July 24, 2024 • 33 mins
On today's episode I interviewed Eyal Malinger, Managing Partner at Resurge Growth Partners.
We delved into Eyal's journey through the venture capital world, exploring his strategies for identifying high-potential ventures and his vision for the future of tech entrepreneurship. From his early days as a software engineer to his roles at McKinsey, Oaktree Capital and Beringea, Eyal shares the pivotal moments that shaped his career and led him to establish Resurge Growth Partners.
Join us as Eyal unveils the thesis behind Resurge Growth Partners, a fund designed to bridge a critical gap in the market. He explains how the traditional venture model, with its focus on exponential growth, often overlooks companies that have solid products and teams but don’t fit the high-growth template. These "orphaned" ventures, as Eyal calls them, are the businesses Resurge Growth Partners aims to support, providing them with the resources and guidance needed to thrive.
Eyal also sheds light on the fund's geographical focus, emphasizing the importance of proximity and hands-on involvement in the UK, Europe, and Israel. He discusses the fund's control-oriented approach, contrasting it with the typical venture capital model and highlighting the importance of cultural alignment and shared goals with portfolio companies.
The conversation takes a fascinating turn as Eyal addresses the challenges of transitioning a company from a growth-focused to a profitability-focused model. He shares insights into the introspective journey CEOs must undertake and the importance of open communication and self-awareness among founders. Eyal also discusses conflict resolution strategies within leadership teams, offering practical advice for maintaining alignment and ensuring a company's trajectory remains on course.
As we explore the future of tech entrepreneurship, Eyal provides a candid assessment of the current market landscape, the impact of technological advancements, and the evolving trends in sectors poised for innovation. He also discusses the fund's strategic approach to exits, emphasizing the importance of EBITDA and the potential for strategic acquisitions.
Throughout the episode, Eyal's passion for identifying and nurturing undervalued companies shines through. He shares his vision for the future of Resurge Growth Partners, aiming to establish the fund as a key player in the venture special situations market. Eyal's insights into leveraging technology, building networks, and fostering open communication offer invaluable guidance for entrepreneurs and investors alike.
Don't miss this compelling narrative as Eyal Malinga takes us on a journey through the venture capital landscape, offering a fresh perspective on unlocking hidden potential and driving sustainable growth. Tune in to gain a deeper understanding of the innovative strategies shaping the future of tech entrepreneurship. Unlock powerful venture investing insights at https://resurgegrowth.com/ and discover expert advice on hiring high-impact leaders to drive software venture growth at https://alpinasearch.com/
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:00):
Welcome to the Startup to Scale Up game plan. Today, we're honored to have Eyal
Malinga, founder and managing partner at Research Growth Partners.
Eyal has a lengthy track record in venture investing, having previously worked
for around eight years at Beringia.
In this episode, we'll explore Eyal's journey in the VC world and his strategies
(00:27):
for identifying high potential ventures and his vision for the future of tech entrepreneurship.
So, Ayol, welcome to the Startup to Scale It game plan.
Hi, Gary. It's a pleasure being here. Thank you for having me.
Now, really interested in your thesis behind research growth partners.
(00:50):
Walk me through that. What led you and your partners to go out and found this
fund, which is really trying to plug an important gap in the market?
Sure. So I started my career as an engineer working software, and then at McKinsey.
But really I spent some of my more formative years in private equity and in venture.
(01:13):
I used to work at a fund called Oak Tree Capital, where actually I worked with
Oren Peleg, who was my boss and today is my partner, and then moved to Beringia.
Having had the experience of private equity and venture capital made me realize
that there is a big gap in the market.
And it's a gap that surprisingly is quite
(01:35):
obvious to most people within the venture ecosystem but is
not as obvious to those out of it and
maybe that is the reason why the opportunity exists and
the best way to think about it is that a the
venture model by design is a power law model right it really works well for
(01:57):
a very few companies that are fitting the model and from this means for the
next Next step from that is that if the venture model is great at nurturing those unicorns,
which may be maybe five, maybe 10% of the portfolio,
they also back a lot of companies that don't fit under the venture model.
(02:18):
The gap in the market is that many of these companies are good businesses they
have a good product they have a great team it's actually growing they're just
not growing at the rate that venture is looking for which is the famous triple
triple double double right in order to make,
10x plus you need to believe the company will grow at double digit rates or triple digit rates,
(02:38):
so these companies on the one hand are struggling to access venture funds but
on the other hand the The private equity market is close to them because they don't have EBITDA.
They never bother building the EBITDA muscle, the way we think about it.
And so they're a little bit stuck in between those two worlds.
(02:58):
Part of the realization we had is that many times these companies don't have
any EBITDA or profitability because they have been nurtured for growth, right?
It's a little bit like if you have a car and you set it up to be very, very fast,
but not do other things very well or to be you
know to be like a great jeep that can go over any possible hill these cars
(03:19):
have been built to be very fast you know no
seat bells no back seats you know as that
as possible but then sometimes they they
you know if they don't hit the the right growth rates they
don't always know how to make this move into the profit-oriented more real world
so that's that's the origin story and so my partner or and i set up to build
(03:41):
research because we believe there a lot of companies that deserve to be funded
but just don't fit under the existing funding models.
Got it. And are you focused purely on Europe, or have you got a broader international reach?
So we are a small team. Today, which is June 24, we are three people,
which means our geographical reach is quite focused.
(04:04):
And we're focusing right now on UK, Europe, and Israel, mostly because that's
the areas that are convenient and I think we can cover well.
We're quite a hands-on model. So we're ultimately a buyout fund looking to have
control of the companies.
And so proximity and ability to work very closely with the team is very important for us.
Got it. And when you talk about being hands-on, are you hands-on after the deal as well?
(04:31):
To what extent are you guiding or some might say interfering in the trajectory
that the portfolio companies take after you've invested in them?
So look, the very important typical distinction between venture and growth,
basically between venture and private equity, is that private equity has control.
(04:51):
And venture are usually minority investors.
And growth somehow struggles those two. We are in the control category.
Part of our realization is that venture is very good at making multiple bets
and having relatively lenient governance with the companies,
whereas our model is a control one, right?
