Soumitra Sharma

Munger Musings – Notes from DJCO Shareholders Meeting 2023

As a long-time student of Charlie Munger, I eagerly wait for his musings at the Daily Journal Shareholders Meeting every year. This time was no different! Here are some of my notes capturing Charlie’s wisdom at the DJCO 2023 meeting:

Importance of under-served markets in software

Both Munger & Buffet are big believers in moats. Having witnessed the natural creative destruction of even the best companies like Kodak & Xerox, they understand the power of competition & what it can do to long term returns of investors.

Munger spoke about how the software business of DJCO, which offers a solution to automate legal courts, is operating in a large yet unaddressed market that incumbent software companies hate. It’s an unsexy business that has long sales cycles & as Munger himself said – “it will be a long grind”.

However, these same reasons also limit competition in the space. Munger believes that this combination of a large, underserved TAM + low competition is likely to drive superior long-term returns, as long as DJCO shareholders are prepared to ride through the grind & hold over the long term.

In my view, this idea also has some interesting insights for venture investors in the enterprise software/ SaaS space. Too often, investors start chasing the hot market of the year without realizing that a space that is obviously popular will end up attracting disproportionate competition & investor $$. And as history shows us, too much competition in a market drives down returns for everyone.

Therefore, there is some merit in looking at startups going after unsexy or under-served verticals. These non-obvious nooks & crannies often hold the most potential for contrarian-and-right bets.

2. Holding is tax-efficient

Munger spoke about how he hates to sell his holdings as California would straight-up take 40% away in taxes. As he went on a brief rant about how California is driving businesses away with its tax policies, the underlying insight stayed with me – how holding securities over the long term is a brilliant strategy for tax efficiency. A simple rule that anyone from Berkshire & DJCO to common folks like you and me can follow in our lives.

As the likes of Robinhood have leveraged the excess liquidity environment over the last several years to create a generation of young day traders, many of them don’t realize how tax-inefficient frequent trading is.

3. #1 bias is denial

When asked what the #1 behavioral bias is, Munger said “denial”. And it’s so true. Often times, when the present reality is too brutal to bear, our brain tricks us into living in a delusion. While this stems from an evolutionary survival mechanism our brains have developed, taking major decisions under this denial state can cause havoc in our lives.

Proactively trying to see & live in one’s reality at any point in time is the best way to behave rationally. If one thinks of all of grandma’s wisdom handed down to us in popular sayings (eg. “live within your means”), they all urge us to recognize & live within our own realities.

4. Betting big when the right opportunity knocks

I loved this sentence from Munger – “What % of your networth should you put in a stock if it’s an absolute cinch? The answer is 100%”.

While I am positive that Charlie wouldn’t like this to be construed as a stance against diversification, which is important for almost all portfolios in varying degrees, the spirit of this sentence is this – a few times in your life, you will come across a no-brainer opportunity with massive asymmetric upside. It will happen very infrequently, but when it knocks on your door & you are convinced about it, go all in & bet really big. Over a lifetime, these bets will drive the majority of your returns, financial or otherwise.

If there is one thing that separates the likes of Buffet & Munger from other investors, it’s the mindset of betting really big when the odds are extraordinarily in your favor. During the meeting, Munger mentioned how Ben Graham made 50% of his money from just 1 stock – GEICO. Also, he illustrated the importance of power laws by sharing how Berkshire’s initial $270Mn investment in BYD (made in 2008) is now worth $8Bn!

PS: I have previously riffed on this idea in my post ‘Only need to get a few right‘.

5. On using leverage

Munger admitted to having used leverage to buy Alibaba stock in the DJCO portfolio. When asked why he violated his own rule (his famous quote being “there are only 3 ways a smart person can go broke – liquor, ladies & leverage”), Munger responded with another fascinating quote:

The young man knows the rules. The old man knows the exceptions.
Charlie Munger

The insight behind this is something I say a lot – context is everything! Rules & checklists are great for driving overall discipline & avoiding foolish behavior but as Munger demonstrates, it’s not wise to become a prisoner of your own rules. With experience, one should learn to spot exceptions & when the context is favorable, be bold enough to break the rules.

6. On long-term economic trends

While both Munger & Buffet generally hate to predict macro trends, Charlie mentioned a few interesting observations:

-Inflation is here to stay over the long run, given most democratic govts. globally have shown an ever-increasing inclination to print money.

-Most govts. across the world are going to be increasingly anti-business, with tax rates steadily going up.

-If one looks at economic history, the best way to grow GDP per capita is to have property in private hands & make exchange easy so economic transactions happen (the essence of capitalism).

If these trends are even directionally true, it makes sense to hold assets that can fight inflation (eg. stocks), as well as invest in a tax-efficient way, over the long term. Developing an investor mindset that can operate in a high-inflation environment will be important.

7. The playbook for success in life – Rationality + Patience + Deferred Gratification

When asked the thing that’s helped him the most in life, Munger said – rationality! Loved this line from him:

If you are constantly not crazy, you have a huge advantage over 90% of people.
Charlie Munger

To significantly improve the odds in your favor, Munger prescribes combining 3 things:

-Rationality (which is often, just doing the obvious)

-Patience (take advantage of compounding)

-Deferred gratification (live within means, save & invest)

Like most things Munger says, the above ideas are simple & profound, yet hard to consistently follow for most people as their biases come in the way.

