The Bunches Principle: why things go right or wrong all at once

What’s common between Nvidia’s recent massive stock jump, Zoom’s unprecedented user growth during the pandemic, SVB’s blow-up in a week & network effects of Calendly?

It’s a phenomenon I call the Bunches Principle, & it poses both risks & opportunities. Here’s how you can be on its right side.

Probably the biggest news of last week was the major pop in Nvidia stock. After an AI-fueled earnings update that massively surpassed market expectations, its stock price rose by 24% in a single day (May 25), taking its market cap close to $1Tn.

While this was happening, I went back to check how the stock has moved since the company IPO’d in 1999 (see chart below). Interestingly, the stock remained flat for almost a decade starting 2006, before growing ~9x between 2016 and 2018, then dropped again in late 2018 before 10x’ing again in the next 3 years. More recently, Nvidia’s stock has been up 235% since its two-year low in Oct’22, beating out the performance of any other S&P 500 company since then.

Nvidia’s stock performance reflects a phenomenon that I see frequently play out in the world at-large, and especially in complex-dynamic systems like financial markets, technology innovation, growth of young companies etc. I call it the Bunches Principle – it states that both good & bad things tend to happen in bunches.

Some examples of the Bunches Principle at play:

1/ Driven by the pandemic lockdown, Zoom’s daily meeting participants rose from 10Mn on Dec 31, 2019 to 200Mn on Mar 31, 2020 and 300Mn on Apr 21, 2020. That’s 20x growth in 3 months flat! This translated to steep revenue growth as shown below:

Source: TechJury

2/ SVB was a top 20 bank in the US by assets, a category leader in servicing the venture space, and had crossed $40Bn market cap in Nov’21. Even with a downturn in public markets, it had a ~$17Bn market cap on Feb 28, 2023. From there, it went bust in a week and was put under FDIC receivership on Mar 10 (see collapse timeline below).

Source: Visual Capitalist

3/ I see a frequent pattern in enterprise software/ SaaS startups wherein it can take several years for a product to grow from 0 to $1Mn+ ARR (especially when run bootstrapped or with minimal capital infusion), but then, $1Mn ➡ $100Mn ARR happens in a fraction of that time (see chart below). Case in point is Calendly’s timeline – the company was largely bootstrapped in its initial phase, raising only a small $550k seed round in 2014. Tope Awotona (who is a solo founder, to top it all – I mean this company is riddled with narrative violations at all levels!) ran it super-frugally for the next 7 years, getting the company to ~$100Mn ARR in 2021 and only then raising the 2nd round of…wait for it…$350Mn at a cool $3Bn valuation.

Source: Sacra

4/ I often say that while we think we are living in the age of innovation, our rate of shipping new groundbreaking technology is perhaps 10% of what the US achieved during World War 2. In 10 war-torn years between 1935-1945, here is a sampling of all the things that were invented in the country – Flu Vaccines, Penicillin, Jet Engines, Blood Plasma Transfusion, Electronic Computers, Radar, Atomic Bomb, Jeep, Superglue, Synthetic Rubber, Radar, Microwave Oven and many other spinoff products. It wouldn’t be an exaggeration to say that the foundation of modern life as we know it, was built in WW2.

What creates the Bunches Principle?

Within any complex-dynamic system, there are many interconnected & intertwined constituent elements, each of which is continuously evolving. As this system tries to achieve its stated goal or purpose, its constituent elements are both interacting with each other (“internalities”) as well as with external forces (“externalities”). On a shorter timeline, changes in these internalities & externalities are hard to observe, and often, can appear random or chaotic.

However, in some systems and at a specific point in time, these internalities and externalities combine in a unique way, sometimes called the perfect storm in everyday language, to create a tipping point. Beyond this point, the system makes explosive progress that can be either positive (towards the goal) or negative (away from the goal).

So, in the above examples:

  • Rapid acceleration of Generative AI via the launch of ChatGPT has created a positive tipping point in demand for Nvidia’s chips & data center products.
  • The pandemic literally drove the entire knowledge worker population on the planet to adopt video meetings, creating a positive tipping point for a consumerized, self-serve video conferencing product like Zoom (& then eventually for Teams & Meet as well).
  • Drastic interest rate increase by the Fed in less than a year (from 0.25-0.50% in Mar’22 to 4.75-5.00% in Feb’23) created a negative tipping point for SVB given it held a significant portion of its assets in long term treasuries that had to be marked-to-market to significantly lower levels, thus severely impacting its asset values & in turn, causing a bank run on it.
  • Calendly is a calendar scheduling product with in-built network effects given meetings are multi-sided. While these types of products have a cold-start problem and take a lot of initial heavy-lifting, once adoption reaches critical mass, a positive tipping point gets created for network effects to take over in a massive way. Same dynamic can also be seen in products like Slack.

What are the implications of the Bunches Principle for me?

Whenever we are operating in a complex-dynamic system, eg. the stock market, venture investing, building a new business, working in a pre-PMF startup, or even careers in general, we should be prepared to encounter the Bunches Principle & take decisions accordingly.

Some of these considerations could be:

1/ While holding a stock, as long as your conviction in the initial thesis holds & the business continues to make solid progress in the right direction, it might be worth holding on even if the stock stays flat, as a positive tipping point could be around the corner. See this pic via a tweet from Ian Cassel that I found worth bookmarking.

Source: Ian Cassel

2/ In my experience, careers move in step functions, in what I call a “sow-reap” format. You sow for a few years, getting yourself to a tipping point where you reap significant rewards in bunches, post which another phase of sowing begins.

Therefore, it’s important to be patient enough during career journeys, in order to be on the right side of the Bunches Principle & catch those tipping points. Founders & venture investors, in particular, will appreciate this point given their careers involve putting in years of upfront work, with the belief that a giant payout awaits in the end.

3/ Watch out for small systemic risks that could be silently accumulating in important aspects of your life, potentially leading to a negative tipping point down the road. This could be neglecting health on a daily basis, various kinds of small debt piling up, not saving enough on a regular basis, over-exposure to one asset class, taking an important relationship for granted & not giving it enough care on a regular basis, having small but frequent burnout episodes at work etc.

4/ As you operate in various macro environments & external contexts, be aware of any negative tipping points that could be lurking within them. Things like the pandemic displacing life as we knew it, remote work destroying commercial real estate, geopolitical conflicts & their ripple effects coming to your door, regime changes leading to social unrest in your communities etc.

While it’s almost impossible to predict these, designing your life in an anti-fragile way with a margin of safety baked in, can go a long way in countering whatever the world throws at you. PS: for more thoughts on this, check out my post: Building an anti-fragile career (& life!).

In the ever-changing landscape of life and business, understanding and embracing the Bunches Principle empowers us to adapt, seize opportunities, and mitigate risks. So, as you venture forth, be aware of the bunches that surround you, for within them lie the seeds of both transformation and caution.

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Reputations & underdogs in VC

In venture investing, there are obvious stars in the portfolio that generate returns. But what about the ones that are struggling?

I believe that spending time with the underdogs offers the opportunity to learn & build reputations. Here’s why.

During a recent brainstorming session with one of my VC friends, the topic of bandwidth allocation between high-performing “stars” and struggling “underdog” portfolio companies came up. In the flow of the conversation, I ended up saying this:

Star portfolio companies will likely generate returns, while the struggling underdogs offer the opportunity to learn & build reputations.