(05:13):
So we need to be able to direct and work with the company, right?
So we don't expect to be in the business every day and telling it what to do,
but the company got to where it got for a variety of reasons.
And having that level of governance, control, being able to work with a company
(05:34):
on a hands-on basis is very important.
I'll give an example. The example I usually give is, as a VC,
one of the more frustrating things is the concept of soft power.
Now, soft power is, I enjoy it, right? It's part of the work of how do you make
people do things if you don't have direct control over them,
but it can also be very frustrating.
You can imagine the number of times I sat down with a CEO and said,
(05:57):
look, you should really think about doing this, or you really maybe should try
and hire somebody, and the CEO will tell me, oh, that's a great idea.
Yeah, I'll definitely do that.
And I leave the room and the CEO says, I'll do whatever I want.
And a month and two and three pass by and not much happens.
In our model, we don't have that much room for error, right?
We are aiming to have every deal be successful.
(06:19):
And so we need to be able to direct the company when needed.
It's not our intention to begin with.
So to what extent do you have to really look at not just the potential of the
business, but also the cultural alignment,
the affinity between your style of investing and guiding companies and what
(06:42):
the leadership team is comfortable with?
Look, it's very, very, very much so is the quick answer, Gary.
You know, the company needs to want to have us involved.
And most CEOs who sit down with Orin and myself see a lot of value in working
(07:04):
with us and seeing the innovative way in which we think about business,
which is quite different than the way a typical venture capital fund would look at.
But we need to be aligned culturally and we need to be aligned in terms of our
goals and what we're trying to achieve. I'll give another quick example.
As a buyout fund, our exit horizon is, I would say, we're aiming to exit within four to five years.
(07:33):
And we're aiming for good growth, but we're not looking to build unicorns.
If the CEO says, look, I'm here for the long term.
I really want to build a business over the next 10 to 15 years.
There may not be an alignment between what we want and what she wants to achieve.
So culture is a very important aspect of what we do.
(07:53):
Indeed. I want to focus on the CEO journey for a few moments.
The notion of the CEO hero all the way from seed to IPO is quite deeply ingrained,
especially in Silicon Valley.
So how do you address the challenges when a founder may not be the best person
(08:14):
to lead the company for its later stages of growth?
The answer is, is the CEO introspective enough to realize that?
The good scenarios for us are when the CEO thinks and says, you know what,
I've built a great business, but I understand and I realize that I need some
(08:36):
more professional help in really taking it to the next level.
Or we'll have the introspection to say, you know what, I've built this business,
but I really enjoy sales or I really enjoy product tech.
And I would love to have someone to come and take all of this headache,
all of this hassle of managing XYZ, whatever it is, and help me focus on what I want.
(08:59):
And I'm willing to make space for that person, but that is not this kind of discussion.
It's a discussion that's quite hard to have with your VCs, right?
And say, hey, you know what?
I got this here, but I really want to bring in somebody else to run this business.
Whereas with us, we're very open for that, and we expect to have a very open
discussion. discussion, what do you think is the right role for you in this
(09:19):
business when it's two times its size, three times its size, four times its size?
So openness and self-awareness amongst founders is something that's going to
be crucial as they progress along the company's growth path.
(09:40):
Look, a CEO may also come and say, I got
it here and I think I can get it to the next level and here is why by
the way i think these things didn't go
well here are the mistakes i did here what needs to
happen but i believe i should be the person that is also fine right
but it is i think that level of ultimately i
believe that people need to understand where their energy comes from what drives
(10:01):
them and what motivates them right when you understand
that it's much easier to have a discussion about what are the things that excite
you some people get a great pleasure and great energy from motivating and coaching
and mentoring people building team that's great there should definitely be CEOs
some people get great pleasure from other places but unless you have that it's quite hard to,
(10:24):
You know, you squeeze yourself into a role that maybe isn't for you.
And we've touched upon conflicts that can arise between founders and different
types of investor styles.
What about conflicts between founders, which can significantly impact a startup's trajectory?
(10:44):
What strategies do you recommend for resolving these internal conflicts and
ensuring the leadership team remains aligned?
It's a tricky question, Gary, because in my experience, these disagreements
are always very different.
It's a bit, you know, all happy families are happy in their own way,
(11:07):
but all the unhappy families are happy in their own special way.
So again, I forget, I think it's Dostoevsky, but it's the same thing,
right? All unhappy teams are unhappy in their own special, unhappy way.
I'm slightly paraphrasing here. So I don't think I have a unanimous answer, right?
It really, really, really, really, really depends, right? Depends what the situation
(11:28):
is. Are people trying to achieve? People want to leave? People want to go?
Is it amicable? It really varies. Got it.
Obviously, you talked about a four to five year exit plan that you're aiming
for with the companies you're investing in.
The market seems to have changed
(11:49):
a lot in terms of the likelihood of IPO the
other exit opportunities what are
you focusing on in terms of navigating towards different
exit strategies for your portfolio companies it's a
great question Gary one of the mistakes I did as a young VC see was assume that
(12:10):
any business can be sold and I learned the hard way that is not the case but
actually it is not that easy to sell a venture-backed business,
on the flip side what I do know is that if something has EBITDA it's growing,
there is almost certainly a market for whatever it is that business does not
(12:33):
Not always, but it's a much, much different sell.
And that is why our strategy is how do we bring these businesses to a certain
level of EBITDA that we know we can sell them?
Okay, and that's really the underwrite for us. Do we believe we can bring this
business to X million EBITDA?
If we believe, what will be the multiple?
(12:54):
How much will we make? And that also actually drives our entry price.
That is now on top of that we always want to have a strategic upside strategic angle right ideally,
most deals we look at looking at them and saying well this is a good business
and we believe we can bring it from a to b but if we things go really well this
(13:20):
would be a must-have acquisition,
for a strategic okay so we think
about it as a private equity exit underwrite with
a strategic upside got it i
hope it makes sense and you're a pretty small
team as you pointed out before so you need to be incredibly focused
are you leveraging some kind of network or some kind of platform even if you're
(13:45):
not calling it a platform to bring different inputs into the portfolio companies
whether it be from a talent perspective or sales and marketing etc so by the
So first of all, I would say that we are very,
very, very heavy users of technology.