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Only need to get a few right!

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Source: the good coach

I recently stumbled upon this clip from the Daily Journal AGM 2017, where Charlie Munger said something really interesting:

You know, the ideas that I have had in my life are quite few. But the lesson I can give you is, a few is all you need, & don’t be disappointed.

When you find the few, of course, you have to act aggressively, that’s the Munger system.
Charlie Munger

As I was ruminating on blogging about my experience of this idea, Warren Buffet did a timely reminder in the recent Berkshire 2022 Shareholders Letter:

The lesson for investors: The weeds wither away in significance as the flowers bloom.

Over time, it takes just a few winners to work wonders. And, yes, it helps to start early and live into your 90s as well.
Warren Buffet

The idea that you only need to get it right a few times in order to lead a rich life is so powerful! Through it, Munger & Buffet also underline the importance of power laws in almost everything worthwhile. That a few decisions & outcomes will drive most of our respective lives.

About a decade back, this idea was an intriguing concept for me, but only at an academic level. Since then, I have experienced, & therefore internalized it, across multiple aspects of my life. Even though I would consider myself a perpetual hustler who has worked in 8 companies, tried multiple functions across diverse industries, lived in many cities across US & Asia, and invested in 20+ startups, I can boil down where I am in life today to a handful of decisions that acted as step-functions:

Where I ended up studying for undergrad, as that’s where I met my (future) wife.
Pursuing & marrying her several years later.
A cold email to a VC firm that eventually became my entry point into tech.
Deciding to move from India to Silicon Valley with no job in hand, no existing networks, with just faith that I will figure it out.
Casually meeting the husband of one of my wife’s friends back then, who eventually led me to join Alibaba.

That’s it! If I take any of these decisions out of the equation, my life would look very different.

At a more specific level, I see this dynamic play out in my angel portfolio too. I have been investing as an operator-angel since 2014, & now with enough data from my own experience, can confirm that 1-2 companies will end up driving a majority of my returns. The countless hours I have spent turning over stones, meeting hundreds of founders & working in the trenches with portcos, translate to just a couple of needle-moving outcomes over a decade. But yes, they are expected to move the needle by a lot (major step-functions, as I like to call them).

Same with content – sometimes I feel like I have written the most thoughtful post or a super-smart tweet, & no one reads it. And then, I write some crazy anecdote from my past lives & it goes viral.

Translating this “only need to get a few right” idea from purely academic to a lived & internalized one becomes important as it helps to frame risk-taking in the right way, particularly dealing with failure.

It has taught me many lessons:

Outcomes in creative & high-risk-high-reward pursuits are random.
Multiple failures don’t matter (& should be expected), as long as the few successes are outlandishly large.
Given success is sporadic, need enough shots at the goal to get odds in your favor. Take more chances with asymmetric upsides.
Given success is intermittent, plan for & evaluate things over a long-enough timeline. Patience is key!
When you get it right, let it compound. Milk every success to the fullest.
While specific outcomes are uncontrollable, a few decisions will always be make-or-break points in life – where you study, who you marry, which city you decide to settle down in, whether you have kids or how many, what house you buy & when etc. When faced with these questions, appreciate their importance, take your time & try to make the best possible decision in your capacity.
Finally, rather than getting fixated on episodic successes & failures, zoom out to look at the bigger picture & visualize your life as a curve. The goal is to have it trending up & to the right over a long timeline.

So, keep playing the game, be patient & wait until you get your “few” right!

Building…one at a time

I recently tweeted a really interesting insight I heard from Mike Maples, Jr of Floodgate at a recent Draper University closed-door event:

This is so true, and a common mistake that founders & product leaders make while building new products. Looking back on my own startup, while I rigorously tried to execute Paul Graham’s “Do things that don’t scale” philosophy, I still created unreasonable expectations in my own head around user growth for each MVP iteration. This was probably due to the baggage I was carrying from my previous experience of working at large companies like Alibaba, where numbers were talked about in Millions & sometimes, Billions.

When the absolute user numbers weren’t met, my morale as a founder would get hit with each iteration. In hindsight, hitting numbers shouldn’t have been the goal at all. The ideal 0-to-1 mindset is like that of a scientist, with curiosity being the core driving emotion, backed by an iterative product development approach. The target outcome of this approach should be to gather insights that help refine the hypothesis.

Similar to how scientists drive their research process one experiment at a time, I have realized that building any new product or service from grounds-up requires moving one “unit” at a time. It’s up to you to decide what that unit should be – acquisition, activation, frequency of use, revenue or even just getting qualitative feedback!

In a scientific process, more than just the number of experiments run, what’s important is taking the learning from each experiment & applying it to the next one so it becomes better than the first.

Similarly, a good approach to building anything new is to delight one person at a time. This automatically focuses the building process & anchors it on an actual customer, thus making it easier to ship something that solves a monetizable problem for someone in the real world. Trust me, this is a non-trivial hurdle that many startup teams are unable to cross.

