50M Fund II Investing in Enterprise SaaS | Jahn Karsybaev, Big Sky Capital VC

Amit: Hello everyone, and welcome to yet another episode of Build AI. Today we have Jahn Karsybaev on our podcast. He is the co-founder and managing partner at Big Sky Capital. Their first fund was a $20 million early stage VC fund investing in enterprise SaaS and other areas, and now they are onto fund two, which is a $50 million fund. Welcome, Jahn. Really glad to have you here.

Jahn: Thanks so much, Amit. Really a pleasure to join you on your podcast. I'm sure this is going to be fun.

Amit: So maybe we can start from the very beginning. You have roots in Kazakhstan. I wanted to first start there. What was your journey from Kazakhstan, then Montana, then Fortune 500 tech executive, and then a VC firm? Can you walk us through it?

Jahn: Yeah, sure thing. I'll try to keep it brief. So originally I was born in Kazakhstan. I'm actually currently in Kazakhstan myself as well. It's probably the largest country that you've never heard of, but it's located in Central Asia. It's the ninth largest country in the world, a former Soviet Union republic. So I finished high school in Kazakhstan, then I moved to the US afterwards to attend undergrad at the University of Montana. That's where I met my fund partner. He's also from Kazakhstan. And hence the name of the fund is Big Sky Capital, because every state has its own slogan. Montana is Big Sky Country. So that's where that originates.

After undergrad, I spent some time in the corporate sector, mostly in technology, working in various roles from product and project management to the C-level. Throughout the journey there were also multiple entrepreneurial stints where I had my own startups. My fund partner and I also had a couple of startups together, several successful failures, a couple of exits, and we had also been angel investing on the side ourselves for quite some time and built a portfolio. Pre-pandemic we had a conversation that it was probably the right time to start and go to the dark side, as we call it, and raise our fund. A little after the pandemic, around 2021 and 2022, we started the fundraise. It took us a little bit over a year to raise the first fund and we have so far deployed into 30 companies.

We focus on three regions. Southeast Asia, where my partner is based out of Malaysia. We invest in Malaysia and Singapore. Central Asia as well, because we do have an office here in Kazakhstan, but we invest across all of Central Asia. Right now quite a few companies, maybe a third of the portfolio, are out of Kazakhstan and Uzbekistan. And the US as well. I was personally based out of Fort Lauderdale and am currently spending time in Kazakhstan. So that's a brief overview.

Amit: Great. So two things, maybe one after the other. I myself was a founder two times and sold my last company to a New York based unicorn. Now I am sort of quasi investing. We are a venture builder and a fund, so we do both. We are on both the bright side and the dark side, using your analogy. But your operator to investor transition, I want to understand a little bit about that. It will be great for the audience because some of them may be going through that transition or may go through it later on. How does the operator experience shape the investment thesis and how you invest? How does it help?

Jahn: That's a great question, Amit, and we've been asking ourselves that for quite some time, even pre-VC, pre-investing world. Even for myself, I've been fundraising all the time, for my own startups, for the fund as well. Throughout the journey, when I was a founder of a startup right out of college, I don't come from money. I don't come from a wealthy family or anything like that. So access to capital has always been a challenge. And throughout the fundraising journey, working with investors of various sizes and levels, VCs, individual investors, it's been a mixed experience, a mixed journey. So I've been taking a lot of mental notes throughout those meetings with different investors, noticing things that I would probably do differently if I were in their shoes.

It also resonated on various levels when I was meeting with either an operator or a former entrepreneur versus somebody who came out of a top Ivy League business school and went straight into investing without any hands-on practical experience of what it takes to build a company. I've had that experience, and I still have it. We have multiple in-house startups of our own and I completely understand and respect how difficult it is to build your own startup. It's one of the first questions I actually ask when I meet founders for the very first time: do you have a very good understanding of how difficult it is to build a startup, how much pain it involves? Musk says it for a reason, right? That building a startup is like chewing glass and staring into the abyss on a daily basis, which is very true. And if the founder has that understanding, or at least that level of experience of how difficult it is, that actually moves the needle in the conversation. So being a former operator and entrepreneur myself is a huge advantage. I think it's an unfair advantage that we have as VCs, being able to find those points of synergy with the founders that we meet with for the very first time.

