Living costs are increasing rapidly across major economic cities globally, be it SF, NY, Sydney, Shanghai, Bangalore or London. A key reason is concentration of knowledge opportunities in specific centers in each country, with other cities lagging behind in new job creation and salary growth.
At the same time, professionals in these geos are also searching for more flexibility compared to previous generations — things like remote work, ability to travel frequently, taking sabbaticals to work on a personal mission, more involved parenting etc.
In order to reconcile higher living costs with more life flexibility, I think an under-rated superpower is keeping your household cash burn low. It means proactively living below your means & cutting unnecessary expenditure, essentially as a trade-off for more freedom. It’s very similar to a low burn startup, which always seems to have much more runway & options of building the business in an agile way, compared to its extravagant peers.
With all our careers exposed to so many external risks that are frankly, uncontrollable, having a ‘low burn’ life provides the necessary resilience to manage uncertainty, tide over tough times and still live with the freedom you want.
As one grows older, one realizes that true success is actually freedom to make your own choices. So the next time you are about to take on an expense that increases those monthly payments, think about it as a trade-off with your overall freedom to make life choices.
One big realization I have had as a founder over last year or so — all Silicon Valley startup narrative is post-facto. Both founders and media conveniently don’t include the real “initial phases” of the company. These include things like the 2nd co-founder getting “recruited” much later, an old services biz revamped to appear like a fresh startup, an advisor/ angel joining & getting co-founder status, taking on a product that was in reality, built by other devs who didn’t see value in it etc. These inconvenient and scrappy realities are glossed over, to paint the narrative of a smooth curve — 2 co-founders, one engg. and one biz, met in Ivy league or top tech co., fell in love with same idea, launched, raised, scaled…done deal.
Till very recently, I had no idea that 1) Travis isn’t the original founder of Uber, but was an advisor to the original devs who created it and then later, saw the potential and hopped on, or 2) Elon Musk isn’t the original founder of Tesla, but had led the Series A round.
A bad side-effect of this managed PR is that new founders take all these narratives as playbooks. So, either they try and forcibly recreate it, or give up altogether once they don’t see a similar narrative coming together. Established founders & investors also don’t call this out.
Going forward, we should always try and peel the onion on startup PR narratives. Actively look for bias by asking critical questions like who is writing the story or Medium post, and what incentives are at play. Talk to operating people to get the real execution insights on these companies.
In today’s age of rapid news cycles, planted news, overzealous investors and internal PR teams, it’s foolish for founders to base our strategies and critical biz/ life decisions on what the media is telling us. In most cases (based on what I see), startup media stories are biased to tell the “curated truth”, with a specific end-objective in mind. As founders, let’s be smarter in digesting & acting on them.
Going by the struggles of massive Indian financial sector organizations like banks, NBFCs etc., in terms of discipline around disbursal, risk assessment, collections & NPA management, I feel startups in this space should brace for serious shocks as they scale.
A mistake that founders and investors in this space will likely tend to make is to get carried away by the “fintech wave” phenomenon, approach these businesses like any other consumer internet one, and grossly underestimate the inherent risks and toughness of building a finance business. What I found funny was a few Indian investors boasting about their lending startups portfolio — “our portfolio has disbursed $X bn in loans”. If I stand with a stash of cash on a street corner and ask people to take a loan, am sure even I should be able to “disburse” quite a bit :).
I know everyone is trying to become the Ant Financial (Alipay) of India but many don’t realize how it really evolved as an organic extension to the commerce biz and how the entire set of Alibaba ecosystem use cases feed it with critical data that helps it tremendously. Also, Ant Financial gets a captive user base of both individual users and merchants/ SMBs (along with all their data) via the Alibaba commerce marketplaces (Taobao, Tmall, Tmall Global, Juhuasuan etc.), essentially for no cost as part of a juggernaut. It’s only in last 5–7 yrs that Alipay started following a dedicated Super Apps strategy, going up against WeChat Pay and adding a slew of O2O use cases via investments/ acquisitions. But by then, it had already become #1 in several fintech segments in China (eg. wealth management, credit scoring), courtesy the Alibaba commerce ecosystem.
