Cutting losses is one of the hardest decisions in startups, investing, and leadership—but it’s also what separates winners from those stuck in the sunk cost trap. Here’s why mastering this mindset is essential.
Recently read this Forbes article on Igor Tulchinsky, a Billionaire quant trader who runs the hedge fund WorldQuant. In particular, this section on cutting losses caught my eye:
While I don’t come from the public markets world, I have taken a series of major risks as a founder, operator, and investor. Of course, now that I am a full-time venture investor, I live in a world where I take and manage risk every day, including macro, business, tech, portfolio construction, and people, among others.
Based on my journey so far, I can’t emphasize enough the importance of developing the ability to quickly cut losses. Interestingly, before making a major decision, most people are fairly good at identifying & mitigating key underlying risks. However, I have learnt with experience that even after executing the best risk management process, things will still go wrong. And once things go wrong, even the most intelligent organizations & individuals easily fall prey to the sunk cost fallacy (“throwing good money after bad money”).
Let’s take the classic example of finding your next job. As part of a thoughtful risk management process, an intelligent candidate consciously tries and figures out mutual fit during interviews, gathers feedback on the company’s culture, perhaps speaks to customers & competitors to evaluate the product, or, in the case of startups, even does a 1-2 week part-time project before commiting full-time.
A similar scenario is also playing out on the employer’s side. Most hiring managers give high weightage to candidates who come recommended from trusted connections or with whom they share a past history. The interview process consists of multiple rounds to stress-test skills & personality. The company does rigorous reference checks, often also focusing on off-sheet checks to eliminate bias.
So both employers and candidates follow a fairly rigorous risk management process. Yet, as most of us have seen in the real world, leadership hiring has a 50 %+ failure rate in Corporate America. Here are some summarized stats from ChatGPT on this:
In this case, even the most rigorous upfront risk management process can’t account for a variety of post-decision risks, including process weaknesses (a great hiring process can be undone by a weak onboarding & training process), uncontrollable externalities, and random one-off events.
In these scenarios, a willingness to quickly cut losses & limit further damage of time & money on both sides is the best way forward. And make no mistake, it requires a lot of courage. That’s why I found Starbucks firing their last CEO in less than 18 months of tenure to be a very bold move, especially for a company of that scale & history (you would expect them to be sluggish).
While exec hiring missteps can be major setbacks even for large companies, they can often become matters of life and death for an early-stage startup. A wrong hire for a critical role can do strategic & cultural damage that might be irreversible with the existing runway. That’s why the best founders believe in the “fire-fast” philosophy.
Zooming out from hiring, startups succeed by taking calibrated risks on top of a technology change that an incumbent would just find extremely hard to do. This requires running a bunch of iterative experiments with very limited upfront data, but balanced by an asymmetric risk-reward profile (if this works, it will massively move the needle).
By the very nature of these experiments, a majority of them will fail. Combine this with a very limited cash runway that even the best startups get at each stage to get to the next set of milestones, and founders need to combine controlling the cost of each such experiment with an active intent to cut losses once it’s clear that the experiment is not working.
Essentially, a mindset to cut losses early till you get to something that is clearly working is a key requirement for startups to successfully emerge from this maze of early experiments with real product-market-fit. Windsurf CEO & Co-Founder Varun Mohan framed this idea brilliantly in his recent interview with 20VC:
Never fall in love with your idea…
One of the weird thing about startups is that you don’t win an award for doing the same wrong thing for longer.
Coming to my world of venture capital, I have seen many instances where the aversion to cut losses has come back to bite the investor. The context I have seen this the most over the years is in ill-conceived bridge rounds.
Classic scenario – the company has exhausted most of its last round of capital, has created just enough progress to keep existing investors somewhat interested, but if looked at with rigor and intellectual honesty, is nowhere near product-market-fit. Combine this with a founder who is good at storytelling and can pitch “if we get just this much more money, we will break through”, and existing investors are highly likely to cave in & bridge the company.