There is an inherent dichotomy in managing a venture portfolio – the best-performing companies require little investor bandwidth & yet, have high probability of success while the ones struggling demand an inordinate amount of effort & yet, have low odds of success. Brad Gerstner of Altimeter said this in a different way during a recent fireside chat with Mubadala:

If this founder relies on us to succeed, then we chose the wrong founder. Our job is to increase the probability of success, not create the success.

Brad Gerstner, Altimeter Capital

Given this dynamic, it’s natural that purely from an opportunity cost optimization perspective, venture investors will be drawn to divert bandwidth away from struggling companies & towards forward-looking activities like triaging & protecting likely winners or sourcing new deals.

However, as an operator-investor focused on the pre-seed & seed spectrum of financing, I tend to view this tradeoff differently. Personally, I believe in spending time with struggling portfolio companies & supporting their founders as they guide the ship through choppy waters. Not for emotional or moral reasons, but because it makes execution sense in really early stages of venture investing:

1/ Because it’s unclear who will eventually win: till Series A, which is typically an acknowledgement that the company has reached product-market-fit, both “high performing” & “struggling” are loosely defined, temporal phases of company building. Companies will move in & out of these buckets during the up-and-down journey towards PMF. Only by spending enough operating time can an investor develop independent judgement on each company’s potential, quality of execution & what all stakeholders should be doing to tip the scales & increase the probability of achieving PMF.

I call this “building conviction” – something that Paul Graham clearly did for Airbnb by closely observing how the founders were building & iterating on the ground. This is what gave him the conviction to bat for the team in front of top VCs even when a majority of them were just not seeing it.

The alpha of OG venture investors like Paul Graham is their ability to see the kernel of a “top” company within a “presently struggling” one. This happens only by spending the time to closely track the founder’s execution approach & mindset. Reproducing some of the email exchanges between PG & Fred Wilson of USV, to highlight this (Source: Paul Graham’s post from March 2011)

_______

_______

2/ Because you learn what is not working: venture investing is a feedback loop business. It’s an infinite game where the goal is to keep improving daily by learning what works & doesn’t as the world evolves & incorporating the lessons back into your systems.

In my experience, spending time with companies in troubled waters helps absorb lessons not available anywhere in the physical or digital world. Be it co-founder conflicts, screwed up cap tables, botched hiring or excess spending, these human experiences are worth their weight in gold, and reflecting them both in front of other portfolio founders as well as in your own investment process going forward, is key to tilting the playing field a few degrees in your favor. Cumulatively, this can add up to a huge competitive advantage over a long period of time.

3/ Because fighting till the last breath is a DNA: while what Brad says above is true, especially for growth stage companies which is where Altimeter operates, even the best founders pre-PMF need a lot of support & coverage for their gaps & blind spots. The best venture investors strive to create delta on the “increase the probability of success” part of the job, which is why while capital is a commodity, individuals GPs that move the needle during a company’s long lifecycle are rare & so in-demand.

I remember listening to Doug Leone of Sequoia at an event a few months back where he mentioned believing in fighting alongside the founder till the last day of the company (also reflects his tough New York Italian upbringing!).

My organic investing style is cut from a similar cloth, wherein I focus on bringing a company-building DNA to every cap table I have been a part of. Though, it hasn’t been without some self-doubts, as there is no immediate fruit to show for all the labor this approach demands.

Case in point being an erstwhile portfolio company in queue management software. I was literally the first check into the company as an angel way back in 2015, and also helped syndicate that first round. About 2 years in, the company was out of cash, all employees had to be let go, 2 co-founders jumped off the ship, and the remaining 2 founders were trying to engineer a pivot from a consumer app to an enterprise use case.

On paper, this would look like a dead duck to any sane person barring 3 people – the 2 remaining founders and me! We kept pushing on, literally on fumes. I remember having many late-night operating sessions with the founders every week for almost an year, in parallel to my day job at Alibaba & also being an expecting first-time father. In fact, I remember my better half asking me more than once – “why are you burning yourself up over a small angel check? Is this worth the opportunity cost of your time as a Director at Alibaba?”.

As I now reflect on these questions, I feel it’s all about the DNA of doing whatever it takes alongside founders. Long story short, the company pivoted successfully, crossing $1Mn ARR at high profitability. The business started throwing up so much cash that investors got multiples of their investments back via dividends, with founders also receiving significant cash-payouts, and deservingly so, for their grit & sacrifice. It didn’t become a unicorn or a household name but left everyone net-positive.

This experience left me with many operating learnings & a lifelong friendship with the founders, whose next company I have promised to back again. Even till today, I use the mental model from this investment while looking for both positive & negative leading signals in any new team I meet. I have no doubt this experience is helping me sow the seeds of future success.

After more than a decade of experience both as an institutional & individual investor, I have only now come around to accept my nature of not giving-up on people & companies that are struggling. It’s part of who I am and perhaps, my alpha as an investor.

I don’t know if this is the smart way to do venture investing or not, but I would like to leave you with this idea – fighting for the underdog companies will at the minimum, help you learn some valuable lessons & build your reputation as an investor that in turn, will create future value in more ways than you can imagine.

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Cooking with the Bay Area secret sauce

I often get the question from founders – “what makes the Bay Area successful? And how can I replicate its model in my teams?”.

Outlier success is usually driven by a set of interconnected factors. But there is one element behind the Valley’s success that is less talked about. Sharing that secret sauce here for your own cooking!

During this India trip, a bright young founder asked me an interesting question – “why does the Bay Area keep doing better at thinking big & innovating? And how can I get my engineering team in India to start doing the same?”. These questions got me to reflect on my own experience of operating in Silicon Valley & what makes it different from other geos.

Any region that becomes an industry hub (erstwhile Detroit in auto, New York & London in finance, the Bay Area in tech) is usually the result of a complex web of factors. These go top-down, starting with the country’s history, values & socio-economic structure at the macro level, to local factors like weather, presence of feeder universities & a critical mass of companies that drive network effects.

However, based on my experience, there is one important element in these complex webs that’s less talked about – the presence of “Relatable” role models. While social, economic & cultural factors set up an amenable environment, seeing people you know or can relate to, pushing boundaries & a few getting outstanding rewards for it, is what drives daily action from talented folks.

Doing anything new or unconventional requires 2 things:

  • Inspiration – stories that create a desire to chase something better than the status quo.
  • Action – internal motivation to translate inspiration to daily action.

Each of these is driven by a different set of role models. Inspiration is driven by what I call as “Prominent” role models while Action is driven by “Relatable” role models.

Prominent role models

These are the handful of most visible, externally successful and recognized leaders of their fields. I have been inspired by many of these in my own life.

Even before startups were a thing in India, I remember discovering Steve Jobs’ famous 2005 Stanford Commencement Address while I was working as an investment banker at Citigroup (& hating it). Looking back, this was my initiation into this world that now deeply lives within me. Jobs inspired me to start looking beyond spreadsheets & discover unsolved problems in the world.

When I entered venture capital, I discovered Fred Wilson of USV & reading his blog inspired me to start writing articles & become an early adopter of Twitter in 2011 when most Indian VCs didn’t even have Twitter accounts. Many years later, as I was driving global expansion for Alibaba, observing Jack Ma’s leadership & learning about his backstory inspired me to startup on my own.

Steve Jobs, Fred Wilson & Jack Ma are Prominent role models that inspire you to the very core, creating those moments of decision-making that change your direction. However, a long & arduous journey only begins in these moments, and walking the path requires years of daily action. This is where the ongoing presence of Relatable role models is super-important.