It’s important for all India fintech/ lending founders and investors to be aware of Alipay’s history & playbook, as well as how tough Indian financial sector itself is and the risks involved. It should reflect in the way these startups get capitalized and operationally built out, including proactive risk management.
I have always been fascinated by Ajit Doval, current National Security Advisor (NSA) to Prime Minister of India. At least from what I have been able to research, he is India’s first NSA to have also previously been an intelligence agent & ground operative behind enemy lines for decades. This makes his talks on defense strategies & decision making really fascinating, as he speaks from his experience on the ground, dealing with extremely high-pressure, high stakes situations.
I recently came across Mr. Doval’s interview called Talking Point. Similar to the Art of War by Sun Tzu, which has fascinating leadership & decision-making insights from ancient Chinese military knowledge & strategies, Mr. Doval gives some interesting insights from his intelligence & military operating experience, particularly around tough decision-making.
Here are some key takeaways from this interview:
What makes a decision tough? — a decision is tough when its consequences are “large” —quantum of impact is large, or impacting large number of people, or consequences remaining for a long period of time.
Objectives (why)→Decision (direction) →Option (how to execute) →Execution — this is the full-stack framework for tough decisions.
Clearly articulate your objectives for taking a decision — take out all adjectives and adverbs, only have nouns and verbs. Make it as simple and crisp as possible. eg. “ I am taking a decision to [ACTION] on [SUBJECT] on [SCHEDULE]”.
Do an objective analysis of your capabilities before taking a decision & choosing optimal execution option — what resources are at your disposal? What is your level of understanding of the subject?
Do an objective analysis of your state-of-mind before taking a decision & choosing option— am I angry? Am I fearful for my life? Am I fearful for my family? It’s almost impossible to take objective decisions under any sort of heightened emotional state.
Each decision option has a cost, associated time and probability of achieving your objectives — you need to choose the option which is most effective on cost and time, while having sufficient chances of achieving your objectives outlined earlier.
Frequently, decisions are right but option chosen is wrong — important to differentiate between the two (my interpretation is that decision is more about direction while option is more about executing on the direction). Wrong options typically get chosen due to lack of experience, knowledge or sufficient preparation.
Manage your fears by articulating them clearly — once you do this, in most cases, you realize that the fear isn’t as big or binary as you thought. Then, mitigate the specificities of this fear via hard-work, preparation and using your knowledge/ expertise.
More important than obsessing over how to take a decision, is being prepared to cope with what happens after a decision has been taken — human brain has limited capabilities and we aren’t crystal gazers. In most cases, vital decisions are taken under stress, anxiety and uncertainty. Given nobody really knows whether a decision is right or wrong, it’s more important to think about how you will cope with the aftermath, in case the decision doesn’t pan out the way you expected.
Assume that the “as-is” situation will unexpectedly change after your decision — be mentally prepared to cope with a new set of reactions, externalities and realities. Trust your capabilities and resources.
While taking vital decisions, work out a “worst-case scenario” and prepare for it — first, figure out if you can survive the worst-case scenario. Second, work on bringing down the cost of this scenario, to bring it to an “affordable” level where the risk becomes worth-taking. Doing this requires time, preparation and knowledge.
More important than making the right decision is making the decision right — you need to use your commitment & hard-work to ensure that once the decision is taken, it delivers positive results.
For decisions with potentially massive impact, always have a “fallback position” — having a contingency plan is crucial.
In addition to these widely-applicable insights, Mr. Doval also talks about his execution style. I found these points interesting so also including them below:
Solo — prefers being a solo operator. In an intelligence mission, risks go up as dependencies on other people get added, especially due to potential Prisoner’s Dilemma in case the mission blows-up. He might totally believe in a mission, while someone else might be doubtful. Hard to achieve success in a doubtful state of mind, particular as an operative agent. He doesn’t like to expose other people to risks that he, personally, is willing to take.