And we're using the various large language models and other tools to give us
(14:12):
huge leverage on our time.
So that's, I think, one of the things we do.
And then look, the other beauty, I would say, in terms of supporting and working
with the companies that we acquire, the challenge as a VC, it's an annoying
thing as a VC, to be frank.
Let's say you have 10% of a business, 12% of a business.
(14:35):
If you now go and you bring a specialist resource, which you pay for,
and the business uses, and it drives $10 of growth, you only get 12% of that value.
Whereas as a private equity owner, if you have 50% or 60 or 70 or 100,
you're much more incentivized to use your own resources to help grow the business, right?
(14:58):
So our ability and willingness to bring experts, board members,
expertise, ex-CEOs, whatever it is, really real help into those businesses is very significant.
Got it. Okay.
Let's talk more broadly about the trends we're seeing in technology.
(15:21):
Technology is increasingly disrupting traditional industries.
Which sectors do you feel are most poised for technological innovation and how
is research growth positioning itself to invest in these kind of transformative opportunities?
Well, the answer is it is and it doesn't. in general what we do right our it
(15:46):
goes back to what we see in the market all right if you have a,
company today and this is going to be different if you listen to this in a year
right but today june 24 that is doing ai llms for energy transition you will
get five term sheets tomorrow no problem right so even though the venture ecosystem
(16:07):
is taking a bit of a step back and slowing down,
there's still a lot of capital chasing the.
The exotic and exciting thing of the day but on the flip side if you are in
the out of favor segments you
may really struggle to raise if you are in fintech or prop tech or edtech,
(16:27):
so because of our approach we are a little bit less focused on what is the next
breakthrough technology and much more what is a great technology great product
great team may not be a the next innovative thing,
but if we can come in at the right price level, deploy capital,
help the company grow, and realize its full potential at a certain valuation,
(16:51):
it's a good outcome for us.
So we're much more focused on what is the company we're buying,
what is the asset we're buying, and are there
positive market dynamics that will help this company do what they're doing i'll
just i'll give an example which it's people talk a lot about vertical and horizontal
(17:12):
markets one of the things we see is that many and again i'm as guilty as any other vc.
One of the problems when you're investing in technology is
you don't really know what the time is right you
think the time is huge but many times you
start working and you realize that you do have strong product
market fit on a specific vertical or
(17:36):
persona or type of client but that
it doesn't go much wider than that right and
so you end up with a product that is excellent and
doing really great job and having a very big adoption
with this vertical but it's not gonna go venture and
their entire company's constellation is built on this on this
model or on buying these businesses but that's
(17:56):
an example of you know is it a massive
technological innovation not necessarily right but it's a good product and a
good business so that's the way we approach businesses i hope i answered the
question gary yeah you did so since your sector agnostic and you're looking
at quite a broad spectrum of businesses across the the geos that we discussed earlier,
(18:20):
how do you find these orphans or how do they find you?
Another excellent question. A big part of what we're doing is awareness, right?
Actually being on a call like this with you and making sure people hear and know about us.
So there's this more outreach, outbound marketing piece of work we're doing.
(18:45):
And having been in the venture ecosystem for the past 10 years,
a lot of the work I'm doing now and Oren and Matt who joined us is actually
going in a very systematic way and meeting as many people as we can in the ecosystem
to tell them what we're doing.
Because we provide a solution for a problem that is big.
And there are very few people who do
(19:09):
what we are doing okay again i'm always happy
to give shout outs again joe cohen is doing what we're doing
in a slightly smaller scale in the consumer space stephen rappaport is doing
what we're doing in the d2c space very specific so but but but you know that
that's the people that are very active but that's about it as of today june
2024 i have a big caveat so for us it is important to go and talk to people
(19:32):
and make sure to understand that.
If you're an entrepreneur you raise too much money you've
worked 10 years blood sweat and tears and your equity is now worth zero but
you think there's a good opportunity to recapitalize the business we can come
and help you if you are a venture debt lender a big portfolio you have companies
(19:53):
which are companies which have a good it's a good business but they need some hands-on,
involvement, need new capital, and the VCs have given up, give us a ring, right?
Talking to venture capital funds, say you have a big portfolio,
you know, your second, third quartiles are not going to move the needle,
are not going to be the unicorn, but you think there's something there, come talk to us.
(20:15):
In a similar way, accountants, bankers, all of those people have clients that
have these problems and we're hoping to be there and try and find a solution.
Solution so you're doing a lot of marketing a lot of networking a lot of pr do you also,
use you talked earlier on about being heavy users of technology so have you
(20:36):
built your own proprietary software
to kind of help you screen and and and monitor the market i don't think,
many people have built things from scratch right i think there are some quite
a few out there but i I think where we are as a small business,
the smart thing to do is to take the best of breed of a lot of things and amalgamate them.
(20:58):
I'm hoping that at some point, some of those tools are gonna become.
Obsolete ones that are of google doesn't but we're using a lot of separate tools
patching them together with some sellotape and a piece of string but it does the job for what we need,
and how do you see things but i'll say
this gary i did go back to writing python scripts and getting data and collecting
(21:20):
so i've been doing some some data work but that's me we're on the stage of building
our own piece of software to do this cool and and how do you see things evolving
over the the next five to 10 years for research growth partners?
What's your vision for the fund?
How do you see yourself scaling even in terms of geos or technology?
(21:42):
Look, our mission is to define what we call venture special situations.
Okay. As far as we know, we're one of the first funds doing this and we want
to be very, very well known and important in the market of working on these deals,
people ask me, what you're saying makes so much sense, but it's only going to
(22:05):
work in 24-25 because that is when there's a bit of this chasm in the market.
What's going to happen in 27-28?
In my view, or from my experience, having sat on these boards,
having been with these companies, this market exists in all years except 2021.
In 2021, if you had a pulse, else you could
raise money in but if
(22:29):
you look back in 2017 2018 2019 these companies
that rich that reach this gap right that the growth is slowing down VCs don't
want to give them more money will always exist that's the way the venture ecosystem
works so there will always be opportunities for us to work with people and help
(22:49):
those companies reach their full potential.