Unfortunately, in my experience, a majority of these types of bridge rounds don’t end up working. Peter Thiel said this uncomfortable truth a few years back about what he has observed in the Founders Fund portfolio over the decades (paraphrasing):
Once something starts working, people often underestimate it. And when things aren’t working, people often underestimate how much trouble they are in
Everytime a company raised an up round done by a smart investor, it was almost always a good idea to participate…
Steeper the upround, the cheaper it was…
In flatrounds and downrounds, it was almost always a bad idea to participate…
This behavioral weakness is perhaps why Michael Kim of Cendana, a major LP in emerging managers, recently said in an interview that the biggest mistake he has seen GPs make is deploying reserves poorly. My logic is that reserves deployment, especially in rounds without quality external signaling or real business progress, is particularly prone to multiple human biases kicking in, including loss-aversion, likability bias, optimism bias, and overconfidence bias.
Funds with relatively large reserve ratios should think deeply about potential solutions to this problem. One thing I have seen a few funds do is have a dedicated GP whose sole job is to evaluate each reserves-deployment situation like a fresh late-stage deal from the ground up. This can help counter the personal biases of the lead GP on the original deal.
To summarize, the ability to avoid the sunk cost fallacy & cut losses early is critical not just for entrepreneurs & professional investors, but also for each of you as every contact with the real world exposes you to risks big and small, whether you realize it or not. Getting out of sticky situations early enough ensures that you stay in the game and keep compounding your advantages.
From my vantage point as a US-India venture investor, sharing what I observed in 2024 and my expectations from 2025.
As a venture investor in the US-India corridor via Operators Studio, I saw 2024 as the year of taking stock, of heads-down building for founders, and quiet contemplation for investors.
A. 2024 Recap
1/ AI(Enterprise)– after the unveiling of ChatGPT on Nov 30, 2022, and the peaking of the AI mania in 2023, 2024 saw a bit of dust settling down in the ecosystem. In the Bay Area, I heard more intellectually honest conversations amongst founders and investors, with folks going deeper into discussing operating details and how to best leverage this tech step function beyond the “AI is going to change everything” hyperbole.
(a) Focus on the Applications layer
Along similar lines, I saw US-India founders go into deep build mode in AI. Most appeared to focus on the Applications layer, which aligns well with their core strengths. Working closely with portfolio companies like Confido Health as well as interacting with several seed-stage US-India founders, it has been particularly heartening to see them doubling down on spending time with customers, while also ramping up on the latest developments in AI. They are actively leveraging new models and tools to quickly ship new features. A lot of early US-India SaaS vibes!
(b) Indian VC skepticism
In private conversations with many large VCs in 2024, I sensed a fair amount of skepticism on whether the current generation of Indian AI companies will be able to compete with global players. As a result, many of them are choosing to be extremely selective in terms of the number of deals, waiting, watching, and observing how things are playing out in the US, while occasionally backing de-risked repeat founders in one-off large deals.
A few are also experimenting with a multiple-bets approach, writing several small checks (up to $1Mn size) into high-potential teams and seeing how they execute. Tailored seed programs have been created to do this eg. Peak’s Surge, Accel’s Atoms, Chiratae’s Sonic etc.
2/ India-to-the-world deep tech
The domestic deep tech market opportunity clearly became mainstream in 2024, with a spectrum of 1st generation companies now well-established, ranging from public companies like ideaForge in drone manufacturing to growth stage space-tech startups like Agnikul, Pixxel, and GalaxEye.
Given these outcomes, almost all major Indian VCs now have a deep tech thesis, which bodes well for the next generation of founders in the domain.
(a) Rise of the 2nd-gen
In 2024, I saw the 2nd generation of deep tech founders like Sharang Shakti (anti-drone defense systems), Astrophel Aerospace (space tech) and Naxatra Labs (EV motors) emerge on the scene. They are piggybacking on the learnings and playbooks of their 1st-gen predecessors to move faster and think bigger.
(b) Global commercial traction
In parallel, I saw early green shoots of Indian deep tech startups starting to go global commercially in a more meaningful way in 2024. The biggest eye-opener for me in this regard was attending Speciale Invest’s Annual Summit in Nov’2024 and getting updates on their portfolio going global.