Relatable role models (the secret sauce!)

Completing the loop I started in the beginning; I believe one of the core strengths of the Bay Area that makes it an ongoing innovation engine is the vast presence of Relatable role models doing non-incremental things.

These are people you either know directly or know of in your extended network. These are people just like you, sometimes at the same stage of the journey as you, maybe a few steps ahead in a journey similar to yours, or perhaps already rewarded for walking the path.

These are ex-colleagues, batch-mates, friends-of-friends & social media acquaintances. To you, they are reachable, approachable, understandable. They aren’t necessarily outlier successes. It’s just that they are either walking the same part of the hike as you or have already walked this segment & reached the next check point.

When I first moved to the Bay Area & was looking to meet people in the ecosystem, I still remember one of my close friends introducing me to his “Mamaji” (mom’s brother) who had sold 2 companies & was living in Saratoga. One of the first intros I got was to this kid in his mid 20s who had just sold a company to LinkedIn & was on to his next startup already.

As I started working in the Valley, I saw colleagues building side-products on weekends & senior leaders joining startups with significant pay cuts. I saw peers investing into startups with salaried money & heard stories of friends-of-peers who were the first angel checks into now-prominent startups.

Humans learn the best by observing others in their surroundings. The core value prop of top universities is not classroom learning, but a high-quality peer group you end up learning with on campus for 4 years. Paul Graham realized this & therefore, created YC as a community-driven venture model where founders build largely on the back of peer learning & support. I can confirm this as a parent too, when I see my kids largely learning by osmosis from their friends & indirectly observing behaviors of grown-ups.

Living in the Bay Area exposes one to a continuous stream of relatable, real-life stories of risk-taking, of taking big bets & importantly, of creating all types of success, big or small, by taking these bets. In most cases, you can even get direct access to the protagonists of these stories, who are more than happy to pay-it-forward by sharing their learning & actively helping out. They do this because they too, are on the way to their next base camp & are looking up to their own Relatable role models for it. And so, the cycle continues!

Coming back to Part 2 of the question I got from the founder – how can one drive a non-incremental culture in your own teams?

As a leader, consciously surrounding your team with Relatable role models is a strong step towards this. It could be by encouraging team members executing differently to share their approach or bringing in folks from other companies for sessions & fireside chats. It could be doing knowledge sharing sessions at an offsite, or discussing a case study of a similar product or company that is nailing something you are struggling with. It could be recognizing taking on large problems & bold approaches via hackathons & ideathons. Or it could be setting up days where talented younger folks shadow leaders, sitting in important meetings & observing how they execute.

I tried to leverage this concept in my own startup a few years back wherein I convinced one of my batch-mates who was the ex-CTO of a large Internet company to come onboard as a CTO-in-residence. Him spending a few hours every month with the team & joining townhalls to share his perspective on technology transformed the learning trajectory & energy levels of our young engineering team. Even today, everyone fondly remembers that experience as a game changer for them personally.

So that’s it, I gave you the Bay Area’s secret sauce. Each of you is a Relatable role model for someone out there, so go ahead & pay-it-forward by sharing your stories, supporting other builders & connecting people to each other. If this becomes the dominant culture in your ecosystem, whatever that might be, success will follow!

Three unicorns & a VC

In my 1st year as a VC, I was fortunate enough to source 3 of the best enterprise startups built out of India over the last decade.

Reflecting on what these companies looked like before they became massive successes and the lessons that taught me about the best way to approach venture investing.

In my first year as a VC Associate in 2011, I started supporting a GP who was native to Chennai, already had some portfolio companies there and was informally leading coverage for the region. Naturally, I started visiting the city regularly and was perhaps one of the few VCs at the time who was spending significant bandwidth in the ecosystem there. And mind you, this is way before the city became the SaaS powerhouse it is today. I spent the most time in events around IIT Chennai, especially in the Rural Technology & Business Incubator (RTBI) there. This is the time when Zoho wasn’t a household name yet, and a few interesting startups like Stayzilla and Ticketnew had just started to emerge.

Candidly, I used to feel a little foolish every time I boarded the flight to Chennai. Was I just wasting my time by not covering Bangalore & Delhi? Which venture-backable company could I realistically hope to find in an IIT’s incubator, that too one which had the word “rural” in it? While my colleagues were neck deep in sourcing hot eCommerce deals from Tier 1 hubs, was I missing the boat by spending time with boring enterprise software & niche consumer Internet companies started by these humble, grinding-type founder personas?

What I didn’t know at the time was that meeting founders in an under-covered but growing hub like Chennai was actually a competitive advantage, a potential “edge” that was there to be leveraged. It led to me meeting two of the best enterprise software founders from the last decade, at a time when both companies were fledgling – Girish Mathrubootham of Freshworks and Umesh Sachdev of Uniphore. My guess is I was also one of the first VCs to ever meet them.

I met Girish during a really nondescript startup event in Chennai. He wasn’t even pitching there, and the organizer randomly introduced us after the event. I still remember Freshdesk had 25 beta customers at the time. I took the deal back to the senior team; we had one call with him but didn’t end up investing for a variety of reasons. Talk about missing the deal-of-the-century!

While meeting Girish was more serendipity, I give myself more credit for spotting Umesh. I was the only godforsaken VC who had built a deep relationship with the RTBI team at IIT Chennai. As part of one of my visits, the lead there introduced me to Umesh & Ravi. They were building Uniphore out of the lab there, with the active support & guidance of Prof. Ashok Jhunjhunwala. I don’t remember the exact traction they had at the time, but it was really early. They were building voice technology keeping rural/ vernacular use cases for India hinterland in mind, which was nicely aligned with RTBI’s mission.

While I didn’t get to interact much with Girish, Umesh and I spent a bunch of time together. I brought him in 2 times to meet the Fund’s senior team, once just before I was about to leave VC and move to the Bay Area. Fortunately, Uniphore didn’t become an anti-portfolio like Freshworks. One year after I had left the Fund in early 2014, it ended up investing in Uniphore. Cut to Feb’22, Uniphore raised a $400Mn growth round at a $2.5Bn valuation, becoming a trail-blazing Indian startup story of grit & perseverance.

As I write this, another similar story comes to mind. Again, in my first year of VC, I had a chance to meet Baskar Subramanian, co-founder of Amagi. This was the most non-intuitive play ever. At the time, Amagi’s flagship offering was a platform to insert regional, localized ads in popular TV programming. For example, say during a national TV soap telecast on Sun TV, viewers in Chennai & Coimbatore would see different vernacular ads of local brands from their specific locations.

If one went by the classic VC playbook of pattern matching, Amagi wouldn’t make it beyond the first meeting (perhaps why most funds passed on it at the time). The company’s existing market didn’t seem like it would support a venture outcome. On top of it, Baskar came across as the polar opposite of a typical VC-backed founder archetype. He was a bit nerdy, a bit fidgety, a bit unpolished around the edges but really smart & always with a big smile.

As expected, while the Fund passed on investing, two things stood out to me even then:

  • Amagi had signs of early product-market-fit in the use case it was going after.
  • Baskar and team were gritty, grounds-up entrepreneurs with a humble vibe, strong belief in their overall market thesis & the energy to play the long game.

