Pearls Capital

Pearls Capital is launching a venture capital (VC) fund, with a mission to support founders eager to challenge prevailing norms. Its investment strategy covers various regions and sectors, allocating to the UK, Scandinavia, southern Europe, and the MENA region. The firm has a keen interest in Qatar, recognising its promising evolution in the startup ecosystem. Similarly, Saudi Arabia has caught its attention because of the country’s rapid growth in the startup arena and the significant increase in both the volume and value of deals, establishing it as a key market for Pearls Capital’s future pursuits. Guided by a transparent and objective approach, Pearls predominantly focuses on innovative startups in the realms of finance, insurance, property, blockchain, AI, and machine learning technologies.

The prominent trend in the VC industry seems to be based on power law. It is widely advocated to invest in a large number of companies. The rationale behind this is that there is a minimum number of investments to be made in order to tilt the probability toward increasing the likelihood of investing in a startup that attains unicorn status. Despite the inherent uncertainty of startups, this strategy is pursued to achieve higher returns for the entire investment portfolio, even though it may involve taking on a higher level of risk.

For Pearls, this seems to be equivalent to a martingale method of investing, where the dollar value of investments or the position size doubles with the lowering portfolio size after losses. Although, theoretically the probability of winning increases as the number of portfolio companies increases, the method is risky as investors need to have enough capital and liquidity to sustain a large loss before they hit a homerun. The view is that Pearls will not focus on such unicorns but rather target established start-ups with higher potential returns on average.

Pearls seems committed to remain small and nimble with the current fund size targeting 20 million USD and future funds not exceeding 100 million USD. This self-imposed restraint is driven by Pearls conviction that bigger AUM leads to more dependency on management fee and less so on performance fee, creating a divergence between the interest of the limited partners and the general partners.

Pearls holds a different view of this most practiced approach. Contrary to exceeding the portfolio size, it invests based on startup reasonable performance expectations, reducing the need to compete to invest in a unicorn that will compensate for the losses made across the portfolio.

“We believe the traditional VC model that promotes the idea of power law and investing in as many companies as possible is flawed. We prioritize alpha generation and a thoughtful allocation of resources through a performance-based model,” says Munder Shuhumi, CEO and managing partner at Pearls.

Its philosophy is based on active portfolio management, where alpha can be generated by allocating capital to the portfolio companies based on milestones rather than initial portfolio construction alone.

Through a data-driven, technology-infused approach, Pearls looks at overall market trends as well as innovations at an individual level while shortlisting startups for investment. Pearls and its partners diversify asset classes to evaluate potential portfolio companies and understand their correlation with traditional assets.

This helps them align their profits within the industry with historical returns. The company, however, doesn’t rely only on numbers to invest in businesses. Its investment strategy is based on assessing each founder, their network, their idea, and their entrepreneurial journey.

Fund Allocation Based on Risks

Pearls believes in allocating funds to companies upon achieving milestones rather than a one-time investment. If a company fails to meet its target milestones consistently, the funds are reallocated to promising companies, creating a more balanced risk approach.

“We try to help companies struggling to continuously meet their milestones through our connections, experience, and advice. If we still feel that the possibility of risk outweighs the returns, we divert the funds to other entities that perform better,” says Shuhumi. “This better-weighted risk approach automatically reduces our exposure to failing companies and increases the allocation to companies with proven ability to meet the targets.”

Its ability to remain objective and focus on target returns, ownership, and follow-on investing based on thematic and data-driven models gives it a sustainable advantage as an emerging manager. It analyzes the data on market trends, observes future opportunities, and determines if the market timing is right for a particular investment. Since investing in startups is a combination of art and science, Pearls’ data-driven and systematic approach provides it with the necessary tools to make an objective investment decision.

Data-Driven Investing Decisions

To select entrepreneurs, Pearls remains as systematic as possible and makes data driven decisions. Initially, it looks at data from a top-down approach to identify the megatrends and understand where the industry is shifting. This includes looking at the financials, as well as code repositories to identify trends in number of commits and projects within a particular field. The company then combines this information to come up with themes that would be relevant for the next five to ten years.

After theme identification, Pearls looks at companies from the bottom up, identifying individual ideas within each theme that align with its principles, ethics, and investment philosophy. The company utilizes AI models to strengthen and accelerate its research efforts and detect early warning for a better decision-making process.

This thematic analysis that includes both top-down and bottom-up approaches helps Pearls identify and capitalize on themes related to technological innovations and advancements that can potentially drive long-term growth and market outperformance.

The thematic analysis is followed by investment identification opportunities through scouting, networks, and systematic selection. The firm is not dependent on inwards deal flow and proactively allocates time and effort to identifying investment opportunities. It carries out an exhaustive study to approximate the results expected from these investments. This screening analysis is conducted qualitatively and quantitatively to determine the convenience of undertaking the project at a particular moment.

Pearls diligently seeks to verify the commercial, financial, and legal profile of the founders, including any convictions, history, bankruptcies, and previous ventures. The outcomes from this investment research, along with the funding or grant application, are presented to the investment and advisors committee for their final review and approval. Once the committees give the green signal, the process of funds transfer begins. Believer in long-term relationships and partnerships, Pearls continuously mentors, supports and monitors their business until their exit.

As opposed to a transactional relationship, it collaborates with limited partners, co-investors, and portfolio companies to foster a partnership ecosystem. Pearls also intends to host an annual meeting for all its partners, including other VCs, entrepreneurs, advisors, limited partners, and co-investors, to bring everyone together and discuss their successes, failures, and pains. This aids collaborative learning and creates an ecosystem within its partnership environment to help people get to know each other.

Pearls’ diverse team of professionals from various backgrounds brings unparalleled perspectives to investment decisions and helps effectively support entrepreneurs, including introductions, advice, operational support, and networking opportunities.

An Investment All-Rounder

Moving beyond financial investment, Pearls provides guidance, connections, and insights to help entrepreneurs grow and expand their reach worldwide.

For instance, it is currently working with a gaming company to develop a state-of-the-art gaming platform for a niche sport. When the company’s founders approached Pearls for investment, it quickly realized the potential of their innovative platform spans beyond the initial plan. It built a strategy to accelerate the adoption of that sport in different countries. Since the complexity of developing this game from simulation to studio building was high, Pearls aimed to help them get in touch with one of the biggest gaming companies in the world.

Beyond just financial investment, Pearls aims to support its portfolio companies in many other services including access to legal services, human capital services, operational services and even access to its co-working space in their London offices.

Pearls is well-versed in the challenges, turbulence, and volatility entrepreneurs go through in the infancy of their startup journey, allowing it to support many clients in their success journey. It knows how costly failures and risks hovering over founders’ heads in the initial phase of commencing company operations put them to the test. It supports them in navigating this stressful phase until the business sees success.

Pearls is committed to supporting underserved segments of entrepreneurs and believes in generating alpha through investing in diverse portfolio companies. It aims to have a well-diversified portfolio of companies from different backgrounds, geographies, genders, and minorities. The firm believes these entrepreneurs will act as a catalyst in moving society forward while generating superior returns for investors.