Surprise — doesn’t use the same operating strategy/ style more than once. This forces him to articulate a fresh set of assumptions every-time, and validate them again. This takes out any historical bias from decisions.
Speed — if you are fast, even if the enemy knows about your mission, you can still beat it say even by a few secs, achieve your goals and escape out of the situation. Key is to strike fast and get out fast.
Secrecy — in any type of situation, being able to hold vital information and secrets within you is critical.
While we consume majority of our content from successful founders, investors and business gurus, it’s important to diversify sources of knowledge and refer to learnings from other disciplines. Personally, I have found 2 such diverse areas very useful for both professional and personal learning — 1) creative arts (movie directors, artists, authors etc.) and 2) military (navy seals, intelligence ops, historical warfare strategies etc.).
Let me know if you found this piece helpful, and what non-venture areas do you refer to for fresh insights.
All worth-while things in life — raising kids, maintaining our closest relationships, building a company, getting fitter, eating healthier — tend to be perpetual battles that need to be fought almost on a daily basis. Everyday (or very often), you need to re-assess where you are and where you want to go, assimilate the ever-changing context around you, figure out the best way to move forward in that moment, and execute on it with the knowledge that your goal is a constantly-evolving & moving target.
There will, perhaps, never be a point in the journey where you will say that “the job is done, mission accomplished” as each goal will generate yet another one. This is why it’s important to respect these daily battles, and maybe then, you will start enjoying them and make the most of each day you live.
Today, I was remembering my strategy professor from ISB Prof. Prashant Kale. All my batch-mates will agree that he was probably one of the best, if not the best, professors that year for Class of 2010. In particular, one of his classes where he taught the legendary Southwest Airlines strategy case is imprinted in my consciousness — I even remember exact drawings he created in the class.
The key takeaway from that class was that the competitive advantage of Southwest Airlines wasn’t a single linear element; rather, it was a “Mesh of inter-connected, inter-dependent, self-reinforcing activities” that was almost impossible to replicate by competition. Eg., turning around a plane in 15 mins (fastest in the industry), which required the gate staff to operate at a certain cadence, which in-turn, required the check-in staff to do certain activities at a certain speed etc. Essentially, executing any precedent element well made the next dependent element even stronger; conversely, if one of the elements was poorly executed on, the entire mesh advantage ceased to exist. This Mesh model has been a transformative strategy concept for me, and has been a key foundational element of my thinking.
Illustrating the proverbial “Mesh of Competitive Advantage”
I recently got reminded of this concept again after a decade, this time in an entirely different context of public market investing. I was reading the Q1 2019 Quarterly Investor Letter by O’Shaughnessy Asset Management (OSAM), a top quant asset management firm founded by the legendary public markets investor Jim O’Shaughnessy. This letter is particularly fascinating, as it talks about how to cultivate real edge as an investment firm.
OSAM defines the following framework for real investing edge (quoting the letter):
“Real investing edge should (instead) be cultivated at the organizational level.”
“Properly built, an edge should be very difficult or impossible for others to replicate.”
“Ideally, the edge naturally increases over time — something venture capital investor Keith Rabois calls an “accumulating advantage.”
Specifically, OSAM does 2 things that drive the edge — 1) consciously building a Research Graveyard, which essentially means doing lot of research, data analysis and number crunching projects that don’t necessarily lead to immediately improved investing outcomes but increase the overall ideation & knowledge of the firm in a compounded way over the long term; and 2) building tools (data-sets, software and combos thereof) and then deliberately opening them up publicly for other researchers to use (like the way Amazon opened up its cloud infra to developers, creating AWS), whose usage, in turn, has generated some of the best research insights for OSAM.