Candidly though, I was still in my 1st year of learning the craft of venture investing & even though I caught these signals from 1st principles, I didn’t have the experience & chops to convert these signals into conviction & fight for the deal internally.

Cut to Nov’22, Amagi raised a $100Mn Series F from General Atlantic at a $1.4Bn valuation, with the company hitting $100Mn ARR! From its origins of inserting local TV ads in the Southern states of India, it has now become a global software platform for cloud broadcast & targeted advertising.

These and many other stories that I have experienced over a decade of early-stage investing, have taught me a valuable lesson – given the inherent randomness in outcomes, a terrible way to do venture investing is to be dogmatic. While frameworks, heuristics & pattern-matching do help evaluate deals more efficiently, you can’t become a slave to them.

Outlier venture outcomes typically come from unintuitive & unpredictable places. If one studies the history of the biggest wins in both public & private markets, they mostly emerge from “non-consensus-and-right” situations. Spotting these, by definition, requires an independent & radically open mind.

When Tim Ferris asked legendary VC Bill Gurley of Benchmark about why he thinks he missed investing in Google, Bill had a tremendously self-reflective response:

Essentially, Bill is saying that at the time, Google was the exact opposite of a classic VC template deal. And that’s exactly what should have pushed him to evaluate it more deeply as a non-consensus bet. In the words of my friend Nakul Mandan of Audacious Ventures – “the pedigreed, buttoned-down, big logo’d, all-bases-covered teams often end up generating a 1.5-2x return while the maverick, underdog, underestimated, headstrong, quirky founder ends up creating the 100x bagger”.

Marc Andreessen has a great expression around the optimal mindset for venture investing (also applies to starting a company) – “Strong opinions, loosely held“. I like to call it having a radically open mind while evaluating any opportunity. In my head, this approach includes:

1/ Turning over every rock to find deals.

2/ Not discounting any vertical/ space upfront, irrespective of general ecosystem biases.

3/ Not underestimating any founder, irrespective of age, pedigree, or track record.

4/ Trying to probe further when the gut feeling is positive but misaligned with VC thumb rules.

5/ Listening to co-investor feedback but making up your mind independently.

6/ Trying to imagine “What if everything goes right?”.

7/ Finally, getting super-excited when a company seems non-consensus.

This is the behavioral North Star I am chasing & where, I believe, the real Alpha in venture investing lies.

The Success Flywheel

Do you know what’s common between Shaq’s investment in Google, Ryan Reynold’s success as a marketer, the business dominance of Ivy Leagues & Peter Thiel’s investment in Facebook? A phenomenon I call the Success Flywheel.

In this post, I unpack this concept, including ways you can kickstart your own Flywheel.

Let me share a story that has 2 of my most favorite things in life – NBA and tech investing. Did you know that Lakers legend Shaquille O’Neal invested in Google’s Series A round in 1999 at a $100Mn valuation? Which, as we all know now, has turned out to be the biggest venture outcome of the last 25 years. So, how did an active basketball player get access to the deal of the century alongside Sequoia?

Shaq revealed the story behind his Google investment during his appearance at TheEllenShow a few years back. Apparently, he was hanging out at the Four Seasons in LA & started playing with a bunch of kids at the next table. In his own words – “I felt like I was babysitting this guy’s kids while he was in a meeting”. As it turned out, this stranger (Shaq didn’t disclose who he was) eventually let him into the Google deal.

Now, knowing Shaq’s storytelling skills, am sure this story is a bit jazzed up. And given he was already an NBA star in 1999 (he would go on to win his first ring in 2000), obviously this stranger must have recognized him. But even discounting for these possibilities, it’s clear that some amount of serendipity was definitely involved – meeting an important investor in a famous watering hill located in a powerful city led to him accessing a once-in-a-lifetime deal.

As you digest this, let’s cut to a similar story of another star, this time in Hollywood. Ryan Reynolds is now considered one of the savviest marketers & investors around. Look at his track record:

  • Became the brand personality for Mint Mobile, reportedly taking a 25% stake in the company. Mint recently got sold to T-Mobile for $1.35Bn!
  • In 2018, started promoting Aviation Gin and also took a stake in the company. The company was purchased two years later by Diageo for $600Mn.
  • In late 2020, co-bought a struggling fifth-division Welsh soccer team for 2Mn pounds. Used his marketing chops, including creating a Hulu documentary, to turn around the club’s attendance & revenues. It is now a thriving organization.

So, how does an active movie actor get access to deals that would be the envy of major private equity funds? And not just one-off – he keeps getting invited to the best deals one after another.

This is what I call the Success Flywheel at play. While the above are outlier examples related to top celebrities, I have seen the Success Flywheel working countless times both in my own career as well as those around me:

  • Repeat founders with prior success get access to the most venture dollars from the best investors. The other side of this coin – VCs with successful track records keep getting preferential access to the best founders.
  • The best recruiters (consulting, banking, investing, big tech) visit only the top campuses in each country for placements. So, these students get preferential access to the best jobs. And the flywheel doesn’t stop there – once you have any of these top logos on your resume, they act as preferential filters for subsequent jobs.
  • Early success brings folks to major economic centers like the Bay Area, NYC, London, Bangalore & Shanghai, either to study or work. Just by participating in the natural flow of information & people in these hubs, they get exposed to the best opportunities.

Morgan Housel of Collaborative Fund has a similar observation in his awesome post “Tails, You Win“:

The Success Flywheel is like a law of nature because it stems from fundamental human behavior. Across countries, cultures, sectors or even historical eras, at a fundamental level, humans are wired to maximize risk-adjusted returns while doing deals. Very crudely, there are 2 ways to do this – increase the numerator (return) and/ or decrease the denominator (risk).

Equally importantly, time is finite so people are looking to get to the most optimal risk-adjusted option, as efficiently as possible. This gives rise to the concept of “access” – how does one get in the flow of these people looking to do the best deals? ‘Cos they will quickly choose from people in their natural flow.

Having a prior event of success helps in getting repeated access to this flow as it creates a strong credentialing signal that plays really well to a crude heuristic that the human brain often uses – “if the person has been successful before, they are more likely to succeed again”. This signal drives 3 kinds of access: (1) Inbound (“I should talk to X”), (2) Referrals (“you should talk to X”) and (3) Serendipity (“have you met X?”).

1/ Inbound

The more socially-visible & externally-validated the prior event of success is, the more broad-based inbound access it drives to various kinds of flows. People looking to do deals proactively reach out even without any significant outbound effort (trying to sell yourself). Hence, visibly successful founders, investors, leaders, celebrities & experts keep getting access to opportunities.

This is also why conventionally successful professionals in any field still continue to productize & distribute themselves, building their personal brand & constantly growing their reach via networking, blogging, tweeting or starting podcasts. Putting oneself out there drives familiarity, which is key to inbound flow.

2/ Referrals

Everyone in these flows is typically in a consciously-cooperative mode, trying to optimize risk-adjusted returns for each other via referring opportunities, in the hope of future reciprocation. So, if a person has a prior event of success & on top of it, is also well-networked, it turbocharges referral-based access.

There is also a mini-flywheel at play here where a success event attracts people to your network, which drives referrals & more preferential access, thereby leading to more potential success & so on.

3/ Serendipity

Finally, even if you are not proactively looking for certain kind of opportunities (am sure Shaq wasn’t sourcing venture deals full-time), just being in the right flows puts you in the vicinity of serendipity that can take you in directions you never imagined. Shaq being at the LA Four Seasons at exactly the right time was the result of his outlier success as a basketball player, not his proactive networking skills.