The 0-to-1 stage can be highly fuzzy but breaking it down into one unit at a time helps give more clarity to the team around the exact short-term goals.

The most profitable way for a product to grow is via word-of-mouth. The above approach naturally optimizes for it. And once the testimonials & organic growth start kicking in, traction compounds with minimal incremental effort.

Of course, the key to executing this building approach well is patience. Again, think of a scientist. A larger research budget or more headcount can’t necessarily speed up a breakthrough. Similarly, building one unit at a time requires a small team committed to iterating over a long enough timeline for customer compounding to kick in. A lean & capital-efficient operating model is a requirement of this approach as a long runway significantly improves the odds of success.

Learning from my mistakes as a founder, as I have now started working towards regularly putting useful startup & investing content out there, I am consciously following the approach of publishing & learning one unit of content at a time – blog post, Twitter thread, LinkedIn post etc.

Same for my angel investing, wherein I am trying to help each founder, co-investor & startup employee I meet, one week at a time, with whatever resources I have – network, expertise, capital etc.

This approach is helping me to first put the core enablers of my venture investing craft in place that then, hopefully, self-compound. Therefore, I feel much better this time about hitting my long-term goals.

PS: on a similar note, I really like this post by a16z on how creators only need 100 true fans to build a business. Whether this number is 100 or 1,000 is less important. The real insight is that even a small number of dedicated fans are needle-moving.

Also, in case you are interested in other similar startup insights shared by Mike Maples at the DraperU event I referred to earlier, check out my Twitter thread on it.

David (Microsoft) vs Goliath (Google)

By coming out & saying “I want people to know we made them dance” in this clip, Satya Nadella has officially announced the beginning of an AI war with Google, who in turn, has also accepted the challenge by launching its own version of ChatGPT called Bard (unfortunately, the launch was botched, wiping out ~$100Bn from its market cap in a day).

Btw, how awesome was this clip? Just the look in Satya’s eyes & the intent behind the statement fired me up, & I don’t even work at Microsoft.

The first battleground of this war is Search. And it’s expected to see classic “David vs Goliath” type asymmetric warfare (Google has 90%+ market share in Search, as opposed to single digit % for Bing). Goliath has everything to lose while David has relatively fewer resources (existing Search distribution in this case).

So, how would each of them be thinking about war strategy? There are clues in asymmetric military wars that have unfolded historically eg. the US in Vietnam.

David’s view (Microsoft):

David can’t beat Goliath in conventional warfare due to the sheer gap in resources. So, it doesn’t make sense for him to engage Goliath by following standard rules in the open. David’s best bet is to engage with Goliath unconventionally, perhaps playing by a new set of rules ‘cos that’s when existing resources will mean less.

Real-world examples of this include (many of these ideas are covered in Sun Tzu’s Art of War, & can be seen in historical military confrontations):

Attack Goliath when he least expects it.
Target areas where Goliath has more to lose than David (eg. a classic nuclear threat).
Avoid a battleground that Goliath is familiar with. Take the battle to unfamiliar territories.
Prefer guerrilla warfare over all-out confrontation.
Use new modes of warfare wherein there is more parity with Goliath eg. economic warfare, communications warfare, strategic diplomacy etc.
Engage in indirect conflict by leveraging third parties that have some edge over Goliath.

If one closely observes how Microsoft is approaching the AI war in Search, it’s using many of the above elements.

First, under Satya’s leadership, Microsoft made itself stronger as a software conglomerate (Teams winning over Slack, LinkedIn’s massive moat, Azure taking a significant lead over GCP etc.). This has brought it more parity with Google at a group level.

Second, while Microsoft has increasingly become an agile & aggressive war machine, Google’s unthreatened monopoly in Search has eroded both the rate of innovation & sense of urgency from its operating culture. In a way, Microsoft is attacking Google when it is at its weakest culturally, while itself being at its strongest in a decade.

Third, the rise of AI is fast changing the rules of the game and as OpenAI’s ChatGPT has shown, Search is likely to look very different in the future. This change is being organically driven by a technology inflection, making Google’s existing dominant position in Search potentially less meaningful going forward.

Fourth, Search is a battleground where Google has much more to lose than Microsoft – the classic Innovator’s Dilemma. Microsoft can afford to take bolder bets, while Google has to fend it off while also protecting its existing business.

Fifth & final, Microsoft is leveraging a third party (OpenAI) as a main actor in this war. Unencumbered, unpredictable, agile & brave – third parties like OpenAI are hard to figure out & gameplan against by large incumbents, similar to how large military machines often struggle against guerrilla warfare.

So, how can Goliath counter these tactics?

Goliath’s view (Google):

While David’s main aim is to use his “brain” & make the battle as unconventional as possible, it makes sense for Goliath to use his “brawn” & exploit David’s vulnerabilities, in particular the disparity of resources.

Some ways he can do this include:

Attempt to drag the war back to familiar territory.
Open multiple fronts against David so he is forced to spread his resources thin.
Drag the war out for as long as possible, to drain David’s resources.
Cut off any access points that David can use to replenish.
David’s key strength is his morale so think of ways to destroy it.
Focus on de-throning the general & the army will automatically collapse.