For instance, Ultraviolette has officially launched its EV Superbike ‘F77 MACH2’ for the European markets. Uravu Labs is starting to get some major international orders for its recycled water technology. Cynlr recently inaugrated its Robotics Design & Research Center in Switzerland. PS: for those interested in a few hours of deep-dive into the India deep tech ecosystem, the full-day recording of Speciale Summit’24 sessions is available here.
I saw similar signs of rapidly growing global traction in the Operators Studio portfolio too in 2024. Flytbase has now emerged as a clear global category leader in autonomous drone software, with major enterprise drone-dock installations across 16 countries. Cradlewise is one of the fastest-growing smart cribs in the US, and giving incumbents like Snoo a run for their money. Playto Labs has created a sharp niche of STEM learning using robotics kits and live instructors, with more than half of its revenue coming from outside India.
3/ Venture Capital
(a) No Enterprise exits
2024 continued to be a fairly tight year for VC financings in the US-India corridor. It feels like the VC ecosystem is still undergoing some sort of recalibration after the 2020/21 mayhem. While VCs saw some great IPOs at least on the consumer side, exits on the enterprise side were almost non-existent.
As a US-India venture investor, I primarily play in 2 areas – (1) AI/ Enterprise Software and (2) India-to-the-world deep tech. Exits in these areas are typically expected via M&A. With Indian acquirers being sparse, and the US M&A environment at a standstill under the previous administration, Indian enterprise exits saw virtually no action in 2024.
While smaller funds like Operators Studio can still generate healthy exits via secondary sales to growth investors, we as an ecosystem still need full company exits via M&A and IPOs to keep the liquidity pipeline flowing end-to-end over the long term.
(b) Limited seed capital
In the US, while the bar for Series As and Bs has moved significantly higher, seed-stage financings continue to see high levels of activity. In fact, most multi-stage firms like A16Z, Sequoia, and Coatue are also writing idea-stage checks into AI as we speak. Essentially, 2024 saw massive crowding at the seed stage in Silicon Valley, and given the bar for follow-ons has increased a lot, graduation rates have dropped significantly. As per Carta – “30.6% of companies that raised a seed round in Q1 2018 made it to Series A within two years. Only 15.4% of Q1 2022 seed startups did so in the same timeframe”.
India’s venture ecosystem behaved a bit differently in 2024. Established Indian VCs appeared to have become fairly risk-averse in the past year, reflecting both their larger Fund sizes (needing to deploy larger checks with more traction) as well as their efforts to triage the excesses of 2020/21. As I wrote in this post a couple of months back:
From what I am seeing in my deal flow over the last few months (and my focus is (1) enterprise software and (2) deep tech), I feel there is almost a dearth of quality, structured & consistent angel/pre-seed/seed capital in India right now.
From what Founders are telling me, almost all major Indian VC firms seem to be holding out & looking for late-seed/pre-Series A levels of traction even to start a real conversation. The proverbial $1Mn+ ARR, 2-3x y-o-y growth…
Anecdotally, it looks like only previously successful repeat founders are mopping up large seed rounds from these firms at the idea/pre-product stage. Pre-seed/seed seems to be significantly tighter for first-time founders.
Genuine question for myself and many India-based enterprise & deep tech founders out there who are fundraising – who are the angels/ seed firms in India that are comfortable in CONSISTENTLY writing checks at the true early stages in enterprise software and deep tech (idea/pre-product/MVP/design partner/some usage stage)? And by consistent, I mean doing 10-12 deals per year.
Essentially, 2024 turned out to be an extremely tricky year for US-India founders to raise seed capital, with rounds taking significant time to come together, investors wanting to see much higher levels of traction, and valuations fairly compressed especially relative to the amount of progress in the business.
Of course, the other side of this coin was that these same factors made the US-India seed ecosystem an attractive pond to fish in for investors in 2024. In fact, looking at both the quality of the teams I evaluated as well as the entry valuations I saw, I believe 2024 will emerge as one of the best vintages of Indian venture capital a few years down the road.
B. 2025 Expectations
As we enter 2025, here are some expectations I have from Global Indian founders. These aren’t predictions; rather, a wishlist of things I would love to see play out, again in the context of my US-India/ India-to-the-world focus:
1/ Thinking bigger
In 2025, I would love to see a “Path to $1Bn ARR” slide in US-India startup pitch decks. As I wrote in this post a month back:
I would like to encourage Indian founders building software companies for the world to think significantly bigger and more aggressive both in terms of how large their business can become and how fast can they get there (y-o-y growth targets).
