DR: Interestingly, there's an SEC carve out for what they call an investment club. An investment club is a fund entity where every member participates in the investment decision and if we can organize that way, then we can have 250 members in our LLC instead of 99, which was the previous limit. And we also have some other things we don't have to worry about. So, what's important is that me as a fund manager is our executive committee on the fund has no say in what companies the fund invests in, that's driven by our operating agreement and voting process among the members. All we're there for is to make sure the rules are followed and that's what's fundamentally different from a typical GP/LP model in a venture fund.
VN: So, in your model, is it that a majority have to say they want to invest?
DR: If five of those 250 members fill out a form that says, “I believe we should make an investment out of our fund in this deal, here's why that, here's what I'm concerned about, here's my conflict,” that form then goes to all 250 members, and if 67% of those members say, “yes, we agree with you,” then we can make the investment a week later.
VN: What's the advantage of that model versus a typical LP model? What do you see as better as doing it this way?
DR: For the entrepreneur, I don't know that it matters at the end of the day. For me, I would compare it more to the traditional angel investing model, where it was a bunch of individuals needing to be herded, and then they would write small checks. And then if it was a meaningful angel group, there might be a sidecar fund that would then juice those checks with a bigger check. But the founders don't need to go through that whole gauntlet process and we've turned that around for these early stage deals so instead of having to just chase down a lot of small checks, they interact with us quickly and get a seed style venture check from what, otherwise, would have been a legacy angel group. So, from a legality perspective, the benefits of our model versus LPs and GPS is those funds are going to require the insurance model, the legal funds setup model, there's a lot of things that make those harder to do than our model. We said that we can set up an annual fund of under $20,000, and be up and running in a few weeks and it's a little bit harder to do that when you're taking in outside capital and subject to the regulatory regime around.
VN: When an entrepreneur comes to NuFund, what's your pitch to them? Obviously, the best entrepreneurs have a lot of different options, they can go to a lot of different places for money. So, when they come to you, what's your pitch to them to say, “this is why we're a good partner for you.”
DR: There's really two dynamics here. One is, we want to be the best place for the best teams to raise their first million dollars; that's really our sweet spot. Our investment size is typically between $300,000 and $2 million, but the sweet spot is probably $400,000 to $1 million. We have a way to do that relatively quickly and that's a competitive advantage for the group.
The other part of that is for 80-plus percent of the deals we invest in, we have significant subject matter expertise and rolodexes that can help the company post money, which isn't that different from a traditional VC, but it's sometimes very different from angel investing groups.
VN: Talk about some of the companies you've invested in. I know you mentioned a few earlier in the call; if you want to go deeper into those, that's fine, or if you want to talk about different ones, just talk about two or three companies that you invested in at NuFund, what it was about those companies or those entrepreneurs that that made you want to invest in them.
DR: We've invested in over 100 companies but using the two examples I shared on the exits that we just had, Discover Echo was a founder who worked in sales in microscopy and was one of the top selling sales execs in the history of Nikon. He found a better way and started a company to do it. He literally bled the concept of the Stockdale paradox where he was able to always see the prize at the end, while navigating everything from COVID to tariffs that happened during COVID when he was manufacturing in China and he just figured out how to adapt to those twists and turns and, ultimately, resulted in the sale to a public company.
DTx Pharma is the company I mentioned that had the half billion dollar initial exit with significant earnout potential. That was a very inspiring, a recently minted PhD who was an expert in their space, who was able to convey a vision for a platform technology that wasn't going to be for one drug, but could be for hundreds of drugs, and the multiple shots on goal that that afforded an investor. They navigated very well, they raised over $100 million on their way to their exit, and they executed very, very well, and it was a successful story.
We could do a whole show on the misses and we also have quite a few where they just have a failure to launch. They do the crossing the chasm thing where they get a few early adopters, and then it just never gets to that broad market adoption.
VN: You mentioned your founder for 20ish years for becoming a VC about 10 years ago. So, talk about some of the things maybe that you've learned, or maybe something has surprised you in making that transition from one side of the aisle to the other. What was that like?
DR: When I started, I was a computer science guy, so a computer science degree, MBA much later, and I was absolutely sure that the programming was the hard part, the software development was the hard part, and sales was easy. You just like to put on shiny shoes, and just go and talk to people. I realized early on in my entrepreneurial journey that actually being able to figure out the go-to-market plan for a product was actually potentially harder than the tech. So, that was something I learned early on.
I also learned a lot about timing. One of my claims to fame is we launched the world's first online restaurant ordering site on the web and in 1997 or 1998 called Lunchnet.com. If you know your internet history, the web as we know it was invented in 1994 with HTTP and HTML and so let's just say that in 1998 it wasn't a convenient advantage to order lunch with your dial up AOL account. So, if you talk about timing, we made lots of mistakes: we were self funded, which was stupid. It was fun, we got on all the national press, all the morning news shows and such but, at the end of the day, we sold it and made back some of the money, but it was definitely an example of timing.
Another one was, we see over and over again how legislative changes create entrepreneurship and opportunities. My last company that was largely the venture that allowed me to transition to being an investor was, we found a way to track the real time location of every large ship in the world. In some ways like the Uber journey in the beginning, or the on demand scooters, there was no regulatory regime. So, it was like, “well, there's no law here saying we can't just dump 1,000 Scooters onto the middle of a city street so let's do that and then figure it out,” and that was what happened with a venture called PortVision, where we found a way to provide a SaaS product that showed the real time location of every large ship in the world. Nothing illegal about it, but it didn't stop NCIS from opening a case against us and the FBI; I got a CIA handler. There was something that happened in 2005 that made this tech possible and so those changes in regulations, those are the things we look at. Who's going to be first to figure it out and make something big happen? And then when I got to being on the other side of the table as an investor and coach, I'm trying to use that body of experience, which is mired mostly in failure, but fortunately a few successes, to hopefully directive a founder to, in that Chutes and Ladders game, to maybe have a few less downward events and keep them moving forward.
VN: What's the part of the job that you love the most being a VC? What motivates you, what gets you out of bed every day makes you want to do this?
DR: I love exercising the muscle of innovation and creation and how to take an idea and turn it into something. One of the things that attracted me to software was it’s something you literally create with your brain, there's no raw materials. I also recognize that late into my 50s, my value, to use a basketball analogy, is not on the court but stepping to the sidelines and being that coach that helps the all stars that are on the court. Or to say it a different way, not pulling the all nighters but worrying about other people going all night. It's just a kick to experience that thrill of the chase and the entrepreneurial journey, but without necessarily having to worry about whether I'm going to pay my mortgage. If I'm sitting on a board, I'm very, very engaged: I'll go to customer meetings, I'll negotiate with vendors, because again, these are early stage deals, so I love that part of the job.
I don't love the part of the job where we take much of the risk in the very, very beginning of the venture, and then, in subsequent investment rounds, they impair the investment that we made through other actions, and we lose a lot of the benefits of being early. I'm still navigating how to best defend against that, so that we don't lose the ability for people to be excited about investing early.
Murat left the VC firm to invest independently; now he enjoys it more
Read more...The firm invests in sectors like artificial intelligence, space, defense, and healthcare
Read more...MMC deploys a media for equity model, backed by Sinclair Broadcast Group and TelevisaUnivision
Read more...