Asset Trip with Swati Chaturvedi: Passing On Delivery Apps to Fund Deep Tech Startups That Could Change the World

On both a personal level, and in terms of your fund, what are your primary investing goals between factors like returns, impact, asset preservation, and whatnot?

That's a very good question. Because as a venture capital fund, you invest very differently from what you do as an individual. So I'll give you an example on an individual level. If I think, "Oh, this company is going to give me 2X or 3X returns, I'm even going to beat the market on this in the next three to five years," it's good enough. It's something I'm passionate about. It's exciting, it's interesting. But from a fund perspective, it's not good enough, right? From the fund perspective, you're looking for that 10X return. And if the company or the startup does not meet those criteria, then you do have to pass.

So just because startups get passed on by VCs doesn't mean they won't raise financing because they might find others like myself, angel investors, who think "This is something I'm passionate about. It's going to beat the market, and I'm going to do something good with it, so I'm going to invest." So there are two different philosophies. As a venture fund, you really do have the financial objective as the first motivation. You have to generate returns, and you're in a competitive world. So that's how they differ.

That makes a lot of sense. How did you get started in the world of angel and VC investing? What led you to eventually start your own fund?

Prior to any of this, I used to work in venture capital and private equity, and then I realized my passion really is startups. I started visiting various angel groups thinking I want to be an angel investor. And I realized all of the startups that were being presented were for SoLoMo (social-local-mobile). This was a while back. And I was like, okay, this is not compelling enough for me. My passion is science. My passion is technology. It's also reflected in my background and education. I wanted to find compelling opportunities that are leveraging breakthroughs in science and engineering to move the world forward. So I started an angel group for MIT alumni initially, and we actually coined the term “deep tech startups” or “deep tech investing”.

In fact, one of the earliest essays on what is deep tech is my research. We started that with MIT angels, and we found really excellent deals were coming initially from MIT and the wider MIT network. We said, okay, this is really exciting. And along the way, I found that there were investors, people like myself who want to engage with these companies, but for the most part, they're geographically dispersed. So how do you invest in these exciting companies that are making a difference?

So that was one [challenge], and then there are other challenges for the average investor to access these startup investments, which are considered alternative investments. The challenges really are around check sizes. So at that time, I was not this billionaire who's going to write $100k checks left, right and center. You're careful about building your portfolio. So, I felt we needed to lower the check size. There's this massive opportunity where there are investors all around the world who don't have access, and we want to enable them. So that was how I started Propel(x). We enable accredited investors around the world to invest in deep tech startups, for the most part. We have recently expanded into fintech startups as well.

I find that fascinating, this style of startup investing that focuses specifically on startups that are going to have a huge impact on the world. It also sounds more challenging, though, than just looking for any old startup that seems like it'll produce your target returns. Is that a correct assumption? And what are some of the challenges particular to deep tech investing?

I mean, that's precisely right. You're not investing in the next pizza delivery app. Not that there is a problem with them, but it just wasn't compelling to me. So that is a correct characterization.

Now, what are some of the challenges? I think the challenge really is to understand how to evaluate these companies. And here's a tip I give to investors or aspiring investors: The evaluation does not really lie in trying to evaluate the technology. You should get a high-level understanding of how this works, certainly, but the real evaluation of the startup is—to what level do you have engagement with customers? So to come back to your point, what is the challenge with these kinds of investments? It's really understanding the traction that the company has.

People think you have to understand the technology, you have to do due diligence on that. That's there, but you cannot, as a VC or as an investor, be an expert at everything. I'll give you a parallel example. People invest in Genentech all the time, in Illumina, in public companies, and not everyone is an expert in biotech. So why are they able to invest? Because they're able to read what other people write about them. They have customers, they're looking to have traction, these are the projections, and so on. In the startup world, projections are pulled from thin air, of course. So we shouldn't put much on them. The way to evaluate is to really ask, "What is your customer traction?" And talk to the customers, if possible. The voice of the customer really does matter.

Do you have any advice for investors who are just getting started, whether they're looking at startups on Propel(x) or another outlet, for what they should look for and how to do their own due diligence?

Yes, absolutely. Don't consider this advice. I'm a registered rep, so I'm not giving advice here. But these are some things perhaps that people could keep in mind.

I think for an investor who's just starting out, it's relevant to understand how much money you should be allocating, right? How much money should you have to start out? How much wealth should you allocate to this? Different people have different portfolio allocations, and institutions invest a large amount of their portfolio into alternatives such as venture capital—for example, 20% or more. But as an individual, your risk profile is different. So understand your own risk profile. And the rule of thumb could be anywhere in the 5% to 10% range. Again, this is not advice, and it depends on every person's individual risk profile. It could be less than 5% for some and more than 10% for others.