Got it. And I kind of want to circle back to something that was nagging with
me around in the conversation or intriguing me is a better way of putting this.
So you're taking companies that are used to being part of a VC portfolio.
(23:11):
They're not the top performers, but they've been focused on growth and they've
been growing reasonably well.
They've not been focused on profitability. profitability that's not
been the environment that they've grown
up in as businesses so getting them
to think more effectively
(23:31):
about unit economics etc getting them to
understand what it would take to transition their
business to being EBITDA positive and to reasonably steadily grow that what
are some of the challenges you you face just almost in terms of mindset and
culture so interestingly gary most companies by the time we speak to them,
(23:55):
have been through some form of you know phase one or phase two of a of a riff
for reduction force by the time we get there right.
And so a lot of the due diligence and work and discussions we're having with them is,
what next right what would you do if
(24:17):
you had the capital now right what we're seeing which is really interesting
is that and many founders find this interesting but it's it's not surprising
if you think companies reduce the workforce the productivity goes up the profitability
improves but the growth doesn't necessarily slow, right?
Because people realize that they can do things in a better way.
(24:39):
They usually let go of the people that should have been let go and they're finding
better ways for working.
The problem they have is that what we hear is, you know, my VC told me to preserve cash, reduce burn.
I did it. I'm not profitable, but I'm growing 20% and I'm unfundable, right?
And so there's a situation where we, I think the company already understands what needs to be done.
(25:05):
But a lot of the time it's working with the company and understand what worked,
what didn't work, which channel was working, which channel wasn't working.
How do you think about your economics?
How do you think about... So there's a lot of drill down to align us in the
business on, okay, tomorrow you have 10 million in the bank.
How are we going to use it in a way that is a creative versus what you've done in the past?
(25:28):
Got it. And who are the people in your world that could be technologists,
that could be investors, that could be entrepreneurs?
Who are the people who've most inspired you with their approach to running businesses,
their approach to investment?
Who are the people who you look up to and most respect and feel most passion
(25:52):
for in terms of their ideas? That's a great question.
So i'll start with a question then i'll i'll point to the person,
i kept joking for many years that i'm a value investor hiding in the venture world,
i've always liked value and for those who don't know there are two theories
(26:14):
of investment or there's more but there's value investment momentum investment
momentum investment says i'm going to buy this because the thing is going to
go up there's a momentum or go down and value means
I'm going to buy this because I think it's trading at 50 cents, it's worth a dollar.
So in one of them, you have to dig deep to understand what the value is in the business.
(26:35):
And a lot of the deals that I've done as a venture investor have really been valued.
I've been places where I've seen value, a great business where other people
did not necessarily see the value, and some of the more successful were like these.
And so if I go back and say, okay, who has influenced my learning as an investor?
Number one is Warren Buffett. So Warren Buffett is the number one value investor.
(26:57):
He wrote the book about, he didn't write the book, but he wrote some of the
books, him and Benjamin Graham, on value investment. And so then,
and I'll also point out Howard Marks. Howard Marks is the founder of Oak Tree
Capital, where I used to work.
And he's another, one of the most famous value investors.
He built an incredible firm, got it to over a hundred billion dollars on management.
(27:19):
So I think those people, I think exemplify the look at the business,
look at what it's worth and ignore the noise.
I think that's one of the big things come out of them because the market I think
Warren Buffett says I feel if it's Warren Buffett or or or Benjamin Trump says
that the markets are Or a manic depressive person you make up in the morning.
(27:43):
Everything is great Everything is amazing the next everything is terrible and
everything is horrible, but the business hasn't changed anything Here's the
markets view of what's going in in a specific industry.
So Yeah, that was a long a long answer to your question No, it was great.
And I want to get your views on AI and machine learning.
(28:05):
I mean, obviously, this has been talked about in the media almost every single day.
Even taxi drivers seem to know a thing or two about artificial intelligence these days.
I know you're not specifically focusing on the latest sexist technology,
but what are your views on the opportunities in that world and how that's going
(28:29):
to shape everything that we're seeing and doing over the next two to three years?
Look i think it will definitely shape shape what we're doing and seeing in the
in the coming years if i had the answers maybe i'll go and do and do more about
it i think we're still in the.
Cambrian explosion phase and everybody is trying to take a guess where the,
(28:54):
where on the table the the chips will fall again the one thing i'll say i'm
a techno optimist i'm I'm not buying into the be no more jobs,
everyone's going to be unemployed category,
but it would create a lot of disruption in the way people work and operate in various categories.
(29:16):
I am excited by, I would say, the providers of specific use cases, right?
So again, if I were doing VC today, I'll be looking at,
you know, know who is using the best
technology the best way they can in order to deliver a specific solution to
a problem rather than saying I'm a tech company doesn't know okay I'm a
(29:38):
law firm but I have no lawyers right or I'm
a law firm instead of having 10,000 lawyers have 10 lawyers and
they're using the best AI we can give you a much better solution at
a much lower cost right that's what I think they're gonna excite me the most
I'm gonna call it worrying but I think the more the biggest disruption a lot
of people are talking about that I think is going to happen is the the ease
(30:00):
of writing code means or will mean that the buy versus build,
decision is going to trend a lot more towards the build versus buy for a lot of.
Software again all kinds of software is going to be more oh you're going to
pick up a few things and write myself rather than pay a lot of money to again
(30:24):
adobe for example which actually that's the one that I don't think is going
to be replaced so easily.
So I think that's where we're going to see a lot of value probably destroyed
in the more traditional software based worlds.
And finally, what advice do you have for a CEO of a company,
maybe one of these so-called VC orphans?
(30:48):
They've heard you on this podcast, they're
interested in some of your ideas
or are interested in your approach obviously one
of the things they should do is at the right time reach out to
you but in terms of getting their pitch
right getting their business to be in the right shape for you and your colleagues
(31:09):
to to have a serious look at their their business what are what tips do you
have for them to kind of prepare for their initial meetings or engagements with research?