The halo effect of success in one field generally transfers to other adjoining fields as well, which can drive massive serendipitous upsides. For eg. Peter Thiel’s track record as a co-founder of Paypal put him in the flows of Mark Zuckerberg in 2004, helping him become the first investor in Facebook. Or Jeff Bezos was able to invest in Google while it was still in the garage, courtesy of his success with Amazon.

Now the million dollar question – how does one leverage the Success Flywheel?

It starts by putting in the work to get your first event of success. The sooner the better so a sense of urgency goes a long way! And the good news is – unless one is born to privilege, most people start from scratch and build towards their initial success.

An event of success could be anything from cracking a top university, getting a coveted internship in a hot field, hustling into a brand-name job, hitting milestones with your business, creating a new product with buzz, publishing a paper, joining a board, building a social media following or just about any accomplishment in your context. Big or small matters less, it’s about getting a win on the score board to get the flywheel going.

While you are putting in the work towards your goal, also build a distribution network in parallel. This includes deep relationships & loose networks, both in the physical (IRL networking) & digital world (social media).

Once you get to that event of success, leverage your distribution network to amplify its impact. Make sure your success is visible, validated & shared in the ecosystem.

  • As Inbounds start, connect with people authentically, leave a good impression & look to solve problems for others.
  • To jumpstart Referrals, start using the tools & resources that typically come with success, to disproportionately give back to the network.
  • To leverage Serendipity, follow the golden rule of “showing-up” everywhere – meetings, events, calls, webinars, conferences, mixers, even birthday parties. PS: if you find networking at events a huge pain like me but still want to get better, check out my post “Networking at Events for Introverts“.

TLDR: the way to get a Success Flywheel going in your life is to first put in the work with a sense of urgency, and create an event of success, big or small. Once you get this event, make sure you “distribute” it well and ensure its compounding by continuous learning & effort.

Meeting customers IRL still works

As the business world reverts to a blend of remote & in-person, meeting customers IRL is becoming important once again, especially in a slowing economy.

Sharing some thoughts on how jumping on a plane & meeting people could be key to unblocking growth for your business.

I was recently in a brainstorming session with a portfolio company that is struggling with stagnant growth. The company is profitable, has clear PMF as demonstrated by loyal top-tier customers, yet is unable to grow the business fast. It has major logos but the ACVs just aren’t expanding.

Now, as with any startup, stagnant revenue is a symptom & the causes could be many. In order to do a root-cause analysis & subsequently unblock growth, my immediate actionable input to them was simple – “go and meet customers in-person”.

When the bolt of lightning called Covid struck our planet, paradigms of doing business changed overnight. As workers went remote, so did interactions with customers. In fact, as companies were forced to do business with each other over video calls during the lockdown months, people discovered that it was both highly productive and profitable to drive the sales process sitting anywhere in the world with a laptop & a stable Internet connection, engaging customers living thousands of miles away over a shared screen.

As the world is stabilizing into a new-normal, many companies are now realizing that the success of a fully remote sales & BD process is highly contextual. In hindsight, its applicability & effectiveness became extraordinarily broad based in 2020 and 2021, mainly due to:

  • An excess liquidity fueled, demand-on-steroids environment, and
  • Altered social norms of human engagement.

Simply put, everyone wanted to buy so badly that the only bar the sales process needed to clear was to show up on a Zoom call. And, it also helped that nobody really wanted to meet a stranger in-person & take the risk of Covid transmission.

Now, as we sit in 2023, both these factors no longer exist:

  • Demand is contracting across industries, courtesy of the ongoing cycle reset driven by rising interest rates.
  • Post vaccine, broader social norms have reverted to a blend of remote & in-person. What proportion will they reach at steady state is hard to predict, although with the present return-to-office movements even with Big Tech like Amazon & Meta, my guess is 60% in-person & 40% remote (assuming a continuing trend of 3 days per week in office).

It’s critical for all founders & operators, especially those in early stage startups that typically have finite resources to deal with business headwinds, to quickly embrace this reality. In a 60-40 IRL:remote world with contracting demand, it’s unacceptable if founders & senior leaders aren’t getting on the plane to meet customers & build trust.

Meeting customers IRL has multiple advantages. First, leaders taking the time to travel & spend bandwidth in listening is a strong demonstration of commitment. It’s Strategy 101 that in most cases, it’s easier to grow a current customer vs land a new one. Even in consumer products, product leaders first focus on retaining existing customers + re-activating inactive ones, before filling up the top of funnel with new leads. In any business, growth is possible only when existing customers are happy.

Second, breaking bread with customers builds 1:1 trust with their execs, putting a human face to contracts, transcending beyond employers & current deals to opening up the possibility of these leaders becoming your personal champions for long after.

Third, getting informal feedback about their product experience as well as larger problems & challenges they are facing, & then connecting the dots across multiple such conversations, is the best way to do a root-cause analysis of “why are we not growing fast enough?”.

Going back to the portfolio company I mentioned in the beginning, I gave them a very simple & actionable plan for the next 8 weeks to unblock growth:

  • One founder to play what I call a ‘Key Accounts’ role.
  • Literally make an excel sheet of top 5-10 customers, hop on flights, meet key execs IRL, get feedback, hear their problem statements & build a personal rapport via drinks/ dinner.
  • As an output of each meeting, create a simple roadmap for (1) enhanced customer success, where customers are unhappy and (2) in-account revenue expansion via upsell/ cross-sell, where customers are happy & want to grow.
  • Finally, and most importantly, partner with relevant teams (product, delivery ops etc.) to unblock & provide execution momentum to these customer-wise revenue roadmaps.

The founder’s role shouldn’t end with token customer visits. Driving results by providing the necessary context, energy & cross-functional unblocking help to operating teams is the real output all stakeholders are looking for.

Btw, as I was working on this draft, star product operator & angel Gokul Rajaram posted this thought yesterday on the importance of building relationships in enterprise sales:

On a side note, willingness to get on a plane often is a career hack I used very successfully at Alibaba & something that I learnt from my then boss. While our international peers in US & EU offices loathed traveling to China & facing all the inconveniences (from jet lag & language to food & other cultural disconnects), me & my team would show up in Hangzhou every month, blending in with our local colleagues & building trust over meals, rice wine & karaoke. Slowly, we came to be known as the “true believers” – the only team willing to make the sacrifice & do a round-the-world trip every month to get s**t done. We gradually earned the right to be ‘insiders’, getting access to unique growth opportunities within the Group.

Now in this new phase of my career as a tech investor, am doubling-down again on this approach. As I ramp up venture investing in the US-India corridor, I am aiming to spend at least 2 weeks per quarter in India & devote more operating time to portfolio founders, grow new deal flow, cement old ecosystem relationships as well as initiate new ones.

Let me end this post with an article from Jason Lemkin of SaaStr that I really like – 10 Things That Always Work in Marketing. This is a must-read for anyone looking to unblock growth in their business. The suggestions go much beyond marketing, touching on all aspects of go-to-market. Reproducing the section on visiting your largest customers:

PS: If you would like to receive my weekly posts on startups, investing & life lessons directly in your inbox, please subscribe here.

The 3Cs of career leverage

As I started experiencing both time & mental bandwidth constraints, especially post becoming a parent, I started thinking through the golden question – “How do I get more leverage in my career?”.