As a finance and investing person, while both these elements are individually interesting to me, the real deal was this sentence (again quoting the letter):
“These things — software, data, research partners, our graveyard, even the podcast and our twitter activity — all link into and depend on each other, which makes each more valuable and harder to copy.”
“Think back to the ownership data project. Without other connected tools, that would have just been a dead idea — time wasted. But now the ownership data set has become a critical piece of another software tool we use for clients called Portfolio X-Ray. It is now also a new data set available to research partners, who may find something interesting that we did not.”
This is the “Mesh of Competitive Advantage” all over again. A set of activities that, while look replicable in isolation, are almost impossible to replicate by competition as an inter-dependent, inter-connected, self-reinforcing system. This, my friends, is where true competitive advantage comes from!
This is the same reason why, despite having an incredibly transparent investing strategy, framework, terms, processes & activities, other venture firms are unable to replicate the Y Combinator model. This is the same reason why I saw Alibaba winning in China eCommerce (a rhythmic mesh of commerce, payments, logistics, cloud and advertising that is perhaps, impossible to replicate even with infinite capital). It’s the same reason why, as Prof. Kale told us in 2009, Southwest won in the US airline market.
As I think more about this concept in the context of tech startups & Silicon Valley, I believe the following execution elements are important drivers of on-ground success:
Mesh creation has to be deliberate — it’s really hard to defend individual, linear advantage elements in the long run (eg. just having more capital than competition).
Constituent elements of the Mesh need to flow from an authentic place residing inside founders/ leadership teams — what we call as DNA, else it’s hard to sustain.
The Mesh strength compounds over time — demands consistent execution over a long-enough period of time.
This is why true diversity in the team is important — underlying this Mesh of Competitive Advantage, is really, a Mesh of diverse people, each contributing a uniqueness that, combined as a whole, is a super-power. Like the YC Founders or Paypal Mafia.
Would love to hear how you have created competitive advantage for yourself/ your companies.
Side-note: the “Mesh of Competitive Advantage” can also be used to differentiate yourself as an individual professional. Instead of being linear in your career, try to create your own cross-functional, cross-sector, cross-cultural & cross-market Mesh of skills & experiences that, while individually might not look compelling enough, combine together to give you a truly differentiated world-view and approach to life. In today’s age of automation & tech-driven leverage, having this type of Mesh is worth its weight in gold as it can’t be replicated by software; rather, software & tech tools can be used to leverage it up & further magnify its impact.
Related note for parents raising kids in Silicon Valley: given we live in an echo-chamber, with template approaches to pretty much everything (from hiking at the same spots, wearing similar Patagonia vests, to starting up and listening to the same podcasts), it’s important we consciously expose our kids to the non-Silicon Valley world. We would do well to nurture their authentic qualities and original habits, whether they fit with the Valley way of doing things or not. In fact, I would argue that the more contrarian or differentiated these intrinsic personal qualities are, the more we as parents, should encourage them. This will set them up as adults to create their own, authentic “Mesh of Competitive Advantage” that stands the test of time and disruption.
To be capital-efficient as a founder (also applicable to life, in general), when evaluating various cost line items or taking on a new cost, have a clear understanding of “Fixed” vs “Variable”. Variable Costs are driven by your intended “velocity” and therefore, can be controlled during tough times via a frugal approach (cut variable marketing spend, let go of expensive contractors etc.). Fixed Costs don’t care about your velocity and will keep eating you up (housing rent/mortgage, office space, full-time salaries etc.). They are much harder to control, given they reflect a certain baseline you have up-leveled your startup (or life) to. Paring down Fixed Costs will require more drastic down-leveling, including completely letting go of certain assets or experiences.
The issue with Bay Area startup environment today is extremely high Fixed Costs (housing, child-care, salaries etc.). These are uncorrelated to the actual state or momentum in your startup so founders have no choice but to live with them. You can’t be frugal with Fixed Costs beyond a point, as they are driven by the external environment, not the choices you make. This, in a nutshell, is the real challenge facing Silicon Valley founders.