So of course, again, reach out to me. And by the way, my email is on my LinkedIn
profile and it's amazing how few people actually bother to find that email address. It's in there.
(31:32):
So I'll just say it like that.
The one advice I would give people that are in these situations is to analyze
and understand really, really well your cap table and your balance sheet.
Because that will give you a very good grasp of what are the options ahead of
(31:53):
you that you can do with us or anybody else.
Who are your shareholders? What do they want in life? Who are your debt holders?
What do what they want in life.
Having that insight might illuminate new paths that maybe you didn't think were
available for you, or may just actually shut down some paths that weren't available for you.
And sometimes having a discussion with those shareholders, an open discussion
(32:19):
can be very, very eye-opening, right?
So another advice, don't be afraid, especially if you are where you are,
of sitting down with your VC and telling her, here's where I am,
here's what I'm thinking. So yeah, that's my advice.
So yeah, circling back on a theme from earlier in the conversation about the
need to be not just self-aware, but also open communications between key stakeholders,
(32:45):
absolutely crucial. 100%.
Super. Well, Io, it's been fascinating hearing about your approach to investing
and the niche you're carving out in the market.
Wishing you and the team at Research
Growth huge success over the coming years. Thank you so much, Gary.
Welcome to the Startup to Scale Up game plan. Today, we're honored to have Eyal
Malinga, founder and managing partner at Research Growth Partners.
Eyal has a lengthy track record in venture investing, having previously worked
for around eight years at Beringia.
In this episode, we'll explore Eyal's journey in the VC world and his strategies
(00:27):
for identifying high potential ventures and his vision for the future of tech entrepreneurship.
So, Ayol, welcome to the Startup to Scale It game plan.
Hi, Gary. It's a pleasure being here. Thank you for having me.
Now, really interested in your thesis behind research growth partners.
(00:50):
Walk me through that. What led you and your partners to go out and found this
fund, which is really trying to plug an important gap in the market?
Sure. So I started my career as an engineer working software, and then at McKinsey.
But really I spent some of my more formative years in private equity and in venture.
(01:13):
I used to work at a fund called Oak Tree Capital, where actually I worked with
Oren Peleg, who was my boss and today is my partner, and then moved to Beringia.
Having had the experience of private equity and venture capital made me realize
that there is a big gap in the market.
And it's a gap that surprisingly is quite
(01:35):
obvious to most people within the venture ecosystem but is
not as obvious to those out of it and
maybe that is the reason why the opportunity exists and
the best way to think about it is that a the
venture model by design is a power law model right it really works well for
(01:57):
a very few companies that are fitting the model and from this means for the
next Next step from that is that if the venture model is great at nurturing those unicorns,
which may be maybe five, maybe 10% of the portfolio,
they also back a lot of companies that don't fit under the venture model.
(02:18):
The gap in the market is that many of these companies are good businesses they
have a good product they have a great team it's actually growing they're just
not growing at the rate that venture is looking for which is the famous triple
triple double double right in order to make,
10x plus you need to believe the company will grow at double digit rates or triple digit rates,
(02:38):
so these companies on the one hand are struggling to access venture funds but
on the other hand the The private equity market is close to them because they don't have EBITDA.
They never bother building the EBITDA muscle, the way we think about it.
And so they're a little bit stuck in between those two worlds.
(02:58):
Part of the realization we had is that many times these companies don't have
any EBITDA or profitability because they have been nurtured for growth, right?
It's a little bit like if you have a car and you set it up to be very, very fast,
but not do other things very well or to be you
know to be like a great jeep that can go over any possible hill these cars
(03:19):
have been built to be very fast you know no
seat bells no back seats you know as that
as possible but then sometimes they they
you know if they don't hit the the right growth rates they
don't always know how to make this move into the profit-oriented more real world
so that's that's the origin story and so my partner or and i set up to build
(03:41):
research because we believe there a lot of companies that deserve to be funded
but just don't fit under the existing funding models.
Got it. And are you focused purely on Europe, or have you got a broader international reach?
So we are a small team. Today, which is June 24, we are three people,
which means our geographical reach is quite focused.
(04:04):
And we're focusing right now on UK, Europe, and Israel, mostly because that's
the areas that are convenient and I think we can cover well.
We're quite a hands-on model. So we're ultimately a buyout fund looking to have
control of the companies.
And so proximity and ability to work very closely with the team is very important for us.
Got it. And when you talk about being hands-on, are you hands-on after the deal as well?
(04:31):
To what extent are you guiding or some might say interfering in the trajectory
that the portfolio companies take after you've invested in them?
So look, the very important typical distinction between venture and growth,
basically between venture and private equity, is that private equity has control.
(04:51):
And venture are usually minority investors.
And growth somehow struggles those two. We are in the control category.
Part of our realization is that venture is very good at making multiple bets
and having relatively lenient governance with the companies,
whereas our model is a control one, right?
(05:13):
So we need to be able to direct and work with the company, right?
So we don't expect to be in the business every day and telling it what to do,
but the company got to where it got for a variety of reasons.
And having that level of governance, control, being able to work with a company
(05:34):
on a hands-on basis is very important.
I'll give an example. The example I usually give is, as a VC,
one of the more frustrating things is the concept of soft power.
Now, soft power is, I enjoy it, right? It's part of the work of how do you make
people do things if you don't have direct control over them,
but it can also be very frustrating.
You can imagine the number of times I sat down with a CEO and said,
(05:57):
look, you should really think about doing this, or you really maybe should try
and hire somebody, and the CEO will tell me, oh, that's a great idea.
Yeah, I'll definitely do that.
And I leave the room and the CEO says, I'll do whatever I want.
And a month and two and three pass by and not much happens.
In our model, we don't have that much room for error, right?
We are aiming to have every deal be successful.
(06:19):
And so we need to be able to direct the company when needed.
It's not our intention to begin with.
So to what extent do you have to really look at not just the potential of the
business, but also the cultural alignment,
the affinity between your style of investing and guiding companies and what
(06:42):
the leadership team is comfortable with?
Look, it's very, very, very much so is the quick answer, Gary.
You know, the company needs to want to have us involved.