So, while Microsoft’s challenge appears stiff, Google can use many strategies to counter it.

First, Google shouldn’t be deterred by the first punch. It can strategically prepare itself for a long drawn-out war & leverage its Search distribution might to outlast the competitor.

Second, it can open up multiple fronts against Microsoft to distract it. Potential areas include Cloud, enterprise workflow (GSuite) etc.

Third, given AI is so early, there isn’t likely to be any first-mover advantage. As we speak, many high-quality teams are already working on OpenAI competitors, providing Google with a valuable opportunity to partner with them & make up for lost ground.

Fourth, one of Microsoft’s major strengths is its leader. Google should be open to making moves in the market that distracts Satya or puts him under pressure.

Fifth & final, Google should use this rare competitive pressure to revitalize its execution culture. Perhaps one of the founders returning to the helm is a possibility? If taken in the right spirit, this is a valuable opportunity for the company to reset itself for the next 2 decades.

These are just game-theory conjectures at this point. Given the resources at the disposal of both companies, this AI war in Search is likely to unfold over several years. We will see many of the above tactics get played out in each scene, which will be tremendous learning for lifelong students of strategy like myself.

Networking at Events for Introverts

I am petrified before attending any event!! There, I said it. Mixers, happy hours, cocktails, group dinners, you name it – the right side of my brain hates them all. Even attempting to “work the room” is equivalent to getting a root canal for me. Who to say hi to first? What does one talk about with a complete stranger? Why am I even here? My mind is fuzzy with these & many other questions, even as I attempt to fill out my name tag with an oversized marker, using my rarely-used & barely-legible handwriting, while awkwardly stooping over the registration desk.

But with experience, you learn to consult both sides of your brain. And while the right side of my brain is freaking out, the left side is reminding me of all the useful insights I have gathered, the wonderful collaborators I have met (many of whom have become close friends), & the positive energy I have taken away from these mixers, happy hours, cocktails & group dinners.

So yes, I am a self-confessed introvert who has been on a long journey of figuring out how to get myself to attend & do better at events. While I curse myself while driving over, palms sweaty, brain thinking through all the small talk I would need to be prepped for, admittedly I have been better off in my career & life after attending almost every one of those events.

Am sure you have heard of that old wisdom – “you should do what you fear the most ‘cos that’s where your growth is”. In that spirit, around the Fall of last year, I resolved to attend every good event I was invited to. But this time, I went in with an approach that I felt would work for me, incorporating all that I had observed about myself during & after these events.

Here are some ideas from this approach:

Ask for an attendee list before the event – I figured that not knowing who I will be bumping into gives me major anxiety (yes, I am a prep-first kinda guy!). So I now ask for attendee lists upfront, so I can identify a few people I would definitely want to introduce myself to. This reduces uncertainty & guarantees at least a few interesting convos. PS: how do you do this when the guest list isn’t available, you ask? Simple – to begin with, I focus on having a good conversation with the event lead 🙂 Guarantees one valuable discussion at the minimum.
Keep modest goals, quality over quantity – early on in my career, I used to put a lot of pressure on myself to meet the most number of people at an event, which made the whole thing really unpleasant for me. Over time, I have realized that spending focused time with a few quality people is significantly more valuable than exchanging business cards with tens of folks. So now, for an average close-knit event, my goal is to walk out with 1-3 quality connections that I can follow up with later. This reframing has been a real game-changer for me!
For large events, set up 1:1 meetings on the sidelines – while attending large conferences, I didn’t even know where to begin, leave alone spending quality time with relevant folks. One hack I have developed is to avoid networking en masse at these conferences. I post on LinkedIn & Twitter that I am attending a particular event & then use outbound (using attendee list) + inbound (via social) to schedule 1:1 meetings on the sidelines. This takes the pressure off of working a large room & ensures a number of focused interactions.
Connect on social post-event – events are just a lead-gen channel. The real value is in transforming these cold connections into warm relationships. Many times, in-person follow-ups are hard to schedule. I have found interacting on social (Twitter & LinkedIn) with these connections to be immensely useful in both giving us more context about each other, as well as maintaining momentum in the conversation. Personally, my social media game is much better than my events game, so this is one of my top strategies.
Lastly, be genuinely curious! – my coach said something beautiful to me last year – “to form meaningful connections, replace judgment with curiosity”. Meeting new people with genuine curiosity, without overthinking about motives & outcomes, totally elevates the quality of human interaction. If I have to suggest just one mindset that can help you the most while meeting new connections, this is it! Whether we are introverts or extroverts, we all crave genuine human connection. And I believe that authentic curiosity is its strongest source.

This topic is very close to my heart so I hope these points are helpful as you initiate new connections at events. I am very much a work-in-progress at this, so please share your learnings too 🙏🏽

Bouncing back in careers

It’s been a gut-wrenching last few days for us to witness several friends get impacted by Google’s RIF. My wife is a tenured Googler so naturally, we have built some outstanding relationships there & got so much value out of its community. This makes it even harder to see close friends & collaborators come to terms with this abrupt life change.