Sharing 3 main forms of leverage that I have identified during my journey in tech as an investor, operator & founder.

The way I design my career completely changed when my first son was born in 2017. From the day I graduated from IIT, I implemented what I call a Brute Force strategy to climb the career ladder. The idea was to basically outwork everyone – worked deep into the weekend during my investment banking days, did every possible hustle during the venture capital gig, and was on a plane 15-20 days a month for 5 years at Alibaba, literally doing a round trip of the world (SF – Hangzhou – SEA – India – back to SF via EU).

Everything changed once a parallel day (& night) job landed on my plate – that of being a parent. Relative to Asia, raising kids in the US is especially hard given there are no support systems to fall back on, especially for a 1st gen immigrant like me.

The easy choice, of course, would be to step off the gas a bit, realign professional goals & essentially, accept the trade-off of more personal time & lower professional outcomes. And many at this life stage end up choosing this option.

But then, I have never been the guy who loves the easy way out. I set out to answer the golden question – “How do I get more leverage in my career?”. Essentially, figuring out ways to significantly improve the ratio of output (value created) to input (time & mental bandwidth invested).

Give me a lever long enough and a fulcrum on which to place it, and I shall move the world.

Archimedes

As I churned on this topic in my head for a year or so, Naval Ravikant posted his now legendary “How to get rich (without getting lucky)” tweetstorm in 2018, where he wrote about leverage as one of the key ideas.

Fortunes require leverage. Business leverage comes from capital, people, and products with no marginal cost of replication (code and media).

Naval Ravikant

Having worked in tech as an investor, operator & founder, I had the opportunity to observe various forms of leverage at play from close quarters. Some examples that hit home hard for me over the years included:

These examples highlight 3 main forms of career leverage I have come to identify in my journey. I call them the 3Cs – Code, Capital & Content.

1/ Code

Code is the strongest form of leverage that has come into existence in the last 50 years. It started from the days when one had to have access to a University with a Punch Card machine, just to run simple programs. Then, Apple and Microsoft together brought computers to regular homes, but coding languages were still complex & needed expertise. As personal computers got more powerful, the open-source ecosystem of programming languages started thriving, creating much broader access to software programming across the world (from s/w products in Silicon Valley to IT services in India). Now, with the rise of generative AI, it wouldn’t be a stretch to say that almost every knowledge worker can code & create products without deep expertise in specific languages.

Code provides game-changing leverage. Over the last 20 years, anyone with a decent laptop and an Internet connection could build a SaaS business, become a freelance developer, or get hired by a large tech company at extremely attractive salaries irrespective of location, background, or past credentials. As opposed to hourly jobs in the industrial age, coding just for more hours doesn’t necessarily translate into better outcomes. Quality of problem-solving matters much more than the quantity of hours, which is what gave rise to the 10x engineer phenomenon.

As someone who had neither the skillset nor the mindset to code, this extremely powerful form of leverage has always been out of my reach. That’s why I am particularly excited about how AI will make coding so much more accessible. At the minimum, it will both increase the global base of developers, as well as significantly enhance the productivity of the best ones (the 10x engineer now becomes a 100x?).

Given coding hasn’t been available to me as a leverage point in my career, I have had to double down on the other 2Cs, as I will explain below.

2/ Capital

Using capital to own assets is the oldest form of leverage that continues to stay powerful. The Vanderbilts made their fortune owning railroads, Carnegie in Steel, the Waltons & Jeff Bezos in retail, Buffet & Munger in owning full businesses as well as investing in stocks, Jobs & Gates in tech, Templeton, Soros & Jim Simons in public market investing, Stephen Schwarzman & Henry Kravis in Private Equity investing, and Don Valentine & John Doerr in Venture Capital investing.

Capital can be used to buy ownership in Real assets as well as businesses. The former benefits from scarcity (land is finite on this planet) & gives double-dip benefits of monthly cash flow + equity appreciation. But personally, I find the latter more interesting, purely because great businesses become long-term compounding machines, providing the prospect of exponential returns that Real assets can’t match.

As an example, Microsoft’s market cap has grown from ~$270Bn to $2Tn+ in 20 years. For any part owner via stock, everyone from Bill Gates to Steve Ballmer & now Satya Nadella has been putting in the work to give shareholders ~17% annualized returns.

Of course, the most powerful route would be to use your “sweat equity” & start a business, but that’s typically not an optimal option for most people.

Given my significant experience in banking & venture investing, I have gotten the most exposure to Capital as a form of leverage & ways to harness it across asset classes. In addition to developing expertise by working across institutions, investing in both public & private markets has also become my personal passion over the years. In a very organic way, I have always turned to the lens of markets & investing to decode life & human behavior.

As a result, I have doubled down on leveraging Capital to acquire ownership in businesses as a core form of leverage. I have been investing in tech startups for more than a decade, & plan to keep doing it for the rest of my life. My simple pursuit is to identify the best founders out there, & I believe this is where my professional Alpha is!

Compared to Code, Capital-based leverage is relatively hard to acquire. Accumulating own capital takes time & being able to manage other people’s money has a really high bar of trust, reputation & accountability.

The good news is – you can start young & with small amounts of capital. Compounding is your friend and as long as you are determined to save & deploy on a continuous basis for decades, every small step adds up. And sooner or later, my favorite model of “you only need to get a few right” kicks in, wherein a smart decision every few years will create a step function in your portfolio.

The first $100,000 is a bi**h, but you gotta do it. I don’t care what you have to do – if it means walking everywhere and not eating anything that wasn’t purchased with a coupon, find a way to get your hands on $100,000. After that, you can ease off the gas a little bit.

Charlie Munger

3/ Content

This is the newest form of leverage, & one of the most exciting ones. Pre-Internet, there were many gatekeepers in the way of getting ideas heard. Most regular people had almost no access to traditional media. One needed relationships with publishers & power brokers to put anything out in the market. Participating in a high-quality exchange of ideas happened within tight cliques – scientific, university, neighborhood, racial, socio-economic, etc. Essentially, the common man was blocked by “access”.

The Internet changed everything. Anyone could build a website to publish their ideas. With search engines, this content became discoverable by anyone across the world. As social media got created, distribution became turbo-charged with authors able to create holistic personal brands & interact with very specific audiences for their work. Now, powerful phones & software have transformed authors into “creators”, arming them with light-weight studios to create various forms of media, from vlogs & podcasts to tweets & reels.

I started writing online in 2011, mainly via blogging & tweeting. Over the years, my conviction in Content as a powerful form of leverage has only increased with time. As anyone who has taken a new product to market knows, it’s just not enough to have a great product. Communicating with your audience in a way that makes the product resonate in their minds matters the most. Case in point: Apple’s legendary 1984 Super Bowl commercial introducing the Mac (& in the process, convincing the audience that IBM is obsolete!). Even a product genius like Jobs spent an inordinate amount of time thinking about marketing (check out this snippet from Jobs on how he simplified Apple’s marketing message).

To me, the ability to influence human minds with your ideas is a superpower like no other. Writing & putting content out there helps me engage with people I would have never met otherwise. It helps me attract people with similar values, with whom I can solve problems. It helps me have a conversation with them even when one of us is asleep, or in a different time zone, or even when the encounter happens many years after the actual writing.

Early-stage investing is a long-tail game, with thousands of new startups getting created across the globe & tens of founders in the pipeline at any point in time. I realized very early that real-time meetings are unscalable, especially at my life stage, & that demand-gen is key.

