Modus Capital's Kareem Elsirafy Is On The Lookout For Entrepreneurs Building Sound Businesses Kareem Elsirafy has had his fair share of struggles and successes in the entrepreneurial world, and now, in his new role as an investor, he's keen to support the ecosystem.
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Kareem Elsirafy has had his fair share of struggles and successes in the entrepreneurial world, and now, in his new role as an investor, he's keen to support the ecosystem. Born in Egypt, he moved with his family at the age of four to the US, and later enlisted in the Marine Corps Reserve. After being discharged from the military, he found himself struggling to transition to civilian life, wherein he even found himself moving to a homeless shelter, washing dishes at a restaurant, and working his way up as a waiter, and then to an assistant manager. Eventually, he began to study for the General Equivalency Development (GED) test, and found a sales job at a car dealership, saving enough to become a licensed insurance and financial services representative, and moving on to roles in finance services, and leading a sales, marketing and operations team. In 2007, he launched M1 Marketing Firm, which provided creative and business solutions for small to mid-sized companies, while also enrolling as a student at a community college to study economics and political science. Excelling in his classes, he enrolled to Columbia University and graduated in 2012 with a triple major in Political Science, Economics and Middle Eastern and South Asian Studies, and an MBA in Technology Management.
After graduating, along with fellow partners, driven by their personal experiences, in 2013, Elsirafy co-founded Unite US, a SaaS platform supporting veterans transitioning from military to civilian life by digitally connecting health and employment services to individuals. It has since expanded to over 15 US states, and to date, according to Crunchbase, has raised US$10.3 million in funding. Elsirafy then moved on to other ventures, and in 2015, joined by his other partners, launched Modus Capital, a venture capital and operating firm based in New York, with offices in Los Angeles and Cairo. Investing in early to mid-stage companies, the firm asserts on its site that its aim is to not just fund their portfolio companies, but also partner with them to shape their products through its Modus Operations arm.
Starting up Modus Capital was, Elsirafy says, due to his and his partners' experiences of building companies and seeing how the venture capital ecosystem -specifically the relationship between VCs, their entrepreneurs and LPs- had its issues, prompting them to start a novel approach. In doing so, they looked at the two main players in the VC relationship. From the startup's perspective, they found that entrepreneurs need more than just capital from VCs. He notes that traditionally, VCs invest and provide capital and access to light mentorship and network introductions. This leaves "treps struggling to find the right type and amount of advisory for strategic value-add, as well as talent. While both are available in the ecosystem, both do come with obstacles: "The right type of advisory is either expensive, and/or is difficult to acquire at the frequency a startup needs (which is, a lot). This is simply a consequence of a high opportunity cost for people with that expertise. On the executing talent side (employees), companies compete with ever increasing salaries supported by the high valuation startup environment which, when combined with the general challenges of finding the right type of credible talent that is a cultural fit for the company, presents a very challenging obstacle."
Either way, he notes that startups struggle to find the right talent at an affordable rate, or hire an agency to plug the gap. From the VC's perspective, Elsirafy and his partners felt that in addition to providing the right type of value add support for portfolio companies, they needed to offer a better investment product to their LPs. "VCs historically engage in a framed discourse: positioning their competitive advantage as a sector specialist, or access to specific dealflow. In the end, and to overly simplify, the game is making educated bets hoping for one or two home runs that will carry the fund to profitability. While this risk is inherent to venture capital, we felt there is a way to provide a better de-risked investment opportunity to LPs." Considering both these perspectives, they took on the challenge to formulate a "new model of venture capital engagement, where you can provide not just more but the right type of value added to entrepreneurs, while giving LPs a safer derisked investment product."
For startups wondering if their enterprise should consider working with Modus Capital, Elsirafy assures that with his company's operational framework, which can provide value for early-stage startups and SMEs alike, it is quite industry agnostic, although the team do have a preference for concepts in fintech, regulatory tech, blockchain applications, SaaS, direct-to-consumer services, and medtech. The founder and Managing Partner admits Modus also tends to focus on businesses that have the potential for significant social impact: "We're looking for companies that can have a positive social impact en masse, more so than as a simple by-product of a new successful venture." And with an office in Egypt, Modus has also launched an initiative to expand its model across the region. Elsirafy remarks on how the ecosystem is still quite nascent, and has a few major gaps that the Modus model can help fix. When asked if his entrepreneurial background has affected the way he sources deals, Elsirafy explains that Modus' methodology is centered on doing due diligence, and having its operational teams work with the entrepreneurs, prior to being considered for investment.