Folks who have built successful BigTech careers are typically pros at the job-hunting process, so I don’t think I can share any particularly new insights there. However, there is one idea I believe could be relevant in navigating this phase, & that I have been sharing with some friends over the last week. It’s the value of being “radically open-minded” while searching for your next adventure.

As we progress through our careers, especially beyond the first decade, we tend to build a certain self-image in our heads. It mostly reflects where we have seen the most external success in the past (titles, money, fame, influence etc.). But the reality is that the market is an ever-evolving beast that doesn’t really care about this self-image.

So while we might believe that we fit best into specific roles, or deserve certain compensation, the market may disagree. And this isn’t necessarily a negative reflection of one’s skillsets or experiences – in rapidly-changing industries like tech, the definition of talent-job-fit for the same role keeps shifting across eras, especially when the macros are hard. We don’t get exposed to this change while at a stable job until we start job hunting under pressure, which is when this reality hits us in the face.

So how can one effectively deal with this challenge while job-hunting? The key is having a radically open-minded approach to this process. Borrowing from a beautiful piece of advice one of my mentors gave me when I was trying to bounce back post my startup – try & approach this phase the same way a founder tries to find product-market-fit:

Talk to many different types of customer segments
Deeply understand their pain points
Talk about your unique value proposition & how it can potentially solve these pain points
Observe where your value prop is resonating the most
Follow the highest-fidelity customer signals
Have an overall vision as a guiding North Star, to keep this process aligned with your internal compass

This approach is much more “discovery-based” (where does the market believe I can uniquely solve a problem), rather than “search-based” (this is what I want OR this is where I think I fit in the best). Similar to how market-pull takes startups in directions that the founders never originally expected, it’s worth being open to all kinds of re-framings & new opportunities that the market sees for you as a professional.

The curse of being an achiever is believing that you know exactly what’s best for you next. I call this a local maxima. But often, the market is giving you signals that can potentially take you to a global maxima in the long run, allowing you to become the best version of yourself. You just need to a) listen to the market & b) be brave to move in new directions. That’s what being radically open-minded is.

Humbly sharing these 2 cents from my own life experience, with the hope that it can give you a new tool to emerge stronger from this uncertainty. If I can help you in any way (listen/ brainstorm/ give intros), please don’t hesitate to DM me on Twitter. More power to you!

PS: in case you are interested in startup roles, especially in the US-India corridor, feel free to check out my portfolio. Happy to make intros.

Using the Focus Canvas to Cut Burn

As the fundraising environment continues to get harder in 2023, founders & investors are deep into rationalizing business plans & finding ways to cut burn. The first temptation is to follow what I call an “excel sheet” approach – starting with the largest expense items without enough strategic thinking around the revised set of goals, business constraints in this new environment, what is working well right now, & how capital should be most efficiently allocated going-forward.

As opposed to big companies, startups operate with a finite runway, trying to address significant customer problems that remain unaddressed by large incumbents. This requires constant innovation – essentially doing hard, non-consensus things across the stack, everything from technology & design to customer experience & business model, that incumbents aren’t doing.

While big companies can afford to be relatively unscientific in cutting costs & still tide through tough macros with the help of their existing PMF, startups unfortunately, have no option but to play offense at all times in order to continue innovating & thereby, give themselves a chance to survive & succeed. In financial terms, this implies investing incremental $$ into innovation that drives more revenue (& profit), which is what will ultimately save a startup, not investor cash sitting in the bank.

So how should founders think about playing offense while being capital-constrained? I would like to propose a thinking tool called the “Focus Canvas“:

As a first step, rather than focusing on P&L line items, break down your business into specific buckets. These could include customer segments (eg. Individual, SMB, Enterprise etc.), product lines (eg. shrink-wrapped, custom deployment, pure services etc.), platforms (eg. desktop app, iOS, Android, browser extensions etc.), distribution channels (eg. self-serve, inside sales, direct sales, channel partners etc.), geographies (eg. US, EU, India etc.), teams by function/ type (eg. engg., product, design, sales, marketing, offshore contractors, agencies etc.) & other buckets that are relevant for your business.
Arrange all the relevant buckets & their constituent elements on a single page. This is your “Focus Canvas“.
On the top-left corner, list the most updated business goals for this year that all stakeholders in the company have aligned on. These could be things like “hit $1Mn ARR”, “show x% retention”, “start fundraising in Q4” etc.
On the top-right corner, list all the business constraints you expect to face this year. These could be things like “12 months runway left”, “only 2 backend engineers”, “sales cycle taking 6+ months to close” etc.
Now, as you are looking at this Focus Canvas, try and answer the question “what is working well right now?”*. You need to define “working well” for each bucket as per your specific context, also taking into account the above goals & constraints. It could be driven by one or more of revenue growth, most profitable, highest ROI, generating the most valuable feedback, creating the most differentiation, highest team productivity etc. *Note: this step is well-suited for a team workshop/ brainstorming session.
The most important step – for each bucket, put a ✅ in front of the element(s) you believe is your best bet to achieve this year’s business goals while navigating expected constraints. Then, ❌ out all other elements in the bucket. This is where ruthless focus is extremely important for the Canvas to do its job well – ideally, force yourself to ✅ only your #1 focus element. In the case of most startups, that’s probably all you can afford to execute anyway.
Finally, take the ✅ element from each bucket & weave them into a simple, 1-2 paragraph Focus Narrative. An example to illustrate this – “In 2023, we will focus on the Enterprise customer segment & offer them the standard product suite with a billable custom deployment services wrapper. The product roadmap will focus on the desktop app. We will double down on the internal sales model for distribution, with founders pitching in for strategic logos. To increase our team’s efficiency, we will significantly reduce contractor headcount & re-allocate them to full-time hires in engineering & internal sales.”