Content is arguably the most scalable form of human interaction, with its engagement & subsequent impact reverberating for years & sometimes, generations (in the case of the best books). In fact, this post itself is a perfect example, wherein I have shared links to an Apple commercial from 1984, a Steve Jobs speech on marketing from 1997, and a Wall Street Journal article from 2000.

My belief is that Content in many ways provides more potent leverage than Capital – money can’t buy the best ideas, but the best ideas can attract money. And this friends, is why I write!

To summarize, employing various forms of leverage is key to creating large professional outcomes. As you design your career, think about proactively layering in one or more of Code, Capital & Content into it & equally importantly, commit to doing it over many decades.

Doing more with less

As an angel, one of the strongest leading signals I look for in a startup is progress per unit of capital – how much forward movement has the team achieved & the resources it has consumed for it.

My thoughts on why a capital-efficient mindset is so important for early-stage tech founders.

Having seen 1000s of deals across a decade of investing my own as well as institutional money, I rarely cringe while evaluating a new company. As an investor, I have often seen the same goods-and-bads in other deals several times before. As an ex-founder, I have walked the path & made the same unforced errors so almost every time, I can empathize & almost pre-empt why a founder is doing things a certain way.

However, there is one specific thing that is guaranteed to make me cringe – a founder attempting to raise an amount that is totally out-of-sync with where the business is. In many cases, this is accompanied by other precursors:

  • No intent to bootstrap from idea to “some” traction.
  • Wasteful handling of the last round.
  • Coding & building product for months at a stretch without putting anything meaningful in front of customers.

Personally, one of the strongest leading signals I look for in a startup is progress per unit of capital – how much forward movement has the team achieved & the resources it has consumed for it, especially when evaluated relative to other comparable startups.

I remember an interesting learning from my time at IDG Ventures (now Chiratae). Sudhir Sethi, the Managing Partner & the lead investor who had backed Myntra (Zappos of India at that time; was eventually acquired by Flipkart for ~$300Mn in 2014), often cited how when he went to meet Mukesh Bansal (the founder) for the first time at the Myntra office, he observed they were working out of a dingy space in a classic Indian neighborhood market with the ground floor occupied by a fruit & vegetable vendor. Sudhir used this as one of the positive signals for the team’s ability to execute in a cut-throat eCommerce vertical like fashion.

Fast forward a few years, and I got a similar insight yet again in the retail context. While working with Alibaba, I saw how frugal the Group was in terms of saving every dollar of operating cost. eCommerce works on wafer-thin margins, especially in highly competitive & price-conscious markets like Asia. And one could see this by comparing the bare minimum facilities & perks we got at the US HQ in San Mateo vs even well-funded growth startups, which were offering everything from catered meals to draft beer stations at that time.

Why is a capital-efficient mindset so important for early-stage tech founders? It’s because they are playing a game where the odds are hugely stacked against them. Where 9 out of 10 new startups fail on average. Where the starting point and end point of companies are vastly different, with each year choked with iterations, a major pivot every few years, and team members jumping on & off the ship.

Setting yourself up to have even a remote chance of winning such a game requires many shots at the goal, many course corrections, and many resets. At the same time, capital is scarce at the pre-PMF stages even for the best teams. Capitalism is brutally efficient, throttling money when relative risk is high, & opening the faucet once success is highly certain (typically post-PMF).

Building even a decently sized company can take anywhere from 6-8 years, & up to 15+ years. In such a long period, both the overall economy as well as your specific market will go through several cycles. The key is surviving long enough, even with limited capital, to be able to walk this arduous path.

This is what the best founders bring to the table – using investor capital like their own, each dollar wisely deployed towards only what’s truly necessary for the stage, raising each round with specific milestones in mind, and realizing that ownership is everything, with each bps of dilution being the costliest trade shareholders can make. To me, this mindset & building approach is perhaps the biggest signal of perseverance in a team.

Come to think of it, in the non-tech world where starting a business isn’t called “doing a startup”, entrepreneurs typically use their savings to get going, & once there is enough business confidence & profitable revenue flowing-in, grow using either internal accruals or debt. Initial bootstrapping creates skin-in-the-game, profitable revenue creates high confidence that customers want what you are making, & debt creates financial discipline around managing cash flows while preserving the founder’s ownership to compensate for all the risk they have taken.

This model has been used by everyone from Sam Walton to Richard Branson, & continues to survive in all parts of the SMB economy. While the venture capital model definitely works for building tech companies, which are asset-light, highly scalable & operate in winner-takes-all dynamics, I believe the founders who are in it for the long run build with a similar philosophy – planning for the next basecamp & raising conservatively, maintaining discipline around cash & giving high importance to ownership.

On a related note, I wanted to share something I recently wrote on Twitter regarding a fundraising pitfall specifically for serial founders:

Often see serial founders who have seen success before (scale and/ or exit), raise large rounds at high valuations at the idea stage!

From what I have seen, even the most successful founders have operated in phases where a lack of capital could have potentially killed their startup. That’s probably why on the 2nd attempt, they try and take that risk out of the equation at the beginning itself.

Oddly enough though, having a capital-rich Plan B to fall back on reduces the scrappy iterativeness, discipline & underdog mindset that startups usually need to succeed. And which probably contributed to their success the 1st time too.

In asymmetric bets like startups, to reference The Dark Knight Rises, “the way to climb out of the pit is without a rope”.

Hopefully, as this cycle resets, all of us founders & investors will go back to the drawing board & start appreciating Benjamin Franklin’s age-old virtue of frugality as a key to success in business & life.

Conviction vs Randomness in Venture Investing

Photo by Nigel Tadyanehondo on Unsplash

Recently came across a fascinating Twitter thread from June 2020 by Dave McClure, ex-founder of 500Startups, where he talks about how “investing with conviction” is a myth. This tweet captures his sentiments well:

I agree with several arguments in this thread:

1/ Picking winners in early-stage investing is really hard. Power laws govern the best venture portfolios, driving down the hitting %. Per Horsley Bridge data, even for a top VC firm like Sequoia, ~4.5% of portfolio companies generate 2/3rd of aggregate returns.

2/ Intelligent venture investing, by its very nature, involves making both Type 1 and Type 2 errors. Therefore, even high-conviction deals are likely to exhibit unexpected outcomes, both positive & negative.

3/ There is a lot of hindsight bias in the way investor narratives are created around companies that turned out to be successful – “Look, I had high conviction on this deal & it turned out exactly as I expected. Ergo, I can predict the future”.

So in games like this where outcomes are random & often uncorrelated with the level of effort that goes in, does it make sense to discard the input process?

Based on more than a decade of venture experience, I tend to view it differently. I believe it’s still important to have a rigorous process of building conviction and to keep improving it bit by bit with each experience. Even though eventual outcomes might still be random, this approach helps tilt the playing field a little in your favor every time. Over a long enough time horizon, as one keeps taking more shots at the goal & with continuously improving odds, the hope is that a home run arrives sooner than later.

Particularly at the earliest stages (angel/ pre-seed/ seed), especially with the advent of small check investments ($1-5k via syndicates/ SPVs) attracting a new generation of 1st-time investors, it’s easy to assume that outcomes are randomized & therefore, fall into the trap of doing spray-and-pray that isn’t backed by an intelligent investment process.