Amit: Well said. I think it will also be interesting for the audience to know a little bit about the kind of investments you have made. Since there are 30 of them, we may not be able to go through all of them, but at least can you tell us what the major segments are, with a special focus on what you have invested in the AI space, especially over the last two or three years?

Jahn: Yeah, absolutely. So as a fund, our investment thesis is enterprise AI and B2B SaaS. We don't touch crypto, we don't touch D2C companies and marketplaces, for reasons I can explain. Right now we are also sector agnostic. We're a generalist fund because we want to make sure we mitigate risk by exposing ourselves to various opportunities. The portfolio right now consists of more or less an even split. A third is out of Southeast Asia, a third is out of Central Asia, and a third is out of the US.

The predominant sectors in the portfolio are cybersecurity, fitness tech, and fintech. We have a couple of agro tech companies, and health tech as well, where we have several startups doing really well. We look at different verticals where the market size is significant enough to justify the risk, but also where incremental improvements from AI can make a huge impact. For example, healthcare in the US is very archaic and behind in technology, not even just in AI. If you build a solution that genuinely solves a particular pain point, and you have a good understanding and craft a GTM strategy that gets you access to the right decision makers, I see that as an interesting opportunity.

For the second fund, we will follow more or less the same thesis, just with a larger check size, and we will focus more on later stage companies like Series A. There are a lot of companies in the corporate sector where, being a C-level tech executive myself, I still stay very closely in touch with executives at companies of various sizes from my network, and we discuss different pain points and areas they wish startups were solving. Right now, with the rapid growth of AI, developer productivity is at the top of mind for a lot of these executives.

The other big challenge is integrating and implementing such solutions in the enterprise. It's very challenging and a lot of founders don't have a clear understanding or strategy for that, even post-sale. How do you go about the actual implementation and integration? That's a beast of its own. One of the reasons we decided to invest in B2B is because the type of founder building an enterprise solution is typically someone very experienced, not someone right out of college building a marketplace. It's someone who spent several years in enterprise and corporate themselves, encountered a problem, and was able to successfully build a team around them to solve it. That's one of the reasons we chose enterprise AI and B2B SaaS as our focus area.

Amit: I can resonate with that so much. At GI Ventures, we actually partner with top domain experts in niches within financial services, commerce, and other areas, and then build companies with them. These people have 10, 15, or 18 years of experience in their particular domain and have wanted to solve a specific problem for a very long time. That brings in a lot of understanding of industry structure, data, and network, and they're able to sell to enterprises. I completely resonate with what you're saying, Jahn. It will also be interesting to know your overall thesis on AI, and any specific company examples that you have invested in, and any areas you are looking forward to investing in within AI.

Jahn: That's definitely a very loaded question that we could probably spend the rest of the podcast on, but I'll try to narrow it down and give you a couple of examples of where we see a huge opportunity.

One area that really stands out is longevity and fitness. It's an area of personal passion of mine. I come from a very athletic family. Both of my parents are professional coaches and I've been in fitness all my life. I ran Division II track in college and to this day, fitness is a huge part of my daily life. So I'm very passionate about that space and I see how much impact AI can make in longevity, wellness, and fitness in general.

There are a couple of companies we've backed in that space. I acknowledge there's a lot of hype around it as well, and there are a lot of studies and research published suggesting that AI in general is yet to make a significant impact in various domains, including this one, where we are yet to see results where a particular AI solution has truly delivered. So it comes back to understanding what specific pain the company is trying to solve, and whether it's a pain that I deal with on a daily basis myself, with my family, with my children. That moves the needle in my decision-making because I know it's something I would actually use. That's one of my initial gut-check criteria when I meet founders for the very first time.

A couple of fitness tech companies like Hero's Journey are building through AI and focusing on retention, because in fitness, retention is the biggest problem. As human beings, we're creatures of habit and it's so difficult to develop any type of habit. So anytime you can pair technology with something scientifically backed to help people develop healthier habits, I see that as a huge opportunity. AI can power that up, even if it can't fully replace the human element.