From his personal experience, Elsirafy has learnt that even if you've met the founding team countless times and have conducted due diligence, you're still only getting a partial perspective to the business. "We all know that execution is key, and that when challenges arise, and stakes are high, this provides an opportunity for teams to either break through successfully or let it get the best of them." The Modus process thus allows Elsirafy and his team to really see how the startup handles hurdles, and get a true insight to their operational flow and in-depth process.
As someone who assesses startups seeking funding, Elsirafy evaluates a startup's pitch based on a few particular aspects. One, is what the startup is trying to solve and the solution they're offering, plus if the demand is apparent and warrants the value proposition of their product or service. He looks at their approach to the solution: from the concept of their product-market fit, to their product's traction as early validation, and its USP of what makes their product or service better than what the market offers, and whether they address the problem distinctive. Two, he focuses on its opportunity and current and probable future market value. "Some companies may be addressing today's market, but knowing where that market is heading, and the underlying drivers contributing to its future development is crucial to understanding the long-term opportunity of the sector."
Third, he factors in the startup's ability to explain their problem, solution and timeline with as few slides as possible, as it indicates that the startup has honed on their focus. "There must be a balance between staying within certain parameters and not being too opportunistic outside of your core focus, while being pliable enough to pivot and get on the best path to success." Fourth, he considers whether the founding team compliments each other's skillset, and Elsirafy notes how each founder contributes to an overall pitch, as it not only indicates how each person brings value, but also the synergy of the founders as a team. And finally, he examines their fit as an entrepreneur and investor. As they'll be working closely, though they would bring value as investors, it's essential startups would be flexible enough to take advice, and steadfast in maintaining their vision for their company, so a balance for each other's role is critical.
On that note, Elsirafy also points out crucial mistakes that entrepreneurs make when approaching investors. An overlooked component is forgetting their story- Elsirafy emphasizes part of every startup's story is information that investors are looking for: problem, solution, experience and expertise in that market, the ability to speak, market and sell it to other investors and customers, and their perseverance and work ethic to make this venture successful. He refers to his beginnings with Unite US, wherein his own pain points were the ideal use case for the company. Using his firsthand knowledge, it drove product development, gaining buy-in from investors and collaborating organizations. Being mindful of an investor's busy schedule can also be easily missed- it's vital for entrepreneurs to be ready, organized and make it easy for investors to have access to everything from their current status, to their future plans and all due diligence items in a packet ready for distribution.
Another mistake startups often fall to? "A lot of entrepreneurs feel like investors have all the power, because they hold key to their success," which Elsirafy informs, is far from the truth. He advises entrepreneurs to keep in mind that investors are "only providing one part of what's needed to make their mark on the worldcapital. Yes, it's a critical part, but it's only one part," he stresses. "This is why you see a lot of investors say that they invest in people, because they do. Being yourself and confident relays to investors that you understand the value you're bringing to the table and that you will be a key contributor to the success of the venture." Upon receiving funding, Elsirafy reminds startups that, yes, new-found capital can make your startup better, but it can also easily make it worse. He points out various factors that need to be properly considered- first, having the right team: "Getting capital makes it easy to hire people to alleviate the existing teams' workload or fill a long-needed position at a company, don't rush it."
At the same time, when it comes to hiring, Elsirafy suggests keeping in mind that everyone has their own professional and personal goals outside your company. He says it's essential to discuss each's goals and make a plan in place to get them there: "Not only are you being a good employer and harboring a great company culture, but you're also sure to get better output from every member of your team since your interests are aligned with mutually beneficial goals." Secondly, a factor that often gets disregarded is identifying diminishing returns- as in, for example, over hiring to the point wherein bringing additional staff would worsen issues: "Make sure you properly assess your needs and continuously perform cost-benefit analysis, so you're aware of when you begin to encounter diminishing returns." With new capital and growth, Elsirafy comments it becomes harder for an entrepreneur to keep a balance of their macro strategy and micro execution for it. He advises to establish a clear internal communication framework to ensure that even when the entrepreneur can't be involved in day-to-day micro on-goings, at least they have relevant information from their team that the micro is aligned with the macro strategy.
Another common mistake that Elsirafy brings up is when founders either communicate too much or too little with their investors. "Investors don't need to hear it all," says Elsirafy, adding that though it's easy to be over eager in sharing positive information in a long update email to your investors (that is not only time-consuming for entrepreneurs to write, but for investors to read too), this sets a precedented for future long updates, and when there isn't as much to update them on, it might be seen as a sign of trouble. "Don't set the bar unnecessarily high, but also make sure communications are there and consistent. Lastly, whatever you do, don't ghost!" He concludes that he wants entrepreneurs to find a balance between "making the money last as far as you can, but without hindering the business from growing or doing what needs to be done." This trait is most often found in startups which had bootstrapped for quite a while, raise capital, and continue to operate lean and allocate resources as efficiently as possible. "If your goal is to make a bigger fire, pouring gas on it does the job, but doing so without the right controls, you can burn everything down."