This Focus Canvas now provides a clear & strategic view of opportunities to both cut burn & re-allocate resources, while staying on track to achieve business goals & making progress toward PMF. The Focus Narrative can be used to socialize the going-forward strategy across teams in an easy-to-remember way. If used well (read: with ruthless focus), this approach can help startups in playing offense even in a tough economic environment.

PS: sharing a Focus Canvas template that you can use as a starting point. Feel free to download a copy & modify it as per your requirements.

Ten big ideas for 2023

2022 definitely felt like the end of an era. A decade-long party for US tech, fueled by low-interest rates -> increased availability of risk capital -> price inflation across asset classes.

The last chapter of this post-GFC era was perhaps the craziest – an unprecedented pandemic -> widespread lockdowns -> more fiscal stimulus -> injecting more air into already inflated asset bubbles.

With inflation crossing 7%, the Fed finally started increasing interest rates last year and is expected to continue quantitative tightening over the next few quarters. Public market valuations expectedly turned south (valuations are based on DCF, so as discount rates go up, valuations go down), with tech growth stocks correcting by as much as 80-90%.

The following dynamics are currently at play:

Large tech: shrinking macro-demand + adverse public markets -> pressure on companies to reduce costs to bring them in line with lower growth projections -> drastic cost-cutting measures, including major layoffs.
Venture Investors: public market corrections -> LPs cut back on venture allocations + downward revision of expected returns on exit -> venture activity slows down + any deals that happen, happen at much lower valuations given new public market comps.
Startups: less capital available + higher bar in private markets -> startups need to cut costs to survive -> layoffs in high-cost/ non-core functions + pause hiring unless absolutely essential.

2023 appears to be the “year of transition”, as both the overall macroeconomic cycle, as well as the technology sector within it, move into a new paradigm. I see the following ten big ideas for 2023:

Leaner-and-meaner big tech

For anyone working in tech over the last decade, we have witnessed first-hand the level of entitlement & cultural complacency that has grown within large tech companies like Google & Meta. With more challenging times ahead, I expect large tech companies to take drastic steps towards re-wiring their cultures & operating models. Layoffs are just one piece of the puzzle – expect significant changes to compensation policies, KPI/ OKR philosophies, org. structures, functional locations, work-from-home policies, contractor hiring, operating routines etc., all with the aim to make execution more efficient.

Founder-led companies (eg. Meta, Salesforce, Shopify, Coinbase etc.) will take quicker & braver calls to re-invent themselves, compared to those run by professional management teams (eg. Google). In the latter case, I expect shareholders to put considerable pressure on these professional CEOs to take corrective measures. In fact, I won’t be surprised if some of the big tech CEOs get unexpectedly replaced as many of them come across as peacetime CEOs who will struggle in wartime.

2. Capital efficiency over growth for startups

The last decade in tech startups was all about growth. This year, expect investing thesis & operating models to decisively shift towards capital efficiency. Mirroring the demands for margin improvement by public markets, I expect private market investors to significantly raise their expectations on operating efficiency.

Founders will have to react fast and in several cases, give a 180⁰ turn to their culture & business models. A silver lining – founders who were heads-down amidst the craziness of 2020-21, building their companies in a capital-efficient way, will have an enviable opportunity (& deservedly so!) to play offense both with customers & investors.

3. Bay Area bounces back

Remote work boomed during the pandemic, as tech companies grew at unprecedented rates. However, we saw signs of a comeback-to-office across both big companies & startups last year. With current headwinds, I expect factors like teams getting together to drive execution & in-person networking to become increasingly important.

With rampant layoffs, tech professionals will also feel more insecure & would need more access & optionality to get their careers back on track. All this bodes well for the Bay Area – I expect significant migration to the region, especially for people in their 20s to mid-30s. In terms of the sheer depth of the tech ecosystem, the Bay Area remains unparalleled. As emerging areas like AI, health-tech & EVs gain strength, they will provide even more reasons for talent to be physically here.

4. “De-angelification” of the startup ecosystem

Amidst the post-pandemic investing frenzy, liquidity-rich, over-optimistic, FOMO-driven tech professionals started dabbling in angel investing. Becoming an angel in a “hot deal” became a status symbol, & rapid paper-markups made everyone feel like a winner.

A majority of newbie angels from this vintage neither understand the nuances of this asset class nor have the depth of resources to play the game effectively over the long term.

As more startups start shutting down this year, combined with layoffs & decreasing compensations courtesy dwindling value of RSUs, I expect a massive churn in 2020-21 vintage angels. In my experience, tourist angels typically drop out of the game around the 4-6 deals/ 24 months mark, as they see portfolio companies starting to shut down & their hard-earned money vaporizing into thin air.