Here are some ways to proactively manage your startup’s Fixed Costs at early stages of the Company:
Explore building a non-Bay Area distributed team — to balance output with salary costs, at least until you see the business momentum required to support Bay Area salaries.
Be generous with equity, (relatively) tight with cash — I know this is a hard one, especially while hiring engineers in today’s market. But as founders, we need to be disciplined about this. I would rather wait out for the right candidate who believes in aligning incentives with the real situation of the startup. For instance, if someone is asking for high cash compensation in a pre-PMF startup, this means they are not the right fit for this stage. I am all for doubling-down on higher equity, even higher than market standards, for early risk-taking hires. But every $ of cash being paid out needs to have a solid justification. Anyone who seriously wants to join a really early stage startup, needs to understand and appreciate this viewpoint.
Try converting Fixed Costs into Variable Costs — some ideas could be paying sales people more on % of sales commissions and less on fixed; going for an “on-demand” co-working space with elasticity to quickly scale up/ down; keeping specific functions eg. designers, content writers etc. (these functions need to be chosen really carefully) on contract per “as-needed” basis, instead of full-time etc.
Be frugal on G&A — optimize costs on office space, service providers, vendors, food etc. In particular, Bay Area startups have a tendency to splurge beyond their means on fancy office spaces, lavish off-sites, dinners at marquee restaurants, expensive swag etc. These non-core costs tend to add up and hit your budget more than you might realize.
Leverage free ways of brand-building — instead of spending tons of $$ on brand marketing to drive early awareness (eg. conference sponsorships, which are essentially Fixed Costs), leverage free channels such as blogging, building a community on social media (Twitter, LinkedIn, Quora etc.), podcasts, creating a compelling website, white-papers, research articles, invited speaker slots etc. Early stages of a startup are all about cost-efficient marketing. This can only happen when founders focus on the above channels to build their startup’s brand, their personal brands as well as communities around their product. Austen Allred, Co-founder and CEO of Lambda School, is doing this very smartly.
Would love to hear what ways of Fixed Cost management have worked well for your startup.
Recently, Brian Armstrong (Co-founder and CEO of Coinbase) did a tweetstorm on how there are way too many investors, vs builders/ operators, in Silicon Valley. And how founders in their prime-age are opting to become full-time investors, rather than starting-up again, even after a relatively small exit.
Brian makes some good points about a trend, though short-term in my view, that even I am seeing in the Valley. Here are my thoughts on why this is happening and how it will eventually get corrected (I did my own tweetstorm with these views).
I think this is a side-effect of the last decade of over-liquidity across markets. Companies got over-funded, assets got over-paid for, specific skillsets (mostly engineers) have gotten astronomical salaries relative to their skills & experience. Also, there is no inherent entry-barrier to becoming an angel/ seed investor, provided you have “some” liquidity, especially as cost of starting businesses has come down a lot and early rounds have gotten increasingly syndicated/ fragmented across multiple small investors.
Given excess liquidity, a person who ordinarily would have been an individual angel, is now getting a shot at raising a small fund. While institutions would still keep a high bar, there are enough friends/ colleagues/ relatives willing to commit funds to ride the tech gravy train.
So am not surprised that many are jumping on the professional investing bandwagon, instead of starting-up/ operating companies. What many wouldn’t realize is:
This asset class has a 10 year feedback loop. You might end up concluding after a decade, that you aren’t really that good as an investor.
While raising a “small” first fund from personal well-wishers is relatively easy, scaling up to 2nd fund and beyond, esp. getting institutions to buy-in, is much harder.
Once you raise other people’s money, you are locked-in for many, many years. Not easy to switch career tracks.
Unlike a startup, it’s really hard to “pivot” or “reset” a fund. If your thesis/ strategy turns out to be faulty, or your Partner team chemistry doesn’t work out for some reason, you are still going to be stuck with these mistakes for a relatively long period of time.