Why? Because software TAMs and market growth rates are much larger than what our brains can imagine. Look at the growth rates of these public companies:
1. Shopify (Founded in Canada) is growing 21% at $8.2 Billion ARR. 2. Canva (Founded in Australia) is growing 40%+ at $2.4 Billion ARR. 3. Toast is growing 29% at $1.5 Billion ARR. 4. Monday (Founded in Israel) is growing 34% at $940Mn ARR.
I am now encouraging my portfolio founders to think beyond the proverbial “Path to $100Mn ARR” slide and start strategizing a path to hit $1Bn ARR.
It’s time we reset our internal narratives and think bigger and more aggressive as an ecosystem.
2/ Thinking non-incremental
One of my observations is that we as Indian founders at large still have a tendency to go after low-hanging problem statements. As AI gathers momentum, these will be automated away quickly and easily especially by incumbents, making it increasingly difficult for venture-backed startups to differentiate themselves.
It sounds counter-intuitive to the whole Lean Startup movement of the last decade, but I believe that in 2025, it will be easier to build a differentiated startup by going after harder markets and tackling hard-to-build products that need to exist in a future that isn’t fully here yet.
In 2025, I would like to see Global Indian founders build for the world in a category-creation mindset from Day 0, and not be afraid to play the game on hard mode.
3/ Founders physically moving to their target markets ASAP
If you are trying to build a venture-scale AI/ enterprise software/ vertical SaaS startup targeting the US, every year you spend not physically moving here will be a lost opportunity. Within the constraints of capital, immigration regimes, and family reasons, I would strongly recommend that US-India founders expedite their move to the US in 2025.
4/ Accelerating Deeptech exports
I would love to see Indian deep tech startups build on their global momentum and double down on exports in 2025. In particular, I see the Global South as an extremely attractive buyer of Indian technology in areas like space tech, defense, energy, and agriculture.
While the West is a harder nut to crack from a commercial standpoint, it can be leveraged to access growth capital as well as cutting-edge research talent. Soon enough, commercial traction from emerging markets will provide these companies with enough product maturity and credibility to be able to compete in the US and Europe in a meaningful way.
5/ Bounce back of seed VC
We are in the early stages of a massive global AI super-cycle, and there are several categories and pockets where US-India startups are likely to have a strong right-to-win. While remaining diligent in identifying these right markets to go after, keeping a high bar on founder-quality as well, and asking tough questions to them, I would encourage Indian venture investors (including angels, family offices, syndicates, and smaller funds/ Solo GPs) to actively deploy at the seed stage in 2025.
The seed stage is where outlier angel outcomes and fund returners get created and especially at this point in the economic cycle, the risk-reward ratios are extremely strong. By all means, it’s fair to keep the bar high. But the ecosystem needs more courageous risk capital to step up at the earliest stages of building truly innovative companies.
TLDR: for the US-India/ India-to-the-world venture story, while 2024 was the year of taking stock, I expect 2025 to be the year the ecosystem starts coming out of the bottom of the J curve.
Presenting a compilation of my best ideas & observations from 2024, sorted across 7 Chapters.
Happy Holidays to all my readers out there. I have a habit of routinely posting pithy and concise ideas and observations on LinkedIn and X. Topics range from Startups, Venture Capital, and the Economy to Careers and Life.
I feel that many of these get lost over time amidst all the noise on social media. Hence, have put together this compilation of my best ideas from 2024, sorted across 7 Chapters.
Note: this is a compilation of my short-form social posts. My long-form posts for 2024 are available on An Operator’s Blog, accessible via homepage shortcuts by year/ category/ tags.
CONTENTS:
Chapter 1: Startups
Chapter 2: Venture Capital
Chapter 3: Economy
Chapter 4: Careers
Chapter 5: Life
Chapter 6: India
Chapter 7: Other People’s Ideas
Hope you enjoy reading it!