5. More pain in Crypto

If you thought 2022 was brutal for Crypto, brace yourself! FTX implosion is only the beginning of a much-needed cleanup in the space. I expect many more tokens to go to zero, projects to shut down & low-conviction talent to move out. Given the scale of the FTX fraud, am expecting even more regulatory oversight & ramifications for the overall sector this year.

Personally, I do believe there is a kernel of truth in the Web3 opportunity. The faster this cleanup happens, the sooner the next chapter can begin & we can make tangible progress towards discovering its real-world use cases.

On BTC and ETH, I expect both to remain flat at best, & significantly down from current levels in the bear case.

6. The FOMO shifts to AI

Whenever there is too much consensus around a trend or an asset class, I get worried! It was clean-tech pre-GFC, then Blockchain & Crypto pre-pandemic, moving to Web3 & future-of-work post-pandemic. Based on my Twitter feed, I can safely say that with the rise of OpenAI & launch of ChatGPT, the FOMO has now shifted from Web3 to AI. I am expecting the space to see a lot of hype, investor interest & startups being launched in 2023.

Studying how the previous FOMO waves evolved gives a fair understanding of what to expect – those without first-principles conviction & a long-term strategy are more likely to get their hands burned. Those who were anyway committed to the space & were quietly building behind the scenes over the last few years stand to disproportionately benefit from the increased availability of risk capital & talent.

7. The return of “moats” (& rise of deeptech)

As the perpetual-growth era of software ends, I expect the question around “moats” to re-appear in the diligence checklist of investors. The lifecycle of companies like Netflix & Robinhood has clearly shown how hard it is to have a sustainable competitive advantage in tech (one reason why Warren Buffet stays away from investing in it!).

As the likelihood of purely growth-driven exits goes down, I expect venture investors to start looking at deeptech verticals with inherent moats much more seriously. These include space-tech, health-tech (including lifesciences), energy, climate etc.

Each of the above markets seems to be getting unlocked in its own unique way & while these companies can be more capital-intensive & have higher technical risk compared to say SaaS or Social, the resulting market leaders have much more defensible competitive positions & hence command healthy valuation multiples.

8. EVs taking over the transportation stack

EVs are seeing major progress on both the supply & demand side. On the supply side, most major auto companies have an EV product in the market, with use cases evolving from urban sedans to SUVs, pickup trucks & now, even semi-trucks.

On the demand side, record-high gasoline prices have acted as a key unlock. This is visible in the rising hybridization of the latest gasoline car models. With non-Tesla EV products rapidly expanding, consumers have more choices across use cases & price points. I wrote a post a few months back on how I warmed up to EVs & Tesla, in particular. I expect EV penetration to have significant growth momentum this year.

9. Digitization of mainstream healthcare

A positive side-effect of the pandemic has been consumers getting increasingly comfortable with digitally-delivered healthcare services. In my case, interacting with healthcare providers over Zoom and accessing services such as Carbon Health & One Medical via their apps (including getting advice via chat) has really opened my eyes to its value. Even beyond that, I work-out with my trainer via video & our family nutritionist is in India with all interactions happening via Whatsapp.

I expect the overall healthcare stack, including mainstream services, to digitize at an even faster rate in the coming year. These tech platforms will also open up opportunities for niche services to exist eg. virtual monitoring & consultations for chronic patients, pre & post-natal advice, nutrition guidance etc.

10. India as a global greenshoot

Amidst an unstable China, weakening EU, war-torn Russia, one-dimensional Middle East, fiscally-unstable LatAm & fragmented Africa, India appears to be a solid greenshoot both geo-politically & economically. A stable & reformist govt. has worked hard to put together core growth pillars over the last 8 years – from building physical infrastructure & a national digital payments network to ensuring economic development at the grassroots & supporting tech startup activity in the country. India is poised to now reap the dividends of all this hard work, and similar to China, grow its per-capita income from ~$2k at present to ~$10k over the next 20 years, all in a democratic environment.

India’s tech ecosystem has also come of age in the last 5 years. The mega question of “can exits of venture-backed companies happen in India?” has been progressively answered, beginning with the acquisition of Flipkart by Walmart, followed by IPOs of consumer companies like Paytm, Nykaa & Zomato in domestic public markets, & the IPO of Freshworks in the from-India SaaS space on Nasdaq. There is a growing pool of startup talent, courtesy of a decade-long Mobile & software wave, which will fuel the country’s tech ecosystem over the next decade.

The above ideas are making me super-excited for 2023, both as an angel investor & operator. After a 2.5-year hiatus, I returned to angel investing in 2022, doing 3 deals in Q4. With the turning cycle & above ideas as a backdrop, my goal is to make 2023 my most active year yet as an angel, while also keeping a high bar on quality. Excited to collaborate with all founders, angels, VCs & operators out there 👊🏽

Top 10 enterprise SaaS learnings from a unicorn founder

Was awesome to hear Jyoti Bansal, Founder of Harness and Unusual Ventures, chat with Anant Vidur Puri at the Bessemer Venture Partners Cloud100 India Brunch in SF a few weeks back. He shared actionable insights from his founder journey building 3 outlier startups (AppDynamics, Traceable AI, Harness).