Looking at the year ahead, when asked about the opportunities and needs of the MENA region's entrepreneurial landscape, Elsirafy is positive that the investment area would continue to bustle with capital and activity- he asserts that, this, is likely as investors would invest more as local governments continue to support and fund economic diversification initiatives and create "diversified local markets" for countries that traditionally depended on oil or other natural resources. "With large labor forces in countries such as Egypt, Morocco, and Saudi Arabia, governments are hard-pressed to help cultivate an industry with increasing job opportunities, and inclusive for women and youth," says Elsirafy on how such initiatives will increase throughout the year (and beyond), which would increase investment opportunities and investors' confidence for the region.
Another opportunity unnoticed are SMEs- Elsirafy comments on how long-established family businesses are having its reigns passed to younger and increasingly entrepreneurial generation, and that with the right capital and advisory, could grow to large enterprises. And to leverage on this opportunity, this is when investors need to step up, to guide entrepreneurs on best practices, for which investors themselves need to be experienced in local markets, as well as sound business practices and management procedures to provide the entrepreneurs the right type of support. However, Elsirafy has a feeling that mentorship might struggle, at least, for now: "There is a significant shortage of advisors and mentors that have gone through a full entrepreneurship cycle (idea to exit). I think this will continue to remain a challenge for the next couple of years until local entrepreneurs have gone through enough cycles to actually qualify as mentors or the transfer of information and skills proliferates from developed venture ecosystems to MENA."
But more so, Elsirafy is adamant on the future, he asserts that the region would start seeing a "reverse brain drain" with talent and knowledge transfer coming back to MENA, particularly from local natives and second generation of those who immigrated. "I'm also confident that it won't be a purely economic driver behind this, but the opportunity for entrepreneurs, highly-skilled talent, and investors to take on the challenge of innovating in a relatively untapped market, while contributing to a positive social impact."
Kareem Elsirafy, founder and Managing Partner of Modus Capital
Looking at your experience as an entrepreneur and as an investor, what do you think makes a "good VC firm"?
"A good VC firm is one that can properly manage their relationship with their LPs (limited partners) and the entrepreneurs they invest in. I feel a significant shortcoming of VCs is that their focus is biased towards portfolio performance strictly from the lens of their LPs. We all understand the fiduciary duty of a venture firm's GPs (General Partners) is a positive return for their investors (that's their job after all), but I think if more VCs provided a better type of support to their companies, positive returns will be an inherent by-product of those efforts. In the end, I don't think there is anything called a "bad VC,' I just think there are approaches and models that are more beneficial than others, in regards to what startups are looking for or need."
With your business growth trajectory, how have you experienced failure? How did you deal with it?
"No matter how much data you have or how well you plan things, you're not always right. We've made mistakes by working with the wrong companies or founders in an effort to materialize an engagement that had a clear economic benefit, although our initial thoughts/ feelings were telling us it may not be the best opportunity from a leadership or thought process perspective. In the end, our instincts were right, and the relationships were unsustainable, but we made sure to disengage in the gentlest way possible and always leave an opportunity to re-engage in the future. Taking the time to digest all the information and overcome your knee-jerk reaction to a failure helps us assess what we did wrong or could have done better, while also reacting in the most mutually beneficial way to you and anyone else involved be they an internal teammate at your organization or someone external."
In building up Modus Capital, what were the biggest obstacles you've faced and how have you overcome it?
"Aside from fundraising which is challenging enough itself notwithstanding doing so with a new model, I would say [it] is educating. I don't mean in a traditional sense of "what to do' or "how to do it,' but more around "why.' Everyone has their own understanding of things and this is not what only drives their actions, but also helps forms their view of the world around them. In such a construct, if you don't articulate the why behind the what and how you do, it makes it significantly harder for you to get buy-in. Attempting a new way to deploy venture capital in a supportive ecosystem while also providing an alternative investment product to LPs, is a significant challenge not only in educating investors and the entrepreneurs we invest in, but also the existing players in the market you're entering and the greater ecosystem. We've faced a lot of pushback when we initially solicited our model, but as soon as we did a better job of explaining why it is this way and the path that got us to Modus, we began finding a lot of support from both investors/ companies and others in the market. In short, we've learned that educating through communicating the right information will help others see things from our perspective which is all we can ask of others."