But you want to then to understand, what are your total investable assets? Let's say it's $5 million. Five percent of that—okay, I have $250k to invest. Then you say, okay, now that I know the pool of wealth I have [to invest], you should diversify it. You should always think of it as a portfolio strategy and plan to invest in, let's say, 20 startups if you're doing venture capital. That, that helps you to determine, okay, you're going to be doing $12.5k for every startup. That's where you're at. So then you have to look for avenues for finding deals that will accept that amount. Typically it would be platforms because otherwise, angel investment is typically around the range of $25k or more.

So that is how you should start thinking of it, starting from the highest level of portfolio allocation. Should I have alternatives? If I want to have alternatives, what would be the percentage and what kind of alternatives should I have? Do I want real estate? Do I want venture capital, crypto, something else? Having determined that, then you go for the portfolio approach. This is how much you're going to invest, I'm going to invest in 20 different opportunities to be diversified. So that's just getting started. I can go into due diligence; I've written extensively about it, but in venture capital and startups, there are certain risk factors—just list the risk factors, and go down that list as to how you would want to conduct your diligence on that.

That's great advice. Are there any alternatives outside of startups that you invest in personally, or that you've been eyeing or intrigued by?

That's a really good question. I'm interested personally in art, but I have not really explored it. Life is busy. I have two children, I have a full-time job, so it becomes hard for me to find the time. But that said, real estate is one that all of us have in our portfolio to an extent. So you own a second home or vacation home or something like that. That is an investment. But I do like art. If there were fine art on offer, I would want to own some of it. I'm not that much into NFTs and such, but I'd want to own fine art if anything.

I think that's one of the coolest things about alternatives is you can get into investing in things you're actually super interested in or really enjoy, and they become a hobby on top of a way to make money. How do you think about the future of alternatives now that there are so many platforms out there with features like fractional ownership that offer more accessibility?

It's amazing to me. I mean, we haven't even scratched the tip of the iceberg. It is a vast world that has opened up for all investors. Here's the thing with the alternatives: Those days of investing 30/70, you know, 30% in bonds and 70% in stocks when you're younger...those days are gone. They're passé. That's old-fashioned, old school. People need to understand that alternatives are a thing. And the reason that alternatives weren't as big before was because they were not accessible. They existed, but they were simply not accessible to the ordinary investor. But times have now changed, and now they are accessible. There are a plethora of platforms, enabling people to invest in everything from venture capital to real estate to fine art and crypto.

So now that the accessibility has increased, people can start thinking, okay, I don't have to think of 70/30. My portfolio allocation can be more like 60/30/10, where I have 60% in stocks, 30% in bonds, and 10% in alternatives. I think it has an amazing, tremendous future. And the future is just starting. Did you know, for example, according to an SEC report, I think released in 2018, the value of private transactions in the US was about $3 trillion as opposed to public transactions, which was $1.5 trillion. Private markets were about twice the size of public markets. So, you can imagine we're just scratching the tip of the iceberg right now. We're just starting to access these alternative investments. And the world of options is huge. So I'm very, very optimistic, very enthusiastic. I'm in this business myself, and I'm excited that I'm part of this movement of democratizing things and making it available to the ordinary investor.

It's very exciting. It's been a lot of fun to see all these new platforms and options open up over the past few years. Do you see alternatives as being an option for a particular type of investor or do you think pretty much any investor can benefit from branching into alternatives?

So the first thing we should know is: alternatives are high-risk. When historically, old-fashioned portfolio construction used to happen, they would say when you're young, you need to allocate more to riskier assets, so 70%, and less to steady assets, income-producing assets like bonds, so 30%. But as you grow older, that allocation changes. You become more invested in bonds and less in stocks because your risk profile changes. So when I say add alternatives, they are the riskiest type of asset. And that's why you should have the smallest allocation to alternatives.

So do I think they're good for everyone? No. I think it depends on your risk profile. That's the number one thing, people have to understand the risks. Especially with venture capital, if you're investing in individual startups, people have to recognize you may lose all your money. So please, only invest an amount of money that you're comfortable losing. It shouldn't be that these things are keeping you up at night. You shouldn't invest all your life savings into this. So I don't know if it is for everyone. I think it is for the right risk profiles.

Very true. In addition to risk, do you think it's worthwhile for investors who are still investing with a pretty small amount of money to branch into alternatives? Assuming they're branching into platforms with very low minimums.

Again, it's a portfolio allocation, right? Do it if you think it adds to your portfolio and you can bear the risk. Even for institutional investing, for very high net worth people, alternatives add a little bit of spice. It's fun, it's different.