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Chapter 1: Startups
1/ “Closing” People
A simple tip to convert customers/ investors/ potential hires who are sitting on the fence:
Keep coming back to them with monthly/ quarterly updates, showing tangible progress and momentum.
Even the most hardened professionals can’t resist a curve that is trending up and to the right.
If you bug them long enough (ranging from a few quarters, to up to a few years) with positive momentum, you are almost guaranteed to “close” them eventually.
A very powerful technique with a high hit rate.
2/ Thinking Big
I would like to encourage Indian founders building software companies for the world to think significantly bigger and more aggressively both in terms of how large their business can become and how fast can they get there (y-o-y growth targets).
Why? Because software TAMs and market growth rates are much larger than what our brains can imagine. Look at the growth rates of these public companies:
(1) Shopify (Founded in Canada) is growing 21% at $8.2 Billion ARR.
(2) Canva (Founded in Australia) is growing 40%+ at $2.4 Billion ARR.
(3) Toast is growing 29% at $1.5 Billion ARR.
(4) Monday (Founded in Israel) is growing 34% at $940Mn ARR.
I am now encouraging my portfolio founders to think beyond the proverbial “Path to $100Mn ARR” slide and start strategizing a path to hit $1Bn ARR.
It’s time we reset our internal narratives and think bigger and more aggressively as an ecosystem.
3/ Time To Real PMF
In recent conversations with growth investors, a bunch of them asked about my experience on how much time a pre-seed company typically takes to achieve real PMF.
Based on my venture experience since 2011, here’s what I have observed on average for pre-seed companies:
(1) Typical enterprise software/ SaaS in existing markets:
without a major pivot: 3-5 years
with a major pivot: up to 7 years
(2) Category creation plays in software: as long as 5-7 years
(3) Deeptech/ hardware: minimum 4-5 years
I am, of course, generalizing a bit here and outliers could get there sooner. But I feel these numbers are directionally correct.
Moral of the story: it’s a marathon for founders and seed investors. So, buckle up to play the long game!
4/ Investor Updates
Both as a founder in my past life, as well as a venture investor now, I have discovered that writing updates (to investors or LPs, as the case may be) on a consistent cadence over the years is an easily accessible superpower.
What it needs is basic discipline and intellectual honesty, which in turn, come from self-awareness, keeping imposter syndrome at bay, being comfortable in one’s own skin, and equanimity about monthly/quarterly wins and losses.
5/ Speed
If you think about it, the only real advantage a new entrant has against incumbents in any field (be it a startup or even an emerging VC manager) is speed. Speed of decision-making, speed of shipping, speed of learning & iterating, speed of taking risks.
As an upstart, if you aren’t fast, the odds are against you.
6/ Boring Zoom Pitches
The majority of first-pitch meetings tend to happen on Zoom these days. I find remote pitching especially challenging for founders. A big part of venture investing is catching the vibes and personal energy of the founders. That’s super hard to communicate on Zoom.
Leaving the detailed nuances of Zoom pitching for another post, I want to leave founders with this one thought – at the minimum, avoid being “boring”! I have been through too many Zoom pitches where it seems like founders are just going through the motions, pitching in a monotone with an almost deadpan expression, and spending little time or care on breaking the ice and vibing with the other person.
Especially on days packed with back-to-back Zooms, you should assume that the investor is coming in with Zoom fatigue. If you don’t grab their attention and get them to lean in during the first five minutes of the meeting, even though they might appear to be listening and nodding through your monologue, they have mentally zoned out.
So, be interesting, and don’t be afraid of bringing your personality to Zoom. It will at least get the other side to actually hear you out and engage with you, without which, an eventual investment is not possible anyway.
7/ Cold-pitching Your Startup To VCs In 30 SecsAt An Event
For the first 30-sec pitch, I recommend having 3 parts to it:
[The Grandmother’s Explanation]
followed by…
[Social Proof of Team]
followed by…
[Proof of Business]
a) The Grandmother’s Explanation means explaining what your startup does in the way you would explain it to your grandmother. Yes, most investors aren’t domain experts in your field. They are likely investing across sectors and aren’t living and breathing your specific area/ problem statement. Assume they are as ignorant about your business as your grandmother.
