Brought to you by Sturgeon Capital
In my opinion, Sturgeon Capital is one of the world's most unusual and interesting funds. Over the past two years, I have had the pleasure of getting to know the team behind the frontier market fund. I am consistently impressed by their high-caliber thinking, strong convictions, and integrity. Investing in underpenetrated geographies is extremely difficult, but I believe Sturgeon has the ingredients to build a remarkable franchise around that practice.
To learn more about Sturgeon, you can visit them here. To dig into their thinking and learn about frontier market investing, sign up for their Substack here.
If you only have a few minutes to spare, here's what investors, operators, and founders should know about Sturgeon Capital.
- Underpenetrated markets. Sturgeon Capital invests off the beaten track. The venture firm focuses on high-potential markets with little capital availability, notably in Central Asia, Egypt, Bangladesh, and Pakistan.
- Building a full stack firm. Frontier market startups have limited funding options. Sturgeon is creating an organization capable of addressing the gamut of needs, spanning early-stage venture to private equity. It may one day offer debt and growth equity, too.
- Succeeding and supporting. So far, Sturgeon has logged impressive returns. The fund has driven an IRR north of 70% and secured meaningful stakes in its portfolio companies. Sturgeon’s team takes a hands-on approach, assisting startups with fundraising, M&A, strategy, and partnerships.
- The next Kaspi. The breakout star of Sturgeon’s portfolio is the multifaceted Zood. The super-app operates across four countries, offering e-commerce, fintech, and logistics services. It has grown quickly and efficiently with relatively little venture funding. Sturgeon hopes it will be Central Asia’s next big winner.
- More than money. Sturgeon seeks to make a tangible impact with its investments. Along with tracking job generation and financial inclusion traction, the firm runs a scholarship program supporting exceptional STEM students.
This piece was written as part of The Generalist's partner program. You can read about the ethical guidelines I adhere to in the link above. I always note partnerships transparently, only share my genuine opinion, and commit to working with organizations I consider exceptional. Sturgeon Capital is one of them.
Venture capital has unlikely roots. Though it is usually associated with modern Silicon Valley, the industry’s earliest incarnation can be found on America’s east coast in the mid-19th century. In Massachusetts, circa 1850, intrepid investors sought high returns in the volatile world of whaling. Though voyages were treacherous and prone to end in ruin, the value of whale fat meant an expedition could yield rich rewards. One fruitful outing could earn as much as $100,000, more than $3.5 million today. Firms emerged to capture the opportunity, leveraging different tactics to maximize their chance of success, investing in tenured crews or focusing on particular patches of ocean.
Seeing these dynamics in contemporary venture capital does not take much imagination. Today’s risk investors employ many of the same high-level strategies, backing experienced founders, efficient teams, and those focused on particular, productive regions.
As the industry has matured, however, these approaches may have lost some of their edge. A venture newcomer looking to invest in the top decile of B2B SaaS companies will face stiff competition. There are plenty of willing backers, and the sea is crowded with well-stocked ships. Even the most fertile grounds may become overhunted.
While frenzied activity churns some waters, Sturgeon Capital backs adventurers headed in a different direction. The $275 million investment firm has succeeded by focusing on geographies most VCs overlook, including Uzbekistan, Bangladesh, Pakistan, and Egypt. Though these countries have several attractive traits and a combined population of more than 500 million, they receive some of the lowest venture funding per capita. Pakistan, for example, receives $1.60 per person in venture funding compared to $30 in neighboring India or $34 in Indonesia. These are exciting, emerging economies, and yet competition is minimal. While executing in developing countries brings challenges, the last decades have seen unicorns emerge from many nations with similar issues. Brazil, India, Indonesia, and Mexico have birthed category-defining companies like Nubank, Flipkart, GoTo, Kavak, and many others. Sturgeon’s bet is that over the coming quarter century, its target geographies will produce their own string of winners that, in turn, positively impact the lives of millions. Because of these dynamics, Sturgeon believes it is targeting “some of the last truly enormous digitally unaddressed markets.” It is an audacious vision of which Massachusetts whaling agents would be proud.
In today’s piece, we’ll discuss:
- Origins. Kiyan Zandiyeh is ideally suited for his current role. Sturgeon’s CIO is an investing prodigy that has modeled his outlook on one of the business world’s greatest thinkers.
- Strategy. Sturgeon is a thoughtfully constructed fund with venture capital and private equity practices. It is chasing a massive opportunity in overlooked markets.
- Case study. Zood demonstrates what excellence can look like in frontier markets. It also reveals how Sturgeon partners with its portfolio.