But I think the question you're getting at is should it be only accredited investors? So what do I think of crowdfunding? My personal view is if you're going to invest $100 in something, even if you had a 10X return, it will get you $1,000 of something. I feel, in my life, it doesn't move the needle. In fact, if it did move the needle, then I probably wouldn't invest that money.

My concern is really that it's not even worth conducting due diligence for $100. Go buy a dress. And so what happens then, when people start investing with such abandon? It's not real investing, because you don't have the bandwidth to conduct proper diligence on things that you're going to invest $100 in. You're not serious enough about it. So I do worry that it gives rise to a lot of not properly diligenced opportunities which will not yield returns, and then it gives a bad name to our industry. That is what I do worry about—it's $100, it doesn't really matter, so I'm not going to do any diligence, it's a lottery. It's not a lottery. The numbers are really not like the lottery. With the lottery, you have a very small chance of success. If you do proper diligence with startups, you have a much better chance of success than a lottery. So it's not akin at all.

Yeah, I think it's a valid concern that's not talked about a lot.

I don't want to speak to other people's businesses, there's a reason they're doing it. And I think where crowdfunding makes sense is small businesses. So, let's say there's a boutique that makes bespoke bridal dresses, for example. They probably can use crowdfunding, maybe in the form of debt even, to get started and get off the ground. It helps that creativity. It helps get creative things out onto main street. But people shouldn't have that expectation of, "oh, I'm going to get a 10X return. No. The expectation needs to match that reality. I think that is where crowdfunding, for community-style businesses, is very useful.

Can you talk a little bit about how you got started investing? Do you happen to remember what your very first investment was?

A hundred investments ago. For the fund, my first investment probably happened after I started Propel(x). It's a life science company, very high-risk. It's in gene therapy, and it was a company that appeared on Propel(x). I can't say that much more just because of the regulations around it, but it was interesting.

And what about for you personally, like the first time you ever bought a stock or the first time you put money into a mutual fund?

I used to play stock games when I was a grad student many years ago. And in that stock game, I invested in Apple, many, many years ago, which eventually turned out to be this giant beast with a trillion-dollar market cap. I want to go back and see what return I made on it.

[Laughter] Oh wow, was that with real money, or was that paper trading?

That was paper trading. [Laughs]

Darn!

I'm genuinely interested in finance and investing. On a personal level, I started very early. I just put money in mutual funds, Vanguard funds, but I did make sure to expose myself very broadly to the world. I have global exposure, whether emerging markets, mature markets. I basically picked a basket of mutual funds, and I said, this is it. Not even mutual funds, index funds. I have quite a few index funds. After this, my wealth is going to grow as the global economy grows.

What first sparked your interest in investing? Was it something that was talked about in your family growing up? Was it something from your educational experience?

Great question. I personally feel I'm born with that. I love math. I love it. And I like things that are applied. I love science, of course, but more than anything else, I love math. So I kind of knew whatever I do, I will be doing math. But I also like to see the big picture. So investing makes a lot of sense for someone like me.

But, I don't think it was talked about in my family. Everyone in my family is a public servant. I come from India, and everyone's a bureaucrat, and my father was in the Indian army. We never used to talk about money. You know, money is, at least in our family, not the best thing to talk about. How should I put it? It's not the classiest thing to talk about, you know? So we never talked about money much, but I think I was born with this interest.

For our last question, I'm going to put you on the spot a little. Can you name your biggest investing win and your biggest investing loss?

Oh my God. Okay, my biggest investing loss? Well, this was a miss. Most VCs talk about "a miss." Many years ago, when I started the MIT angels group, I sourced a company. They were looking for financing, they were still at some very minimal valuation. They were still in the lab at MIT. I loved them, I loved the concept. I said, this company is going to do really well. A lot of MIT angels invested for various reasons. But at that time, because I was short on cash or whatever it was, I didn't invest. That company went public last year. And it was a big win for many of the people that I've worked with. So that was a miss [for me].

In terms of wins, my portfolio is keeping above the water. That's a good thing. That's a great starting point. I think with the Newton fund portfolio, which is the fund affiliated with Propel(x), it's doing quite well. We've invested in some amazing companies. I'm really proud of them. Some very early stage [companies] that are going on to do great things, and now they've raised a lot of capital from big VCs. One of our companies, ProbiusDx, just raised a large round led by Kodak Capital. We had invested in their seed. Another company, Aperio Systems—it's a data integrity company—we invested in their seed. We've had a big write-up because they just raised financing led by National Grid, which is one of the biggest utilities in the country. So we're excited about the overall portfolio looking really good. We're beating the benchmark by quite a distance. What I want to emphasize here is that deep tech is worth investing in.

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• Propel(x): Propel(x) is where investors and world-changing science and technology startups meet.
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