It’s important for new angels to first deeply study the asset class & build their personal investment process – areas of expertise, focus sectors, stages, target founder persona, deal flow engine, unique value-add to get into best deals etc. Post which, the odds of success are significantly better.

While being a champion of a “conviction-building” investment process, I also agree with the 3 takeaways that Dave closes the thread with, regarding having enough shots on goal:

Even with the most intelligent investment process, venture investors need to acknowledge their limited picking ability & therefore, keep taking enough intelligent shots at the goal for the odds to work in their favor. Semil Shah of Haystack wrote a great post titled “Shots on Goal” on this idea a while back.

Equally important as portfolio diversification via numbers, is making asymmetric investments – ensuring that the few winning bets have huge outcomes so that even with a high loss ratio, the returns math still works at the portfolio level. The smartest thing a venture investor can do is to befriend the power law, and work towards being on the right side of it!

To summarize, acknowledging the randomness of venture outcomes doesn’t need to be at odds with running a rigorous & continuously-evolving investing process. In fact, such a system should be intelligently designed to account for this randomness, combined with other considerations like power laws, compounding, economic cyclicality etc. Even a few points of “edge” that is systematically created with each experience, can slowly accumulate into a sizable alpha over the long term.

Munger’s Tao

Image Source

I recently came across this awesome Tweet & Podcast from David Senra of Founders Podcast, wherein he captures learnings from his dinner with Charlie Munger, as well as his reading of The Tao of Charlier Munger.

Here are some insightful ideas & quotes from Munger that stayed with me from David’s experience:

1/ Buy wonderful businesses at fair prices

Before Munger joined Berkshire, Buffet used to invest in Ben Graham’s “cigar-butt” style – buying super-cheap stocks, often trading below book value.

Munger gave him a new blueprint: “Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices”. This is what led to Berkshire becoming the compounding machine it is today.

2/ Cash is king

Through a company called Blue Chip Stamp, Munger & Buffet learned about the value of “float”- excess cash that a business throws up due to the timing difference between receiving payments & settling payouts. This excess cash could then be re-invested in profitable companies.

Through his early investing experiences, Munger started seeing the advantages of investing in better businesses that didn’t have big capital requirements and did have lots of free cash that could be reinvested in expanding operations or buying new businesses.

Munger advises keeping enough cash at all times, in order to take advantage of stock market crashes.

We made so much money because when the great deals came during an economic crisis, we had cash and could move fast.

Charlie Munger

3/ Acting on the few big ideas that matter

Munger says that very few times, you will be presented with an opportunity to buy a great business run by a great manager. Not buying enough when presented with this opportunity is a big mistake.

You have to be willing to act when the right opportunity comes along. ‘Cos great opportunities don’t last very long in this world.

Good ideas are rare. When you find one, bet big.

Charlier Munger

4/ Portfolio concentration creates outlier outcomes

Real wealth is created via concentration. Or to put it in another way, over time, one should expect 1-2 outlier winners to constitute a majority of the portfolio.

When Munger wrapped up his pre-Berkshire fund, Blue Chip Stamp accounted for ~61% of his portfolio.

Worshipping at the altar of diversification is crazy. One truly great business will make your unborn grand children wealthy.

Charlie Munger

5/ Chase unfair advantage

Competition is for losers! Why would you want to compete with people?

Some quotes from Munger on this:

  • “My idea of shooting fish in the barrel is to first drain the barrel”.
  • “Only play games where you have an edge”.
  • “Differentiation is survival”.
  • “Aim for durability”.

Munger talks about how size and market domination has its own kind of competitive advantage. When a company is deeply entrenched with customers, it acts as a deterrent for other players to enter the space.

Sectors that are generally considered to be “bad businesses” (eg. retail, textile, airlines etc.) are intensely competitive. Players beat each other over price and drive down profit margins for everyone, killing cash flows and bringing down chances for long term survival.

That’s why Berskhire looks for great businesses that have a durable competitive advantage. 

Mimicking the herd invites regression to the mean. 

Charlier Munger

6/ The power of Compounding

Find an exceptional business where underlying economics are going to keep increasing its value, and then hold on to it over time.

Quoting Munger – “Time is the greatest friend of an exceptional business. It’s the greatest enemy of a mediocre business”.

Compounding also works in knowledge. Munger gives an example of how over 50 years of consistently reading Barrons, he found just 1 idea worth investing in but that made him $80Mn, which he then gave to Chinese fund manager Li Lu, who turned it into $400-500Mn!

7/ The value of Rationality

To quote Munger:

  • “We don’t let other people’s opinions interfere with our rationality”.
  • “Life is like poker. You have to be willing to fold a much loved hand when new info or facts come to light“.
  • “It’s remarkable how much long term advantage people like us have got by trying to be consistently not-stupid, instead of being highly intelligent”.

8/ Focus is a super-power

Munger says:

  • “I succeed because I have long attention spans. People who multi-task give up their advantage”.
  • “You will always lose in a race to that one guy who sacrifices everything he has in service of one idea”.
  • “Extreme specialization is the key to success”.
  • “Intense interest in a subject matter is super powerful”.

He cites examples of how great companies tend to focus on optimizing one specific lever in their business:

  • Costco – optimizes costs
  • Geico – optimizes distribution via direct-to-consumer
  • Nebraska Furniture Mart – optimizes price for the end customer

What’s the one thing that both Warren Buffet & Bill Gates said was the key to success? Focus!

9/ Frugality drives value

Munger cites one common quality amongst all Berkshire businesses – they will go to great lengths to keep operating costs low. Even Berkshire itself demonstrates the same behavior:

  • It has no PR department.
  • It has no investor relations office.
  • For many years, its annual report was published on the cheapest possible paper & had no expensive color photos.

10/ Brands are magic

Munger says – “A great brand is a piece of magic”.

Brands like Coca Cola & See’s Candies have a piece of a consumer’s mind & therefore, have no competition. Charlie calls them “consumer monopolies”.

A lot changed the day Berkshire realized the power of brands.

11/ Business plans are useless

Munger says Berkshire has no master plan – “We always wants to be accounting for new information. We are individual-opportunity driven. Our acquisition style is driven by simplicity”.

He shares an interesting anecdote. When Mrs. B (Rose Blumkin), Founder of Nebraska Furniture Mart, was asked about having a business plan, she said – “yes, sell cheap & tell the truth”.

12/ Patience is rare

Human nature is all about being impatient. People just can’t sit around, waiting patiently. They want to feel useful. So they end up taking action and doing something stupid.

13/ Learning from mistakes is crucial

Learning from history is a big form of leverage. The biggest financial disasters get forgotten in a few years.

Munger says:

  • “Wise people step on troubles early”.
  • “Every missed chance is an opportunity to learn”.
  • “Be willing to take life’s blows”. 

I love rubbing my nose in my mistakes. It’s an extremely smart thing to do.

Charlier Munger

14/ It takes many, many attempts to find your life’s work

For context, Munger started working on Berkshire in its current form only in his 40s.

15/ Finally, lots of life advice…

“Build relationships with A players”.

“Problems are a part of life. So why are you letting them bother you?”.

“The best way of reducing problems is to go for quality – Go for Great!”.

“It’s the strong swimmers who drown”.

“Envy has no utility. The key to living a well-lived life is killing envy”.

“The best armor for old age is a well spent life preceding it”.

PS: If you love Charlie Munger’s wisdom, you might enjoy my post capturing his musings from the 2o23 Daily Journal Shareholder’s Meeting.