Tag: Behavioral Finance

Drip-feeding For Better Post-Seed Execution

With millions in the bank post a seed round, Founders often face the challenge of maintaining disciplined execution. Excess capital often ends up slowing progress towards real PMF. I share a brain hack to counter this.

Was in a working session with a founder recently. The company is going after a huge market opportunity and has raised a low single-digit Mn seed round from some very good VCs.

Issues with too much early capital

The issue though is that, like most category-creating seed startups, the precise customer persona and pain points to be solved are not obvious right now. After just a few months of execution, it’s quite clear that the company will need a grinding customer discovery process, with long and deep engagements with early design partners.

In my eyes, this is all great. As an investor looking for non-incremental startups, I precisely expect this and in fact, get excited by it. Sharing an excerpt from my post ‘Building…one at a time‘ on my learnings as a founder on the 0-to-1 stage:

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!

Building…one at a time

The challenge is when a company has raised significant capital relative to its stage. While this de-risks the company from a runway perspective and opens up many options in each execution track, having money sitting in the bank often puts undue pressure on the founders to use that capital.

In my experience, this pressure starts manifesting in many ways at an operating level:

1/ While the seed stage needs founders to be directly talking to customers and building product, capital often creates a tendency to do premature functional hiring and delegating core aspects of PMF progress to new employees.

2/ Even as a seed startup is still figuring out the customer persona and pain points that it needs to solve, excess capital drives founders to invest in GTM even before the company knows what product needs to be taken to market. This could involve unnecessary paid marketing, attending events vs talking to customers, building PR rather than product etc.

3/ Excess capital can often create an environment where the team starts to feel victorious even before any material progress towards PMF. The mindset shifts from ‘doing things that don’t scale‘ to ‘doing fake work’ via mindless reps.

Ultimately, this creates a massive risk of founders not being honest to themselves about execution and learnings, while also setting wrong expectations with their Board/ investors. Most investors aren’t builders anyway, and given their primary concern is the next round markup, often push startups to increase burn and “show numbers” prematurely. Unless the founder can push back with a high-conviction execution philosophy that they believe the company needs at this stage (I espouse founder-led, lean, frugal tiger teams doing things that don’t scale), this Board pressure will create a negative flywheel.

Only founders who are honest with themselves about where the startup really stands can then push back on investors with the best model they believe is needed to make progress at this specific stage.

Drip-feeding as a brain hack

So, how can a founder create this disciplined, frugal, ‘doing things that don’t scale’ mindset even with millions sitting in the bank? During this working session I mentioned at the beginning of the post, I blurted out a brain hack:

“What if we just virtually ring-fence the funds, maybe even create a CD or something, and give ourselves say only $500k (the standard YC deal amount) or something similar for the next 6-12 months to execute? In a way, we use this artificial scarcity to discipline ourselves, and drip-feed execution till a certain set of milestones are reached.”

It’s almost treating raised capital like a 401k account – there to save your a** in the long run but not accessible day-to-day. It’s what HNIs do with trust funds – even with a large pool of capital, the kids still get drip-fed for their own good.

A similar spirit is reflected in grandma’s age-old wisdom that advises folks to minimize easily accessible funds in bank accounts and instead, lock them up in CDs. Adding that extra layer of friction itself acts as a nudge to avoid impulsive spending.

OG public market investors like Nick Sleep and Guy Spier have openly shared how they use behavioral nudges like keeping the Bloomberg terminal in an uncomfortable location or only placing Buy/Sell orders when the market is closed, to avoid unnecessary noise and the tendency to frequently trade at the expense of compounding returns.

This idea of drip-feeding immediately resonated with the founder and in fact, she encouraged me to blog about it. Hence this post! Am eager to see how the results of this execution nudge pan out. Will share the learnings on that soon.

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Making Money by Understanding the Crowd

During a recent train ride in London, I observed an interesting pattern in the crowd that “rang a bell” in my head.

Here’s why understanding patterns in crowd behavior is important for successful investing.

For those of you who regularly follow my writings, am sure you have observed by know my fascination with behavioral economics/ finance & the psychology of crowds. One of my major insights from studying the work of OG investors like Charlie Munger, Howard Marks and Bruce Flatt is that the key to superior (i.e., above market average) returns is to be non-consensus & right. Getting a read on how the crowd is behaving at any point in time is one of the important analytical tools necessary to achieve non-consensus behavior.