Cybersecurity is another area where we have a couple of companies in the portfolio. We see AI making a significant impact in streamlining and automating the more rudimentary tasks of cybersecurity. And as we all see today, the next war is probably already being fought in the digital space. Companies like Key Caliber in our portfolio are able to identify signals around potential weaknesses in a corporation's ecosystem and help them mitigate certain risks. It's not necessarily an end-to-end solution, but it solves a real problem.

The bigger challenge, as I mentioned, remains the ability to integrate and implement these solutions into the existing ecosystem of a large corporation.

Amit: That's very interesting. And given that you have worked in some of these big enterprises and have seen your portfolio companies selling to enterprises, I wanted to ask you a very specific question. Since you have been an operator as well, startups usually think about distribution, especially B2B companies, in two very different ways. One approach is to go to small and medium businesses first. They are easier to crack a deal with, have smaller compliance and regulatory departments, and there's less friction overall. You get a bunch of logos and then go to bigger companies. That's approach number one. Approach number two is what Harvey AI did. They went to the top 100 law firms in the US and started there, playing the big game from day zero. YC actually advocates approach one, and there are a lot of VCs who advocate approach two. What do you suggest to your companies and what are your thoughts on this?

Jahn: That's an ongoing dilemma and an ongoing challenge for every startup trying to sell to enterprise. As harsh as it may sound, anyone can build a product. Well, I don't mean anyone, but it's relatively easier these days to build and launch technology because of the tools available to us. But to sell it, to get it to the right user, to identify your ICP, your ideal client persona, and really narrow it down and go five levels below, that's a combination of art and science and it's very, very difficult. We spend a lot of time talking to founders on that particular area, on their GTM, their business development process, and how you replicate that so it becomes scalable at 100x.

There's no right or wrong answer, but in business development, especially in enterprise, it all starts with relationships. A top-down approach in enterprise definitely works, because identifying the right strategy to get to the right decision maker at the right company is a challenge in itself. So I spend a lot of time talking to founders pre-investment about their strategy. When your personal rolodex runs out and your friends and network stop returning your calls, what is your strategy to consistently generate that flywheel and get to the right decision makers on an ongoing basis? And then how do you maintain that relationship?

Because in enterprise and B2B sales, one of the most important metrics for VCs, and for us in particular, is NRR, net revenue retention. How much money do you generate from your existing clients on an ongoing basis? That's a huge indicator of your ability to build a product that actually solves the problem. You can probably generate the initial sale, but how much you continue to generate from those clients on an ongoing basis tells you whether the product is truly valuable.

So regardless of whether it's the YC approach or any other strategy, you have to be able to adjust to the type of client you're serving, maintain that relationship, and come up with creative strategies to keep that open dialogue going. And is that model replicatable? Can you scale it? Harvey, I'm sure, spent many years before they found the flywheel to get in the door of the top law firms in the US, because working with lawyers is a relationship game. I'm sure there was a lot of homework and prep work executed before they could demonstrate the results they're showing now.

Amit: That's very helpful. It's also something that evolves, as you said. It's not cast in stone. Every company has to figure out their own distribution channel. We have usually seen that the most successful companies nail at least one distribution channel of their own. But switching gears, I want to talk about what type of founders matter. In our business, the founder and the team is everything. I read somewhere about you and your fund that you have a special focus, or at least some part of the focus, on immigrant and underrepresented founders. I wanted to know a little bit about that, but also what kind of founders and what kinds of signals matter most to you.

Jahn: That's a great question and the answer also evolves all the time. As we build that muscle and our own internal criteria, as we meet with founders on a daily basis, we try to continuously improve that process and those mental models for identifying the right signals on an ongoing basis. The biggest challenge for VCs is also to rely on intuition and gut feeling, because if your intuition tells you one thing but your internal checklist says another, it's a balance you have to manage as a risk manager first and a capital allocator second.

On the topic of diverse, underrepresented, and immigrant founders, yes, that's a very important aspect of our investment thesis, mainly because at the end of the day, that's who I am. That's who we are as a team. We are all immigrants ourselves, especially in the US, and we understand the challenges and the difficulty of that. We also understand how that can be an advantage when it comes to competition.

For various reasons rooted in personal experience, it's important to me to be able to work with founders who come from scarcity and from emerging markets that don't necessarily have access to capital. How do they come up with creative ways and creative solutions? If you're knocking on the door and nobody opens it, how are you going to climb through the roof or through the window to get to what you're trying to do?