And most CEOs who sit down with Orin and myself see a lot of value in working
(07:04):
with us and seeing the innovative way in which we think about business,
which is quite different than the way a typical venture capital fund would look at.
But we need to be aligned culturally and we need to be aligned in terms of our
goals and what we're trying to achieve. I'll give another quick example.
As a buyout fund, our exit horizon is, I would say, we're aiming to exit within four to five years.
(07:33):
And we're aiming for good growth, but we're not looking to build unicorns.
If the CEO says, look, I'm here for the long term.
I really want to build a business over the next 10 to 15 years.
There may not be an alignment between what we want and what she wants to achieve.
So culture is a very important aspect of what we do.
(07:53):
Indeed. I want to focus on the CEO journey for a few moments.
The notion of the CEO hero all the way from seed to IPO is quite deeply ingrained,
especially in Silicon Valley.
So how do you address the challenges when a founder may not be the best person
(08:14):
to lead the company for its later stages of growth?
The answer is, is the CEO introspective enough to realize that?
The good scenarios for us are when the CEO thinks and says, you know what,
I've built a great business, but I understand and I realize that I need some
(08:36):
more professional help in really taking it to the next level.
Or we'll have the introspection to say, you know what, I've built this business,
but I really enjoy sales or I really enjoy product tech.
And I would love to have someone to come and take all of this headache,
all of this hassle of managing XYZ, whatever it is, and help me focus on what I want.
(08:59):
And I'm willing to make space for that person, but that is not this kind of discussion.
It's a discussion that's quite hard to have with your VCs, right?
And say, hey, you know what?
I got this here, but I really want to bring in somebody else to run this business.
Whereas with us, we're very open for that, and we expect to have a very open
discussion. discussion, what do you think is the right role for you in this
(09:19):
business when it's two times its size, three times its size, four times its size?
So openness and self-awareness amongst founders is something that's going to
be crucial as they progress along the company's growth path.
(09:40):
Look, a CEO may also come and say, I got
it here and I think I can get it to the next level and here is why by
the way i think these things didn't go
well here are the mistakes i did here what needs to
happen but i believe i should be the person that is also fine right
but it is i think that level of ultimately i
believe that people need to understand where their energy comes from what drives
(10:01):
them and what motivates them right when you understand
that it's much easier to have a discussion about what are the things that excite
you some people get a great pleasure and great energy from motivating and coaching
and mentoring people building team that's great there should definitely be CEOs
some people get great pleasure from other places but unless you have that it's quite hard to,
(10:24):
You know, you squeeze yourself into a role that maybe isn't for you.
And we've touched upon conflicts that can arise between founders and different
types of investor styles.
What about conflicts between founders, which can significantly impact a startup's trajectory?
(10:44):
What strategies do you recommend for resolving these internal conflicts and
ensuring the leadership team remains aligned?
It's a tricky question, Gary, because in my experience, these disagreements
are always very different.
It's a bit, you know, all happy families are happy in their own way,
(11:07):
but all the unhappy families are happy in their own special way.
So again, I forget, I think it's Dostoevsky, but it's the same thing,
right? All unhappy teams are unhappy in their own special, unhappy way.
I'm slightly paraphrasing here. So I don't think I have a unanimous answer, right?
It really, really, really, really, really depends, right? Depends what the situation
(11:28):
is. Are people trying to achieve? People want to leave? People want to go?
Is it amicable? It really varies. Got it.
Obviously, you talked about a four to five year exit plan that you're aiming
for with the companies you're investing in.
The market seems to have changed
(11:49):
a lot in terms of the likelihood of IPO the
other exit opportunities what are
you focusing on in terms of navigating towards different
exit strategies for your portfolio companies it's a
great question Gary one of the mistakes I did as a young VC see was assume that
(12:10):
any business can be sold and I learned the hard way that is not the case but
actually it is not that easy to sell a venture-backed business,
on the flip side what I do know is that if something has EBITDA it's growing,
there is almost certainly a market for whatever it is that business does not
(12:33):
Not always, but it's a much, much different sell.
And that is why our strategy is how do we bring these businesses to a certain
level of EBITDA that we know we can sell them?
Okay, and that's really the underwrite for us. Do we believe we can bring this
business to X million EBITDA?
If we believe, what will be the multiple?
(12:54):
How much will we make? And that also actually drives our entry price.
That is now on top of that we always want to have a strategic upside strategic angle right ideally,
most deals we look at looking at them and saying well this is a good business
and we believe we can bring it from a to b but if we things go really well this
(13:20):
would be a must-have acquisition,
for a strategic okay so we think
about it as a private equity exit underwrite with
a strategic upside got it i
hope it makes sense and you're a pretty small
team as you pointed out before so you need to be incredibly focused
are you leveraging some kind of network or some kind of platform even if you're
(13:45):
not calling it a platform to bring different inputs into the portfolio companies
whether it be from a talent perspective or sales and marketing etc so by the
So first of all, I would say that we are very,
very, very heavy users of technology.
And we're using the various large language models and other tools to give us
(14:12):
huge leverage on our time.
So that's, I think, one of the things we do.
And then look, the other beauty, I would say, in terms of supporting and working
with the companies that we acquire, the challenge as a VC, it's an annoying
thing as a VC, to be frank.
Let's say you have 10% of a business, 12% of a business.
(14:35):
If you now go and you bring a specialist resource, which you pay for,
and the business uses, and it drives $10 of growth, you only get 12% of that value.
Whereas as a private equity owner, if you have 50% or 60 or 70 or 100,
you're much more incentivized to use your own resources to help grow the business, right?
(14:58):
So our ability and willingness to bring experts, board members,
expertise, ex-CEOs, whatever it is, really real help into those businesses is very significant.
Got it. Okay.
Let's talk more broadly about the trends we're seeing in technology.
(15:21):
Technology is increasingly disrupting traditional industries.
Which sectors do you feel are most poised for technological innovation and how
is research growth positioning itself to invest in these kind of transformative opportunities?