- Impact. Sturgeon’s target geographies struggle with youth unemployment and financial inclusion. The firm is keen to help address these issues, tracking its impact via its portfolio. Early indications show it is making a difference.
Origins: The road less traveled
Investing in emerging markets has traditionally been difficult. Driving returns in politically and economically volatile environments requires skilled management, strong discipline, and a willingness to go against the grain. Sturgeon’s leadership exemplifies these traits – none more so than Chief Investment Officer Kiyan Zandiyeh.
Between two worlds
“The older you get, the more you can put the links together,” Zandiyeh said in our conversation. Indeed, with the benefit of hindsight, the investor’s upbringing seemed to prepare him to run a fund like Sturgeon.
Zandiyeh was born in the U.K., the son of Iranian immigrants. His father had been sent to the United Kingdom to study at just sixteen. Zandiyeh’s grandmother had saved for years to finance that crossing; in return, she asked her son to promise her to do something with his life. “The arc of his life was a function of that promise,” Zandiyeh said. His father thrived in the U.K., eventually receiving a Ph.D. in Mechanical Engineering and rising through the ranks of an oil and gas company until he ran the firm.
In many respects, the younger Zandiyeh’s life also seems to be a product of his father’s promise. The man Zandiyeh described as the “most productive and disciplined person I’ve ever met” certainly wasn’t about to allow his children to idle. From age four, Zandiyeh was enrolled in karate lessons to remedy his shyness. By ten, he’d received his blackbelt and earned a place on the U.K.’s team. Zandiyeh was the national youth champion five years in a row, leading the team to a title at the World Championships.
Along with his father’s intensity, Zandiyeh also inherited a dual identity. Though he lived in London, summers were spent in Tehran, surrounded by family. During those visits, Zandiyeh began to notice differences between the lives of him and his cousins. “Many of them were much smarter than me,” Zandiyeh remembered, “but the opportunities I had were incomparable. That didn’t seem fair.” That realization sparked Zandiyeh’s interest in contributing to the success of developing countries, but it would take another few years for him to find his preferred method of transformation.
When Zandiyeh wasn’t at school or practicing karate, he usually read. His choice of material was unusual for his age. While others might have buried their noses in the latest fantasy series, Zandiyeh was studying investors like Warren Buffett and Charlie Munger as early as fourteen. “I became obsessed with them,” he recalled, “They were such unique, interesting characters.”
Though comparing any young investor to the Oracle of Omaha is hyperbolic, either by chance or design, Zandiyeh’s adolescence and early career share several similar beats. While Buffett spent his high school years selling golf balls and stamps, Zandiyeh found his own opportunities. “I had a bunch of side hustles,” he explained. One of them involved buying face masks for fractions of a cent on the Chinese e-commerce platform iOffer, then selling them for twenty cents in Iran. He quickly expanded the arbitrage, graduating to buying and selling clothes. “I loved the independence of it: having an idea, pulling resources together, and then iterating,” Zandiyeh said.
Soon enough, the young entrepreneur shifted his focus to investing. Zandiyeh signed up for a brokerage account, taking advantage of a signup offer that gave new customers £100. “I quickly lost all of that,” he said, “but it was a good introduction to that world.” As with operating his side hustles, what Zandiyeh liked most about the practice was the autonomy it gave him. “I could sit and read and come to my own conclusion,” he explained, “If I was right, I would make money; if I was wrong, I would lose it.”
He was soon given a chance to test his judgment on a larger scale. At seventeen, Zandiyeh decided he wanted to start a fund of his own: the Zandiyeh Investment Partnership (ZIP). He wrote a four-page memorandum outlining a value-based approach and an interest in special situations. Zandiyeh mimicked Buffett’s fee structure, charging no management fees, and 25% carry above a 6% hurdle.
“I took it very seriously,” Zandiyeh said of the fund, “and I took myself too seriously.” Something about the intensity and earnestness of the teenager nevertheless appealed to investors. Zandiyeh successfully raised a seven-figure fund. “Some of it was the novelty of a young kid trying to do this,” Zandiyeh said of the raise, “But the experience also validated to me that if you’re serious about something, people will sympathize with you and give you a chance.”
Investors’ faith paid off. Over five years, Zandiyeh drove returns above his hurdle while receiving a bachelor’s from Imperial College. He did so by staying true to the strategy he had initially outlined, collecting a set of undervalued global equity names, many of which had been battered by unusual circumstances.