Key takeaways that resonated with me 👇🏽

1) In SaaS/ Cloud, having a free product is really important to drive product-led-growth [note: strongly echoes what I heard from Dheeraj Pandey at the SaaSBOOMi Summit a few weeks back. Post Nutanix, he is building DevRev to be PLG-first].

2) Focusing on getting into enterprise deals much faster in his current startups compared to AppDynamics, as “that’s where the $$ are”. Eg. started doing $1Mn deals ~1.5 yrs into Harness vs taking a few years for the same at AppDynamics.

3) When doing a 0-to-1 in Enterprise, important to first build a “top 3 product” in the segment. Once that’s achieved, various layers of monetization can be built around it.

4) Really important to qualify beta customers in Enterprise, so the product can be built efficiently. Once they start using the MVP, ask them the question “what’s the business case of this product for you?”. Will help filter out potential non-customers from the beta group.

5) While in the early stages of building an Enterprise product, avoid going down a feature-building rabbit hole for specific customers. The risk here is building features that not everyone will use.

6) Content marketing is key to early customer discovery. Put great content out there and let customers find you.

7) To identify which customer segment to focus on, run multiple experiments & track metrics. Eg. do cold emails on LinkedIn to multiple personas in parallel & measure response rates to see where you are getting the most interest.

8) To build a $100Mn ARR Enterprise business, founders need to have a view early on of how that destination math will eventually look in terms of no. of customers & ACV.

9) Interestingly, the current macro climate is seeing a slowdown only from an investor perspective. Enterprise customers are still growing rapidly & also spending more on software.

10) Important to operate lean in times like these where access to capital is getting constrained. Eg. at Harness, we are asking the question “can we achieve the same growth targets but with 20% less burn?”. Looking grounds-up at each function’s op-structure & optimizing.

An angel’s struggle with entry valuations

Recently, I was in a shareholder’s meeting of a portfolio company. It has been a gut-wrenching last 3 years for the leadership. Unfortunately, the company’s market pretty much shut down during Covid. Significant liabilities built up & the team saw significant churn. To survive, the company had to raise a bridge at a major haircut.

During the meeting, the management team walked us through their journey of turning the business around from this dire situation. After the lockdown was over, customer demand got re-ignited. The company drastically cut costs, improved operating metrics to get revenue back on track, re-negotiated long-term vendor contracts, and cleared-off short-term liabilities, all while retaining the core manpower, many of whom had to take salary cuts.

As a result, the company is now PBT-profitable & growing through internal accruals. Btw this turnaround was achieved on a ~$13Mn revenue base. As an operator & ex-founder, I was blown away by this execution story & the team’s grit.

But then, I put my investor’s hat on – despite all this progress, early investors are deeply out-of-money & are likely to remain so for a while. During 2017-19, the company raised equity at aggressive valuations that were misaligned with both the maturity of the business as well as the underlying multiples the sector trades at. In boom times, startups get valued at hyper-growth tech multiples. However, as soon as the cycle resets, follow-on investors revert to valuing them on realistic sectoral comps.

The good news is, courtesy of the awesome restructuring efforts, the business is on a profitable growth path. But given the extent of divergence between our entry valuations & current market comps, it’s going to be a long road toward generating healthy returns for early investors. And even if we get there, the sheer time taken will negatively impact IRRs.

As an angel, this is the part I really struggle to get my head around – how important is the entry price? Bill Gurley says in this 20VC podcast with Harry Stebbings – “the market sets the price on a deal-by-deal basis but as an investor, you have to keep an eye out for the price you are paying at a portfolio level”. This becomes especially hard for angels, who typically have to adhere to the price set either by the founder (SAFEs) or an institutional lead. In this era of fragmented checks via syndicates, SPVs & RUVs, I frequently see valuations that aren’t correlated to the underlying risk in the business & smaller check investors unable to push back. Ultimately, everyone ends up toeing the line.

As an investor, I always have the option of not participating in a highly-priced round. But then enters the other side of the coin – power law ensures very few companies drive a majority of venture returns. Therefore, angel investing is the game of accessing the “best” companies, which often requires paying up to get in. An argument frequently made is “if the company ends up as an outlier, it doesn’t matter what price you got in at”. I get this line of thinking but an “outlier return” is very contextual. Eg. a 10x return potential over a 5-7 year period is very solid for an angel, though might not meet the deal hurdle for a large fund. There are cases in my own portfolio wherein early angels are sitting on a 5-10x unrealized return because we entered at sub-$10Mn valuations and frankly, the likelihood of a startup hitting a $50-100Mn valuation is significantly higher than becoming a unicorn.

Over a 20+ angel portfolio built over 8+ years, I still struggle with thinking about entry valuations the right way. Presently, am taking it deal-by-deal with the guiding North Star of discovering & backing the best founders I can find, while also accepting the reality that angels will usually be price-takers that are prone to macro sentiments & the whims of lead investors. As Bill Gurley advises, maintaining perspective & discipline around portfolio-wide avg. entry price seems to be a smart way to play a balanced game.

Author: Soumitra Sharma

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