The other criteria is relentlessness. Not taking no for an answer. Not getting discouraged. Because at the end of the day, as we discussed earlier, building a startup is also very lonely. Even if you have a co-founder, being at the top of the food chain, being the CEO of your company, is a very lonely job. How do you maintain that drive, that energy, that motivation, day in and day out? How do you have a very thick skin, take rejection on a daily basis, and turn that rejection into an opportunity? That's very rare to find.

We're all human beings and it's very difficult to deal with rejection, especially when you're fundraising and growing a company. That's a daily grind. How are you able to personally maintain that without letting it break you? Those things are very important. How does a founder bring themselves back and view daily encounters not as problems but as opportunities, whether that's an opportunity to improve, to change their pitch, or to change their approach? That's a huge indicator and a big signal in terms of the type of founder we want to associate ourselves with.

Because when I invest, I don't just want to write somebody a check and watch from the sidelines. That's not interesting and it's not something I want to do. I'm at a stage of my career where if I'm not having fun and it's not a space where I'm genuinely enjoying myself, it probably doesn't even make sense to get involved. VC is a very long game and it's getting even longer. So being able to build that relationship with a founder early on, and identifying that this is something we could spend many years working on together, those are usually good signals to say let's explore this further.

Also, if a conversation starts with bad news, that's usually a good indication that the relationship is there. As human beings, we have an internal radar. As they say, horses can smell fear from very far away, and the same goes for human beings. If something is being hidden or not transparently communicated, there's usually some kind of feeling inside you that picks up on it. But if someone is being very honest and very transparent from the very beginning, I think that's something to explore further.

Amit: Talking about bad news and good news, I want to ask you about what traction or milestones at Big Sky Capital, or at the portfolio level, you are most proud of so far. What have been the achievements?

Jahn: It's tough to answer because we're a very new fund in VC terms, having been in existence for a little over two years. But considering how risky this game is, I can say with full confidence that out of all 30 companies we've invested in, not a single company has shut down. That's a metric for us. Quite a few of those companies are actually growing at a tremendous pace year over year. It's hard to identify any specific metrics that definitively mark something as a winner, but a lot of it comes back to transparent communication.

Another factor that's important to me as an investor is having some type of influence at the board level. My fund partner and I actually wrote a book called "VC Boards: How to Be an Effective Board Director of a VC-Backed Company," because there's a lot of misconception in terms of what a board is and what it's for. For a lot of founders without that experience, a board is typically associated with some type of loss of control or a bunch of people sitting around a table telling you what to do. In reality, if you have that experience and you're able to design an effective board for your company, that becomes a secret weapon. A huge advantage. If you're able to leverage executives on your board who can open doors that would otherwise be challenging for you to access, who can help you with fundraising or on the technology side, that's a massive advantage.

So a lot of times pre-investment, we spend a lot of time looking at whether a board even exists at that startup, how they leverage board directors, and what they have the board for. I'm not a believer that if I write the largest check, I should automatically be on your board. That doesn't make sense to me. It should boil down to what type of value I can bring to the company and whether I can be an effective board director and help the company grow.

Amit: That's very interesting. I'm going to check out the book. I keep joining boards every now and then so I think it will be very helpful for me as well. People who have been operators and investors, this is my personal observation, I always feel like they write really well and produce good books. My partner Vijay, who worked at 500 Global and then at BBB Ventures, wrote a book last year called The Funding Framework, and I think it's a very good distilled view of how founders should approach fundraising. So I'm also going to go through your book and learn about what to do when you're on the board.

Now you said you started the fund about two years ago. I'm guessing the groundwork probably started a year before that, so around 2020. That brings me to my favorite topic. 2021 and 2022 were, depending on how you look at it, the finest or the worst years in venture. Checks were being written based on one email and one deck. It was incredibly easy to raise a fund from LPs, and individuals were writing $500K checks at the time. Versus now, it's incredibly difficult. I have not seen any individual writing a $500K check anymore. Can you talk about what you're seeing? Has the strategy completely changed, where you go to family offices and institutional LPs? Or is there still a lot of juice in the individual high net worth segment?