In professional investing, showing commitment & consistency over a long period of time is critical. Yet, this is really hard to do, especially when you have decades of your career ahead of you.
In the end, market forces will weed out short-term players and restore balance. This could start once the current boom cycle turns around and liquidity becomes tight.
My personal philosophy — the world is shaped by “Builders”, not “Investors”. Why would you want to be a full-time cheerleader, when you can play the actual game?
Read an excellent article today by Clint Korver of @uluventures on the importance of diversification in venture portfolio construction. Sharing some key highlights that I found really interesting:
Venture returns (R) are driven by 2 main factors — # of investments in a fund (n) AND probability (p) of an investment being an outlier return-generator. [UPDATED] in discussions with a few readers, I realized that a 3rd factor, ownership % in the winners (o), is also a key determinant in eventual returns (this was missed out in the original referenced article). Therefore, have updated the equation to R=f(n, p, o). To optimize R, ’n’, ‘p’ AND ‘o’ need to be optimized for.
Excellent chart on “chance of an outlier” — x axis has # of investments vs y axis has chance of at least one outlier for a specific portfolio size. Successful VCs need at least one outlier to have a well performing fund.
3. Summary from the chart in below table — to quote “Even the Superstar investor, who is 50 percent better than the top tier VCs, only has a coin flip of a chance of an outlier with a small, concentrated portfolio of only 10 companies.”
4. Interesting that @uluventures has chosen 50 as optimal portfolio size. This is really big, given just 2 investment partners. Strictly by data, assuming they are “top-tier” in terms of picking ability, they believe they have 90% prob. of having at least one portfolio outlier.
5. While 50 is still a huge portfolio, given failure rate of companies, incoming follow-on investors as well as organically graduating to the next stage, @uluventures can still smartly manage their workloads. This has been my experience as well at Operators Studio.
6. Whatever your “picking ability” might be, it’s just a smart choice for any venture fund to adequately diversify. While large firms do it organically by having multiple investment partners to do a sizable # of deals, smaller venture teams would need to do it more consciously.
7. Side-note: loved the reference to @AlignedPartners and their strategy of taking relatively lower risk profile bets (capital efficient, less dependency on external capital, more ownerships for everyone on exit). Resonated a lot with my approach for Operators Studio.
Overall, am a believer in thesis-driven diversification that is done consciously and thoughtfully, especially at the angel and seed stage (where I operate). Of course, if a venture investor can marry diversification (n) with top-notch picking-ability (p), [UPDATED] as well as maintain high ‘o’ in the winners by doubling-down on them, magic happens!
[UPDATED] Remember the brain tattoo R=f(n, p, o)
Would love to hear your thoughts and experiences on diversification of early stage venture portfolios. Are you a believer in diversification? Or do you focus on “being focused”? When does diversification become “spray-and-pray”? How should an angel/ seed investor go about balancing ’n’, ‘p’ and ‘o’ simultaneously?
Am super-pumped to welcome Nishant Gairola to the Operators Studio team, as a Student Associate. He is currently pursuing his MBA at IESE Business School in Barcelona, and has been a serial founder for a decade, building multiple companies from grounds-up.
Nishant will support me across core investing tracks for Operators Studio, including ramping-up deal flow, evaluating interesting investment opportunities and supporting current portfolio companies on their most pressing challenges. Nishant and I will also work together to further refine OS positioning, value proposition & differentiation in the global angel/ seed investing space, including cross-border themes. Finally, with his presence in Spain, OS will now have access to the European market, in addition to my deep US-China-India networks. I am particularly excited to explore Eastern European markets, as I have met some special engineering & founder talent from there over the last year.
Excited to be adding such high-quality young talent to the Operators Studio journey. If you are a founder, investor or any professional from the venture ecosystem looking to collaborate with Operators Studio, especially in Europe, please feel free to reach out to Nishant!