Well, the answer is it is and it doesn't. in general what we do right our it
(15:46):
goes back to what we see in the market all right if you have a,
company today and this is going to be different if you listen to this in a year
right but today june 24 that is doing ai llms for energy transition you will
get five term sheets tomorrow no problem right so even though the venture ecosystem
(16:07):
is taking a bit of a step back and slowing down,
there's still a lot of capital chasing the.
The exotic and exciting thing of the day but on the flip side if you are in
the out of favor segments you
may really struggle to raise if you are in fintech or prop tech or edtech,
(16:27):
so because of our approach we are a little bit less focused on what is the next
breakthrough technology and much more what is a great technology great product
great team may not be a the next innovative thing,
but if we can come in at the right price level, deploy capital,
help the company grow, and realize its full potential at a certain valuation,
(16:51):
it's a good outcome for us.
So we're much more focused on what is the company we're buying,
what is the asset we're buying, and are there
positive market dynamics that will help this company do what they're doing i'll
just i'll give an example which it's people talk a lot about vertical and horizontal
(17:12):
markets one of the things we see is that many and again i'm as guilty as any other vc.
One of the problems when you're investing in technology is
you don't really know what the time is right you
think the time is huge but many times you
start working and you realize that you do have strong product
market fit on a specific vertical or
(17:36):
persona or type of client but that
it doesn't go much wider than that right and
so you end up with a product that is excellent and
doing really great job and having a very big adoption
with this vertical but it's not gonna go venture and
their entire company's constellation is built on this on this
model or on buying these businesses but that's
(17:56):
an example of you know is it a massive
technological innovation not necessarily right but it's a good product and a
good business so that's the way we approach businesses i hope i answered the
question gary yeah you did so since your sector agnostic and you're looking
at quite a broad spectrum of businesses across the the geos that we discussed earlier,
(18:20):
how do you find these orphans or how do they find you?
Another excellent question. A big part of what we're doing is awareness, right?
Actually being on a call like this with you and making sure people hear and know about us.
So there's this more outreach, outbound marketing piece of work we're doing.
(18:45):
And having been in the venture ecosystem for the past 10 years,
a lot of the work I'm doing now and Oren and Matt who joined us is actually
going in a very systematic way and meeting as many people as we can in the ecosystem
to tell them what we're doing.
Because we provide a solution for a problem that is big.
And there are very few people who do
(19:09):
what we are doing okay again i'm always happy
to give shout outs again joe cohen is doing what we're doing
in a slightly smaller scale in the consumer space stephen rappaport is doing
what we're doing in the d2c space very specific so but but but you know that
that's the people that are very active but that's about it as of today june
2024 i have a big caveat so for us it is important to go and talk to people
(19:32):
and make sure to understand that.
If you're an entrepreneur you raise too much money you've
worked 10 years blood sweat and tears and your equity is now worth zero but
you think there's a good opportunity to recapitalize the business we can come
and help you if you are a venture debt lender a big portfolio you have companies
(19:53):
which are companies which have a good it's a good business but they need some hands-on,
involvement, need new capital, and the VCs have given up, give us a ring, right?
Talking to venture capital funds, say you have a big portfolio,
you know, your second, third quartiles are not going to move the needle,
are not going to be the unicorn, but you think there's something there, come talk to us.
(20:15):
In a similar way, accountants, bankers, all of those people have clients that
have these problems and we're hoping to be there and try and find a solution.
Solution so you're doing a lot of marketing a lot of networking a lot of pr do you also,
use you talked earlier on about being heavy users of technology so have you
(20:36):
built your own proprietary software
to kind of help you screen and and and monitor the market i don't think,
many people have built things from scratch right i think there are some quite
a few out there but i I think where we are as a small business,
the smart thing to do is to take the best of breed of a lot of things and amalgamate them.
(20:58):
I'm hoping that at some point, some of those tools are gonna become.
Obsolete ones that are of google doesn't but we're using a lot of separate tools
patching them together with some sellotape and a piece of string but it does the job for what we need,
and how do you see things but i'll say
this gary i did go back to writing python scripts and getting data and collecting
(21:20):
so i've been doing some some data work but that's me we're on the stage of building
our own piece of software to do this cool and and how do you see things evolving
over the the next five to 10 years for research growth partners?
What's your vision for the fund?
How do you see yourself scaling even in terms of geos or technology?
(21:42):
Look, our mission is to define what we call venture special situations.
Okay. As far as we know, we're one of the first funds doing this and we want
to be very, very well known and important in the market of working on these deals,
people ask me, what you're saying makes so much sense, but it's only going to
(22:05):
work in 24-25 because that is when there's a bit of this chasm in the market.
What's going to happen in 27-28?
In my view, or from my experience, having sat on these boards,
having been with these companies, this market exists in all years except 2021.
In 2021, if you had a pulse, else you could
raise money in but if
(22:29):
you look back in 2017 2018 2019 these companies
that rich that reach this gap right that the growth is slowing down VCs don't
want to give them more money will always exist that's the way the venture ecosystem
works so there will always be opportunities for us to work with people and help
(22:49):
those companies reach their full potential.
Got it. And I kind of want to circle back to something that was nagging with
me around in the conversation or intriguing me is a better way of putting this.
So you're taking companies that are used to being part of a VC portfolio.
(23:11):
They're not the top performers, but they've been focused on growth and they've
been growing reasonably well.
They've not been focused on profitability. profitability that's not
been the environment that they've grown
up in as businesses so getting them
to think more effectively
(23:31):
about unit economics etc getting them to
understand what it would take to transition their
business to being EBITDA positive and to reasonably steadily grow that what
are some of the challenges you you face just almost in terms of mindset and
culture so interestingly gary most companies by the time we speak to them,
(23:55):
have been through some form of you know phase one or phase two of a of a riff
for reduction force by the time we get there right.
And so a lot of the due diligence and work and discussions we're having with them is,
what next right what would you do if
(24:17):
you had the capital now right what we're seeing which is really interesting
is that and many founders find this interesting but it's it's not surprising
if you think companies reduce the workforce the productivity goes up the profitability
improves but the growth doesn't necessarily slow, right?
Because people realize that they can do things in a better way.
(24:39):
They usually let go of the people that should have been let go and they're finding
better ways for working.