To simplify, a crowd is a set of largely independent & uncoordinated entities, though you can define it in many other ways as per your context. There are many mental models to visualize the properties & behavior of a crowd. These include the Madness of Crowds, Herd Behavior, Social Proof, Incentives etc. However, during a recent trip to London, the city’s “Tube” train system brought back the most fundamental of these models right in front of my eyes – the normal distribution, popularly called the bell curve.

So, here’s the story. Last week, I landed at Gatwick on a busy morning, and boarded the train to Heathrow. The first thing I observed is how significantly better the London transit system is compared to anything I have experienced in the US. Even the NYC subway is nowhere close in terms of quality, multi-modality & cleanliness.

This particular train (I think it was called the Southeastern) had a very cool feature wherein it displayed how crowded each carriage was in the train, so people could shuffle around. Check out the below pic I took of the display in my train – do you notice an interesting pattern within it?

The distribution of the crowd across carriages is very close to a bell curve. Out of 12 carriages, the middle 5 are “standing room only” (yellow), 3 on the right and 2 on the left are “few seats available” (dark green) and the 2 carriages on extreme left & right are “plenty of seats available” (light green).

Seeing this pattern in a random, real-life event involving hundreds of independent & uncoordinated strangers blew my mind. I couldn’t resist taking its picture even while hanging on to 2 large bags while getting jostled in a..wait for it..middle carriage (see the bottom part of the above pic, it says “you are in coach 7”). I was myself in the middle bulge of the bell curve!

Now, besides this being a nerdy but cool anecdote, is there anything to learn from it? The applicability or importance of a normal distribution is not the main point here. The real insight is that attempting to decode & model how the crowd is behaving in a certain environment, as well as its potential implications, can by itself give investors a massive head start.

As Howard Marks says in his latest memo “Taking the Temperature“:

So, to be successful at contrarianism, you have to understand (a) what the herd is doing, (b) why it’s doing it, (c) what’s wrong with it, and (d) what should be done instead & why.

Howard Marks (Taking the Temperature)

The importance of rigorously decoding crowd behavior (or what we often call “the Market”) can’t be emphasized enough due to the simple reason that the crowd is right most of the time. When the investor-crowd is signaling that a company is un-fundable, most of the time it has correctly identified a weak business. If the market is predicting an interest rate cut by the Fed in the next few quarters, its combined wisdom is likely to be more accurate than most experts. If investors at large are investing in the AI wave or piling into an EV stock, they are indeed spotting a market opportunity that is likely to be exponential. If investor interest is low in a particular real estate location or type, most of the times it’s due to the right reasons.

While going blindly against the market consensus is flawed, first-order thinking, asking the right questions around “what” the market is doing & “why” is the first step of rigorous, second-order thinking.

The difference between “the market has spotted/ rejected an opportunity correctly” vs “the market is overly optimistic/ pessimistic on the said opportunity” is a fine nuance that can create a big delta on long term returns.

In particular, second-level thinkers understand that the convictions of the masses shape the market, but if those convictions are based on emotion instead of sober analysis, they should often be bet against, not backed.

Howard Marks (Taking the Temperature)

Abstracting this idea of understanding patterns in crowd behavior a bit more, I believe there is tremendous value in seeing various aspects of life as a distribution of outcomes. Personally, I find probability distributions more helpful in understanding how the real world works in a continuum, as opposed to statistical distributions, which are like static snapshots of reality & more academic in their usefulness.

Probability reflects how life operates in the “grey”. I have found viewing the world probabilistically to be immensely helpful in managing risk & uncertainty in every aspect of life. Too bad they don’t teach these applications while covering the subject in school!

Btw, coming back to the earlier train story, I practically used the bell curve pattern in how Londoners board trains by myself lining up either in the extreme beginning or extreme end of the platform during subsequent trips. Oh, the joy of boarding an empty carriage from the busy London Bridge station. Just goes to show that being a bit nerdy can sometimes be useful in practice!

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to my weekly newsletter where in addition to my long-form posts, I will also share a weekly recap of all my social posts & writings, what I loved to read & watch that week + other useful insights & analysis exclusively for my subscribers.