One such example was an Egyptian goldmine. The stock price plummeted annually from £1.76 a share to £0.25. Such precipitous declines sparked Zandiyeh’s curiosity. What had happened to the firm? And was the market’s reaction reasonable or overbaked? “You’re reality hunting,” Zandiyeh explained, “In those circumstances, I’m trying to understand the problem. If the problem is real, I don’t touch it. But if it isn’t, you might be onto something.”
Zandiyeh stayed up to six in the morning, scouring local press reports, online forums, and the company financials. The closer he looked, the more he began to feel that the mining business was undervalued. Its fall had been precipitated by the revoking of licensing rights that seemed tenuous, and the stock was now trading at just 0.1x book value. Zandiyeh decided to make a big bet, putting 30% of ZIP into the company and adding leverage.
It paid off. The company turned around with the stock price rising to £1.80 a share. It proved to Zandiyeh that making money betting on emerging markets was possible.
Learning from Dr. Doom
Zandiyeh decided to shut down ZIP after college. He had made a “fair amount of money” from performance fees and ably served investors. Next, he wanted to improve his craft.
He chose an accomplished mentor: Dr. Nouriel Roubini. The economist has worked as an academic for much of his career, as well as advising the International Monetary Fund, World Bank, Federal Reserve, and several presidential administrations. Roubini is perhaps best known for foreseeing the global financial crisis, which earned him the nickname “Dr. Doom.” He has been a vocal critic of cryptocurrencies in recent years.
At the time, Roubini helped run an eponymous research firm, Roubini Global Economics (RGE). For two years, Zandiyeh acted as an analyst investigating opportunities in emerging markets. As part of his research, Zandiyeh examined the short history of modern frontier market investing. The practice emerged in the early 1990s as financiers like Bill Browder bought into entities emerging from the former Soviet Union. These companies often didn’t know the true worth of their assets, meaning they could be purchased cheaply. As the opportunity became clearer, foreign money flowed into Russia, driving up prices. “Those investors were effectively frontrunning future flows,” Zandiyeh explained.
The success of investors like Browder led many to believe a similar playbook could be executed elsewhere. Funds tried in Africa, Asia, and Central Europe; for a time, Mongolia was seen as the hot new geography. But in almost all cases, the anticipated flow of secondary capital never arrived, meaning that positions struggled. Most efforts ended with little to show for them. “What people didn’t realize was that what happened in Russia was due to a very unique set of circumstances,” Zandiyeh said.
One exception to the rule was the Abraaj Group. At the time, Abraaj was considered a stunning success: a multi-billion dollar fund driving strong returns in emerging geographies. Founded in 2002 with $116 million, Abraaj grew to $14 billion in assets under management, boasted limited partners like the Gates Foundation, and advertised annual returns of 17%. In 2018, the firm unraveled as it became clear that management had misused capital. Reflecting on the state of frontier market investing, Zandiyeh noted that “funds either couldn’t generate returns, or they failed from a governance perspective.”
At Roubini’s firm, Zandiyeh used his lessons to create a complex model for emerging market investing, which, in turn, laid the foundation for an ETF. But Zandiyeh’s sights lay beyond the world of public equities.
Taking the reins
After leaving RGE, Zandiyeh set out to build a new shop. Unlike the Zandiyeh Investment Partnership, however, he intended to focus on the private markets; and rather than picking names in mining or commodities, Zandiyeh intended to back tech companies. His research under Roubini had helped him settle on the approach.
Unlike other sectors, technology didn’t necessarily progress linearly. Instead, they could allow a country to “leapfrog,” jumping over outdated systems. For example, M-PESA had brought mobile money transfers to Sub-Saharan Africa long before its users had bank accounts or smartphones.
This favorable dynamic meant technology could impact emerging markets and potentially contribute to creating large businesses. Yet, private equity and venture capital were virtually non-existent in these countries. Innovation investment relied on the government. “They’re the primary allocator of resources in these markets,” Zandiyeh noted, “but they don’t know how to handle technology.” If Zandiyeh could pick the right country and identify strong technologically-savvy founders, he believed there was an opportunity to create a frontier market fund with exceptional performance.
He was helped by a friend. At the same time that Zandiyeh was looking to create a new firm, Clemente Cappello was looking to step back from his. Cappello had spent nearly a decade investing in emerging market entities and was ready to pursue new endeavors. In Zandiyeh, he saw an impressive insurgent manager looking to make his mark in similar geographies. In 2016, Zandiyeh took over Sturgeon Capital, bringing new funding and a fresh approach. Perhaps unsurprisingly, he focused his initial efforts on a country he knew well: Iran.