The problem they have is that what we hear is, you know, my VC told me to preserve cash, reduce burn.
I did it. I'm not profitable, but I'm growing 20% and I'm unfundable, right?
And so there's a situation where we, I think the company already understands what needs to be done.
(25:05):
But a lot of the time it's working with the company and understand what worked,
what didn't work, which channel was working, which channel wasn't working.
How do you think about your economics?
How do you think about... So there's a lot of drill down to align us in the
business on, okay, tomorrow you have 10 million in the bank.
How are we going to use it in a way that is a creative versus what you've done in the past?
(25:28):
Got it. And who are the people in your world that could be technologists,
that could be investors, that could be entrepreneurs?
Who are the people who've most inspired you with their approach to running businesses,
their approach to investment?
Who are the people who you look up to and most respect and feel most passion
(25:52):
for in terms of their ideas? That's a great question.
So i'll start with a question then i'll i'll point to the person,
i kept joking for many years that i'm a value investor hiding in the venture world,
i've always liked value and for those who don't know there are two theories
(26:14):
of investment or there's more but there's value investment momentum investment
momentum investment says i'm going to buy this because the thing is going to
go up there's a momentum or go down and value means
I'm going to buy this because I think it's trading at 50 cents, it's worth a dollar.
So in one of them, you have to dig deep to understand what the value is in the business.
(26:35):
And a lot of the deals that I've done as a venture investor have really been valued.
I've been places where I've seen value, a great business where other people
did not necessarily see the value, and some of the more successful were like these.
And so if I go back and say, okay, who has influenced my learning as an investor?
Number one is Warren Buffett. So Warren Buffett is the number one value investor.
(26:57):
He wrote the book about, he didn't write the book, but he wrote some of the
books, him and Benjamin Graham, on value investment. And so then,
and I'll also point out Howard Marks. Howard Marks is the founder of Oak Tree
Capital, where I used to work.
And he's another, one of the most famous value investors.
He built an incredible firm, got it to over a hundred billion dollars on management.
(27:19):
So I think those people, I think exemplify the look at the business,
look at what it's worth and ignore the noise.
I think that's one of the big things come out of them because the market I think
Warren Buffett says I feel if it's Warren Buffett or or or Benjamin Trump says
that the markets are Or a manic depressive person you make up in the morning.
(27:43):
Everything is great Everything is amazing the next everything is terrible and
everything is horrible, but the business hasn't changed anything Here's the
markets view of what's going in in a specific industry.
So Yeah, that was a long a long answer to your question No, it was great.
And I want to get your views on AI and machine learning.
(28:05):
I mean, obviously, this has been talked about in the media almost every single day.
Even taxi drivers seem to know a thing or two about artificial intelligence these days.
I know you're not specifically focusing on the latest sexist technology,
but what are your views on the opportunities in that world and how that's going
(28:29):
to shape everything that we're seeing and doing over the next two to three years?
Look i think it will definitely shape shape what we're doing and seeing in the
in the coming years if i had the answers maybe i'll go and do and do more about
it i think we're still in the.
Cambrian explosion phase and everybody is trying to take a guess where the,
(28:54):
where on the table the the chips will fall again the one thing i'll say i'm
a techno optimist i'm I'm not buying into the be no more jobs,
everyone's going to be unemployed category,
but it would create a lot of disruption in the way people work and operate in various categories.
(29:16):
I am excited by, I would say, the providers of specific use cases, right?
So again, if I were doing VC today, I'll be looking at,
you know, know who is using the best
technology the best way they can in order to deliver a specific solution to
a problem rather than saying I'm a tech company doesn't know okay I'm a
(29:38):
law firm but I have no lawyers right or I'm
a law firm instead of having 10,000 lawyers have 10 lawyers and
they're using the best AI we can give you a much better solution at
a much lower cost right that's what I think they're gonna excite me the most
I'm gonna call it worrying but I think the more the biggest disruption a lot
of people are talking about that I think is going to happen is the the ease
(30:00):
of writing code means or will mean that the buy versus build,
decision is going to trend a lot more towards the build versus buy for a lot of.
Software again all kinds of software is going to be more oh you're going to
pick up a few things and write myself rather than pay a lot of money to again
(30:24):
adobe for example which actually that's the one that I don't think is going
to be replaced so easily.
So I think that's where we're going to see a lot of value probably destroyed
in the more traditional software based worlds.
And finally, what advice do you have for a CEO of a company,
maybe one of these so-called VC orphans?
(30:48):
They've heard you on this podcast, they're
interested in some of your ideas
or are interested in your approach obviously one
of the things they should do is at the right time reach out to
you but in terms of getting their pitch
right getting their business to be in the right shape for you and your colleagues
(31:09):
to to have a serious look at their their business what are what tips do you
have for them to kind of prepare for their initial meetings or engagements with research?
So of course, again, reach out to me. And by the way, my email is on my LinkedIn
profile and it's amazing how few people actually bother to find that email address. It's in there.
(31:32):
So I'll just say it like that.
The one advice I would give people that are in these situations is to analyze
and understand really, really well your cap table and your balance sheet.
Because that will give you a very good grasp of what are the options ahead of
(31:53):
you that you can do with us or anybody else.
Who are your shareholders? What do they want in life? Who are your debt holders?
What do what they want in life.
Having that insight might illuminate new paths that maybe you didn't think were
available for you, or may just actually shut down some paths that weren't available for you.
And sometimes having a discussion with those shareholders, an open discussion
(32:19):
can be very, very eye-opening, right?
So another advice, don't be afraid, especially if you are where you are,
of sitting down with your VC and telling her, here's where I am,
here's what I'm thinking. So yeah, that's my advice.
So yeah, circling back on a theme from earlier in the conversation about the
need to be not just self-aware, but also open communications between key stakeholders,
(32:45):
absolutely crucial. 100%.
Super. Well, Io, it's been fascinating hearing about your approach to investing
and the niche you're carving out in the market.
Wishing you and the team at Research
Growth huge success over the coming years. Thank you so much, Gary.
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Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies! Crime Junkie is presented by audiochuck Media Company.
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If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.