Jahn: That's another great question, Amit, and you're absolutely right. Fortunately or unfortunately, we missed that post-pandemic period where capital was relatively easier to access than it is right now. In hindsight, it's probably better that we missed that period, because it really forced us to think carefully about fundraising as a strategy, as a challenge, and as an opportunity. It's something you have to approach very carefully from the very beginning, and it requires quite a bit of planning well in advance. Because especially for emerging managers like us, we don't necessarily have a lot to show from a portfolio standpoint. And the same framework applies here. The LPs who invested into our fund first and foremost invested into us. They believed in us as risk managers and as operators of the fund. They saw us as the type of people they want to bet on, people who would take this type of business very seriously. Anytime you become responsible for someone else's money, that adds another layer of complexity and responsibility in terms of managing and growing their hard-earned capital.

It's also about having realistic expectations. In any type of fundraising environment, you should never expect an immediate answer. It's simply unfair to both sides to go into a presentation and expect an immediate check or an immediate response. I don't believe in that. When founders come in and ask point blank, are you interested to invest, yes or no, that's not the type of dialogue I want to continue with, because it shows me there's no real interest in building a relationship. Because every LP, everyone who has backed us, it's a very long-term relationship game at the end of the day.

We're very transparent from the very beginning about how risky this business is. It's probably one of the riskiest businesses in terms of the mortality rate of companies that shut down. But at the same time, the upside is also unlimited. That's why it's also called Big Sky. The sky's the limit in terms of where a company could go if you make the right bet. So just like every founder who is fundraising for their startup, it's exactly the same game for fund managers throughout the lifecycle of a fund raise. You first and foremost invest in a relationship, and you build that relationship on an ongoing basis. It doesn't stop with one pitch presentation where you show a beautiful deck, then open up the data room, and then expect an answer. That's not how it works.

There are some LPs we've known for 20 or 30 years, and there are some institutional investors we've been talking to for about two years, keeping them consistently updated, sharing insights, and being very transparent not only with our wins but also with our losses and the areas where we could do better going forward. Those are just some of the thoughts I subscribe to and will continue to subscribe to as I fundraise for the second, third, and future funds.

Amit: This is great. We covered a lot of topics. I actually missed asking you one question. Maybe that's the last one I'll ask you. We're almost out of time. As you are looking at a pipeline of AI enterprise SaaS companies or vertical AI companies, in your own mental framework, what do you think is more or less important? Some people give a lot of weight to data and data moats. For example, we focus a lot on workflow and how deeply you understand a workflow and how important that workflow is in a particular sector or industry. And then there are VCs who focus a lot on distribution. They don't care how good the product is or what the data moat looks like, as long as you can sell. Of course, all of this is important and we all look at everything, but usually there is something that is slightly more important than the others. What is that for you?

Jahn: Those are all important aspects, especially when it comes to AI, because we've seen that change by the hour these days and not even just on a daily basis. When it comes to whether it's the actual technology behind the AI being built, the distribution channels, the workflow, or the data infrastructure, how do you go about prioritizing? You said it yourself, it's impossible to identify just one specific aspect. It's really about being able to very effectively balance all of those balls that you're juggling when it comes to building out the right technology, while also knowing when to stop. That's the biggest challenge even for myself when I build technology. At what point do you draw a line in the sand and say this product is good enough for me to go sell?

That's why frameworks like SLC over MVP resonate with us. Simple, Lovable, and Complete is a better analogy than Minimum Viable Product, because it means you understand the space, you understand the workflow, you understand the technology, and you can say this is the type of problem I'm solving and I can bring this version of my product to my ICP to see whether it's something they'll actually use. It requires very thorough planning and relentless execution, but also in those very early stages, when you're trying to find that flywheel, it's a lot of experimentation.

As founders of AI startups, it's very important to understand that if today's version of a product is version one and the demands or pain points of your client are changing, you need to be able to adapt, and adapt very quickly. A lot of founders are not capable of making that adjustment and it kills them. You pour your heart and soul into your product and then it's not being utilized and not being put in front of the right audience. That can crush you. So finding that right balance is always the key.

Amit: Thank you so much. It was great talking to you and this was really, really helpful. I'm sure the audience got a lot from it. Thanks for your time.

Jahn: Likewise, Amit. I really appreciate the invitation and I look forward to staying in touch with you.

Amit: Absolutely.