That year, President Obama’s administration had lifted sanctions on the country, increasing the possibility of economic development. For the next three years, Zandiyeh spent 50% of his time in Tehran, meeting with entrepreneurs and making investments. Online car dealer Khodro45 was among them.
Impressed by Khodro45’s CEO, Sturgeon invested $500,000 into the company – a position Zandiyeh added to over time, reaching a total of $2 million. Khodro45’s earliest rounds valued the business at $2.1 million. It turned out to be a steal. Today, the platform boasts GMV more than an order of magnitude beyond that figure. As Khodro45’s CEO tells it, Zandiyeh was a vital supporter. “There were times I thought about quitting,” they said, “but Kiyan helped me stick to my guns.” Beyond emotional support, Zandiyeh helped bring capital into the company and served as a helpful external strategist.
Sturgeon’s second bet in the market was Azki, an insurtech startup. As with Khodro45, Zandiyeh was impressed by the company’s founder and savvy business model, and invested a total of $1 million. Once again, it proved a sharp bet with Azki growing rapidly. Today, it is on track to do $30 million in annual recurring revenue and holds 90% market share.
What is perhaps most remarkable about Khodro45 and Azki has been their ability to maintain growth despite adverse circumstances. In 2018, President Trump reinstated sanctions on Iran, a move that prompted an 80% currency devaluation. According to Zandiyeh, both businesses have managed to grow more than 2x per annum even as the Rial wilted. It proved to Zandiyeh that emerging market companies with a large addressable market, a sound model, and a strong founding team had the potential to weather extreme volatility. That lesson was pivotal in informing Sturgeon’s next chapter.
But with Iran closed to foreign investment, the fund would have to look for winners elsewhere.
Expanding the mandate
The same year that Sturgeon departed Iran, Zandiyeh met Alex Branton. After earning a Master’s in Development Studies and working in Shanghai, Branton built a career as an investor. He started at Cambridge Associates, one of the largest limited partners in the world, a seat that gave him access to elite fund managers across asset classes. After a few years at Cambridge, he moved to Columbus Point, building the growth equity fund’s London practice from scratch. While working at Columbus, a mutual friend introduced Branton to Zandiyeh.
“He has a real aura,” Branton said of Zandiyeh. “I had been in enough meetings at Cambridge Associates to know when I was onto a winner.” The pair’s shared interests in international development and investing made them fast friends and, inevitably, partners.
Zandiyeh, Branton, and then-investment analyst Robin Butler, set about creating a new strategy for Sturgeon. Sturgeon’s team analyzed geographies along a set of dimensions to guide their exploration. Alongside more obvious high-level figures like population size, GDP, and GDP per capita, the fund examined factors like smartphone penetration rates, internet availability, average education levels, demographic dynamics, and venture capital funding per head.
Through this analysis, Sturgeon landed on a new set of target geographies: Central Asia, Bangladesh, Pakistan, and Egypt. Though none could be considered consensus choices, Central Asia was perhaps the most contrarian. “No one ever talked about the region,” Zandiyeh said, “But you had Kaspi.” As we’ve analyzed previously in The Generalist, the Kazak company is more than a tech company – it fulfills many functions of a state. Sturgeon places particular emphasis on Uzbekistan as an area of opportunity.
With a strategy determined, Sturgeon set about raising $25 million. It would end up closing in 2020, amidst peak pandemic fear. “It required an extreme amount of commitment to raise a fund from London for Uzbekistan in the middle of covid,” Branton explained. “That was not trivial, to say the least.”
In a little more than a decade, Zandiyeh went from trading stocks in his bedroom to running a venture firm that reflected his interests, expertise, and personal story. Its performance to date suggests Zandiyeh will have the chance to make it his life’s work.
Strategy and model: Building for the future
Sturgeon has an impressive list of accomplishments for a fund whose modern incarnation is just four years old. It identified an overlooked opportunity set, devised a novel structure, amassed leading talent, comprehensively supported its entrepreneurs, and delivered strong performance.
We have already outlined some of the dynamics Sturgeon Capital looks for in frontier markets, but it is worth more definitively outlining the opportunity. While many factors influence the fund’s focus, three are worth highlighting:
- Size of population
- Extent of digital opportunity
- Levels of capital availability
Sturgeon’s core markets have a combined population of more than 500 million. Factoring in surrounding areas, that number rises to more than 1 billion. Pakistan boasts a populace of more than 220 million by itself, while Bangladesh tops 160 million. This size is important. For a company to succeed, it must have a sufficiently large market – populations of this size mean that suitably directed businesses should have no trouble growing large enough to deliver venture returns – often without expanding beyond their home territory.
A large population is not sufficient in and of itself. There must be a sizeable digital opportunity to make a country interesting as a venture market. Through detailed research and triangulation with existing studies, Sturgeon has developed an understanding of the size of the opportunity in its geographies. As of 2022, annual digital revenue stands at $108 billion in target markets and is poised to grow to $290 billion by 2030, a CAGR of 13.14%.
Achieving such rapid growth will depend on companies emerging to fill the gaps. Many pieces of tech infrastructure and services have yet to be built in these markets. Sturgeon focuses on four areas: lending, fintech infrastructure, B2B SaaS, and marketplaces.
The final variable is capital availability. Sturgeon does not play in markets like India, Brazil, or China. Though these countries have large populations and massive digital economies, they also have more robust investing ecosystems. VC funding per capita is $30 in India, $47 in Brazil, and $74.60 in China. Compare that to Pakistan’s $1.60 per head or Uzbekistan’s $0.20.
This absence of capital has both drawbacks and benefits. On the one hand, relatively few investors can support a company, especially as it scales. For those that focus on the seed stage, like Sturgeon, this presents a risk. Companies need to either build toward self-sufficiency or woo investors from larger markets. The benefit is a lack of competition. Those with boots on the ground can effectively see 100% of new startups, an impossibility in more mature markets like the U.S. or China. One consequence is that valuations are favorable, compensating for the potentially lower upside of frontier market businesses. Paulo Bilezikijian, the CIO of a family office that invested in Sturgeon, noted that this was part of the attraction of investing in frontier markets like Uzbekistan. “It comes from such a low base, that if you don’t make too many mistakes, things will work out,” he said.
When you bring these three dimensions together, the attractiveness of a market becomes apparent. Bangladesh is a good example. It is the eighth most populous country in the world, with highly favorable demographics. The median age is 28, and 62% of the population is under 35. There is a clear digital opportunity given that 115 million are mobile internet users, making it the ninth largest mobile market by population. And yet, over the past five years, just $401 million has been invested in the venture ecosystem. Neighboring India received $38.5 billion in 2021 alone.
Of course, investing in frontier markets comes with obvious risks. There is a reason that Kiyan Zandiyeh’s research under Roubini turned up so many failed funds. Political and economic volatility often complicate operations, as they did in Iran. While such instability can harden startups into indestructible, capital-efficient organizations, it also limits growth.
Talent availability is also an issue. Khodro45’s CEO highlighted the persistent “brain drain” his company faces. Many skilled individuals seek opportunities outside their home country, making employee retention difficult. “We’re facing recruiting challenges all the time,” they remarked.
Finally, the specter of corruption is never far. Investors, founders, and other stakeholders can all succumb to financial temptation. Such incentives complicate proceedings for those that seek to act fairly. Both honest founders and investors may see progress thwarted by unscrupulous rent-seekers and gatekeepers.
Ultimately, no investment is without its drawbacks, and investing in untrodden geographies is not for the faint of heart. “The added risk of going into frontier markets must be justified by the returns,” Paulo Bilezikijian noted. So far, Sturgeon has demonstrated appreciation of the opportunity, awareness of the pitfalls, and an ability to navigate between them.
“We want to build Sturgeon into a weapon of the companies we back,” Alex Branton explained. Pivotal to that ambition is the goal to develop Sturgeon into a comprehensive financial provider spanning early-stage financing, growth capital, private equity, and debt. “There are a few institutions that offer some of this, but they often take a year to commit to a deal,” Branton added, “There is no one offering a full stack of capital in an extremely high-caliber way.”
Today, Sturgeon covers two bases: early-stage funding and private equity. It is best known for its venture practice. As mentioned, Sturgeon’s first official fund – Sturgeon Emerging Opportunities I or “SEO I” – was $25 million, which closed in 2020. Before that, Kiyan Zandiyeh had deployed a few million into Iranian bets like Khodro45 and Azki. Those early investments have performed well to date, delivering a 3x multiple on invested capital (MOIC) at an IRR of approximately 37%.
It is dangerous to judge any venture vintage after just two years. But as things stand, SEO I looks even more promising. So far, Sturgeon has delivered 2.1x MOIC with an IRR of 73.4%, while 90% deployed. It has built a relatively concentrated portfolio of just sixteen names. In many cases, it has accumulated a significant share in the companies it backs – sometimes more than 25%. The firm has also not been afraid to double down on its winners; more than a third of the fund went into a single company. At the same time, Sturgeon has refused to sell many of its promising positions to other investors. The firm intends to continue this practice of high-conviction investing in its forthcoming $50 million fund, SEO II.
Sturgeon’s private equity practice is newer, though it capitalizes on the team’s experience – partner Aljion Ravshanov previously ran UzOman Capital, one of Central Asia’s largest private equity vehicles. Sturgeon’s efforts began in 2021 when the firm won a mandate from a large oil and gas business to invest $250 million into the Kazakh ecosystem. The petroleum behemoth is a significant player in the country, contributing an average of 6.3% of GDP over the past decade. As part of the mandate, Sturgeon is tasked with investing in companies that create a positive impact, particularly those that create jobs. Sturgeon hired an experienced local team to support this new initiative, ensuring its venture team could retain focus. Though it may have a relatively small venture fund by U.S. standards, its combined financial might is $275 million. That’s helped it bring on venture partners that have built and exited companies in Sturgeon’s target verticals in frontier markets.
In time, it’s easy to imagine how Sturgeon’s structure may develop. Once it has further proved the success of its approach, a growth fund could prove particularly impactful. The ability to write eight-figure checks into companies would allow many entrepreneurs to scale more aggressively and compete on a regional or global scale.
Nearly every venture capitalist seeks to support the companies in which it invests. The dynamics of frontier markets mean that Sturgeon must be more hands-on than most. Fundraising, hiring, and strategy can all be particularly complex in less-developed environments.
It is clearly working. The firm boasts an NPS of 90 from its entrepreneurs, an impressive figure. Much of this success stems from Sturgeon’s ability to balance local expertise with global range. The fund has on-the-ground team members in Uzbekistan, Kazakhstan, and Pakistan and a headquarters in London. It is actively hiring in Bangladesh and Egypt.
This positioning has allowed Sturgeon to benefit from the best of both worlds. It has strong national and regional networks spanning technology, traditional business, investing, and government. When it comes time for a startup to seek regulatory approval, find a partner, or add investment, Sturgeon knows who to speak with and how to best optimize for success. Because of its regional focus, the fund is instrumental when it comes to geographical expansion. For example, Zood, a company we’ll discuss in greater detail, leveraged Sturgeon to launch in Pakistan. “In a week, we were able to meet everyone,” CEO Michael Kho said, “There are many that invest in Pakistan, but few that have spent so much time there.”
Often, cross-border collaborations occur within Sturgeon’s portfolio. “The advantage we have is that by investing in multiple markets, we see similar companies at different stages, in different environments,” Head of Impact Robin Butler noted. “We can share those lessons across the portfolio and create partnerships.” Earlier this summer, Sturgeon connected Pakistani logistics business Trukkr with Uzbek e-commerce infrastructure player, Zip24. Each is helping the other break into their respective markets. “We like helping this cross-portfolio pollination happen,” Butler said.
While Sturgeon could not be successful without deep local roots, its global scope is also pivotal. From its HQ in London, Zandiyeh’s team maintains links to more mature venture environments in Europe and the U.S. This positions them to raise from larger LPs and connect with historic venture funds. Sequoia, Tiger, and Benchmark have played in Sturgeon’s target geographies in recent years. If the fund is right about the opportunity, others will follow suit. Should that happen, Sturgeon will be well-positioned to connect its portfolio to further investment.
Case study: Zood
Sturgeon has succeeded in creating a portfolio of promising companies. The undisputed breakout, however, is Zood. Launched in 2019, the fintech and e-commerce platform has snowballed, becoming a major player in Central Asia and beyond. According to CEO Michael Khoi, the goal is to build a digital lending platform for 300 million underserved users and 5 million merchants.
To better understand the kind of companies Sturgeon backs, and the potential of regional players, it’s worth delving deeper into Zood’s story.
Zood is a comprehensive ecosystem. At its core, it is a digital lending platform geared toward the e-commerce market. How it provisions this lending is multifaceted. Zood can be divided into three main business lines:
Zood started with its e-commerce marketplace. Its shopping app functions similarly to Amazon or Mercado Libre, giving consumers an easy place to purchase various goods, from clothing to electronics to furniture. Today, “ZoodMall” boasts more than six million products from 30,000 merchants. It is the number one shopping app in both Uzbekistan and Jordan, with GMV growing by 15% month-over-month in the former. There’s an extraordinary opportunity for this platform to scale, given e-commerce’s current penetration rate in Zood’s target markets of Uzbekistan, Iraq, Pakistan, and Jordan. In the first three, rates are under 2%; in Jordan, the figure is 8%.
Following the playbook of other e-commerce businesses, Zood used its large consumer base to expand into fintech products. It started with a “buy now, pay later” (BNPL) service, offering shoppers the ability to amortize the cost of a purchase, provisioned on ZoodMall, third-party websites, and offline. Though common in Western markets, BNPL is effectively non-existent in Zood’s target countries. Since most of Zood’s customers do not have credit scores or observable financial histories, the company can only underwrite these loans thanks to the data it collects through its platform. It looks at online behavior to judge which customers are equipped to pay back a BNPL offer. Zood has distributed more than 350,000 loans, adding to its data advantage. Less than 5% have defaulted.
From this base, Zood has built a more significant lending business. To assist with larger purchases, the company has developed a network of partner banks across the countries it serves. When customers need to buy something larger than a new shirt or pair of headphones, Zood sends the request to partner institutions via its API. It’s able to offer loans up to $500 instantly.
Zood’s final lending offering is geared toward e-commerce merchants and those willing to move online. Vendors leverage “ZoodSME,” an inventory financing solution to support their growth or mitigate cashflow issues. Zood offers up to $30,000 and uses the merchant’s inventory as collateral. The result is a short-term, low-risk lending product.
This offering connects to Zood’s final business unit: e-logistics. The company has developed a robust solution that includes warehousing, fulfillment centers, smart lockers, and delivery. Zood itself does not have to manage all of these tasks. Instead, it has constructed a constellation of partners that it synchronizes between. The result is an effective product that allows merchants to simplify e-commerce sales. It also benefits Zood, allowing the company to optimize its risk management thanks to the data collected across the lifespan of a transaction – from merchant sourcing to customer delivery.
Beyond its three core business lines, Zood has built a series of additional products that help the company operate more cohesively. Fraud detection, proprietary credit scoring, debt management, virtual cards, and point-of-sale solutions contribute to Zood’s operations. It’s easy to imagine how these products might become foundational to new or existing business lines.
Succeeding in one frontier market is hard; growing across four is remarkable. We’ve alluded to some of Zood’s traction above, but it’s worth digging into its financials, too. Since beginning in-country operations in 2019, Zood has grown volume and revenue at an eye-catching pace.
That first year, the company handled a total payment volume (TPV) of $2.4 million; two years later, it had grown to $48.5 million, an increase of more than 20x. Zood estimates that 2022 will see its TPV surpass $100 million. Its average take rate is 15%, with certain markets meaningfully above that figure.
Impressively, Zood has managed this with relatively little funding. The firm has raised just $48 million to date. The result of this comparative scarcity is that Zood has built a resilient business with solid foundations. Paulo Bilezikijian, one of Sturgeon’s LPs, highlighted this as one of the company’s strengths. “It is the type of story that I like very much,” he said, “Zood is not dependent on constant financing. It has real fundamentals.” Indeed, the company was profitable on an adjusted basis in 2021; it has a line of sight to net profitability in the near-to-medium term.
In many respects, Zood is operating the ideal frontier market playbook. As Kiyan Zandiyeh explained, many companies that have come from similar environments and prospered follow a common pattern. First, they amass distribution; then, over time, they layer on services that increase LTV and profitability. Companies like Nubank, Mercado Libre, Rappi, Tokopedia, and many Rocket Internet inventions have all executed this maneuver. Zood may one day be as well-known as those giants.
Working with Sturgeon
One of Zood’s obvious strengths is its leadership. Zandiyeh described Khoi as “one of the most capable people I’ve met in my life.” Robin Butler gave a similar assessment, describing Zood’s CEO as “a phenomenal operator and executor.” Butler added, “he is just relentless.”
As a result, it seems fair to believe Zood would have succeeded without Sturgeon’s assistance. But it is reasonable to think that Zandiyeh and the company have streamlined the growth of the startup. When I spoke with Khoi, he highlighted the many ways Sturgeon had supported the company.
“I speak with Kiyan every week, minimum,” he said. “He and the team are experts in emerging markets.” Sturgeon’s support goes far beyond expertise, though, Khoi stressed. He noted that the firm had been pivotal in bringing in new investors and making connections across its portfolio. As mentioned earlier, it guided Zood’s geographic expansion and has helped define benchmarks based on its broad regional knowledge.
Perhaps most remarkably, Sturgeon staffed a bespoke team to Zood for an entire month. The group was tasked with assisting Zood’s M&A strategy, advising on three acquisitions across Uzbekistan and Pakistan. “No other VC does that,” Khoi explained. “They act like entrepreneurs,” he added. “The assistance they provide is very high.”
Impact: More than money
Sturgeon Capital is after more than just financial returns. While it seeks exceptional returns, it also recognizes that it has the potential to make a real impact in the countries it operates. To maximize its chances of doing so, Sturgeon has tasked itself with two high-level goals: to increase employment levels, especially among the young, and drive financial inclusion. It is already making strides in both.
Sturgeon operates in countries with young populations. In some, as much as 70% of the population falls under the age of 35. This stands in contrast to aging nations like the U.S. and Japan, which face a future scarcity of workers.
But while having a young population may be advantageous, finding employment for them is often tricky. Sturgeon’s Head of Impact Robin Butler noted that unemployment rates are twice as high among the young. Still, the opportunity is there. “If you can create jobs for the new generations, you can build the economies of the future,” he said.
Sturgeon has set itself a series of goals to make this happen. The first among them is for its investments from SEO I to indirectly support 500,000 jobs. It is also committed to increasing the percentages of female founders and employees – both of which are extremely low. Indeed, Sturgeon has studied this discrepancy thoroughly, organizing a research study into the matter that interviewed forty startups and forty venture firms.
As of 2Q22, Sturgeon’s portfolio companies directly employ more than 2,100 people, with 60% under the age of thirty. Nearly $28 million has been paid in wages. Thirty percent of total employees are female, a remarkable figure for the target geographies. Sturgeon hopes that the findings of its research study will allow it to offer female-forward recommendations to its portfolio.
Indirectly, portfolio companies support 50,000 businesses which, in turn, employ 360,000 – 72% of Sturgeon’s target.
As mentioned in the Zood case study, access to financial services is limited in target geographies. Both consumers and companies struggle to access essential products like credit. Sturgeon hopes that the startups it backs will allow many more to enter the financial system. Sturgeon tracks lending volume and the number of loans across its portfolio to gauge its impact.
Thus far in 2022, Sturgeon’s companies have disbursed or facilitated 2.3 million loans, totaling $267 million. Most recipients were first-time borrowers with little or no access to alternatives.
One additional metric that Sturgeon charts is R&D spending. The firm hopes that the startups it backs will invest in innovation, driving further benefits for local markets. In 2021, portfolio companies deployed $3.8 million into R&D efforts. That figure looks to rise this year, with $3.3 million already invested.
“You really feel like you’re investing in businesses that if they’re successful, they really will change the lives of millions of people,” Robin Butler said of his work. Sturgeon is well on its way.
The Sturgeon Foundation
Sturgeon recognizes that some problems cannot be solved with investment. The fund has set up a separate philanthropic vehicle, the Sturgeon Foundation, to further its impact. This entity hopes to provide scholarships for tens of thousands of students across Central Asia, Pakistan, and Egypt.
Sturgeon has been running an informal version of this program for several years. In 2020, Zandiyeh and his team contacted local universities, asking which of their most talented STEM students struggled to afford their education. Those suggested were helped financially and connected to portfolio companies for internships and, eventually, full-time jobs.
“It’s not entirely altruistic,” Zandiyeh said, “We know that it helps our companies if there’s a strong talent pool in the country. But we also believe there’s an opportunity to create something very, very cool that can impact thousands of people.”
Earlier this year, Sturgeon decided to formalize the effort. It has convened a board of directors that includes World Bank experts, university deans, and business leaders. This group will be tasked with advising and guiding the Sturgeon Foundation. The entity will be funded by a portion of Sturgeon Capital’s management fees. Fifty percent of funds are explicitly reserved for female students.
One of the fund’s LPs was particularly impressed by this approach. With expertise in emerging markets, Rizwan Rahim knows how much impact such initiatives can have. For Rahim, Sturgeon’s scholarship program revealed something fundamental about the team’s character. “These are people that are very humane,” Rahim said, “They’re always talking about job generation. They are clearly driven by having a positive impact on society.”
For some, venture capital as we know it is coming to an end. In a piece published last year, Slow Ventures’ founder Sam Lessin argued that as software investing has become better understood, it has lost the characteristics that define the venture industry. “What we are currently calling venture capital is rapidly becoming just run-of-the-mill globalized, highly competitive and reasonably low-margin finance,” he said.
No such criticism can be leveled at Sturgeon Capital. Like Massachusetts’ whaling agents, the firm has set out for the horizon. Zandiyeh’s fund has embraced geographical risk, choosing to invest in markets other investors scarcely consider. It does so believing that the prize warrants the risk and knowing that success brings financial reward and real impact.
The Generalist’s work is provided for informational purposes only and should not be construed as legal, business, investment, or tax advice. You should always do your own research and consult advisors on these subjects. Our work may feature entities in which Generalist Capital, LLC or the author has invested.
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