I am literally shocked by how most founders can’t explain their startup in simple tech-layman’s terms. Barring a few, true deep-tech startups coming out of research labs and universities, most enterprise software, SaaS, and consumer Internet startups should be able to explain their business in simple words. This is the bare minimum signal of clarity in thinking.
b) Social Proof of Team means talking about your credentials in a straight-up manner, without beating around the bush. These could be:
Education-related – undergrad and grad schools, unique course work etc.
Work-related – past employers, roles, needle-moving projects, accelerators like YC or Techstars etc.
Execution-related – products shipped, content created, social following, word-of-mouth etc.
c) Proof of Business means talking about the business progress of your startup in tangible terms. Things like user base, retention, engagement, number of customers, revenue, customer acquisition etc.
It’s important to remember that while providing Proof of Business, both absolute numbers and growth rates are important. So, frame statements like “we have $Xk ARR, growing y% m-o-m”.
Most startups attending these events don’t have enough Proof of Business yet. For the ones who do, make sure you talk about it as traction trumps everything, and especially at the seed stage, any traction will help you stand out.
For startups who don’t have much Proof of Business, you can still talk about proxies of business progress like the velocity of shipping new features, people on the waitlist, early design partners, and how they are deeply engaging with your product etc.
PS: An important recommendation for the 30 sec pitch format:
If you have compelling traction, pitch [Proof of Business] first and then [Social Proof of Team].
If you are very early and don’t have compelling traction, pitch [Social Proof of Team] first and then [Proof of Business].
The idea is simple – always lead with your strongest suit.
8/ Pitch Decks
I see an overemphasis on creating sophisticated-looking pitch decks at the seed stage.
While an eye-catching deck is always nice to have, have seen terribly basic & verbose decks getting funded simply because the underlying business was super differentiated & therefore, interesting.
PS: this changes at the Series A & beyond stages, where the pitch materials areheld to a much higher bar by larger institutional investors.
9/ Over-capitalization
These lines from a post by Christina Farr on X resonated with me:
“One of the top reasons companies die in health tech is overcapitalization. I can’t tell you how many growth-stage founders I’ve talked to lately who told me they wished they’d raised less and at a lower valuation. Huge problem, rarely discussed.”
This is a smart observation. The underlying reason seems to be that most health tech companies either tap out at a certain revenue scale or tend to grow slower than what enterprise s/w VCs expect. Overcapitalization then artificially distorts execution velocity and/or makes it harder to exit.
This point actually applies to more verticals of enterprise software than folks realize. Many of them can’t support very large outcomes and yet, if they can be capital efficient, can still lead to meaningful outcomes both for founders and early investors.
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Chapter 2: Venture Capital
1/ Liquidity
As a GP, it helps to have gone through some personal experiences that teach you the value of liquidity, why cash is king, and how it’s not around when you need it the most.
This helps develop empathy for your LPs and how unrealized paper gains can’t be used to pay medical bills, take care of kids’ tuition, build homes, and support pension liabilities.
As much as sourcing & picking the best investments, another core job of a GP is to proactively create liquidity for LPs so the cash can be used towards human needs.
2/ Psychology
One of the biggest changes I have seen in myself as an investor over the last decade – I now spend significantly more time studying the psychology of both the markets I am playing in as well as specific individuals I am working with.
3/ 1st-Time vs Repeat Founders
While second-time founders are great risk-adjusted bets, I keep reminding myself that a majority of generational tech companies were started by 1st-time founders both in the US and India.
4/ Non-Consensus-And-Right
2024-25
“Hot” theme of the year: Gen AI
What I have been investing in:
(1) AR/VR
(2) Edutech
(3) Robotics
(4) Drones
Periodic reminder: outlier venture returns are non-consensus-and-right.
5/ Alpha
Given AI is leading to massive competition in every obvious software opportunity, perhaps a good way to improve the odds of true venture returns in the portfolio is to index on “potential for category creation” much more than ever before.
This will require being open-minded to narrative violations, leaning in on products that look implausible/ hard to understand at this point, believing that future winners are unlikely to be simple extrapolations of the past, and having the courage to act on this belief.
However, one thing remains the same. The fundamental traits & qualities of a top-notch founder don’t change across cycles.
So, rather than thematic or market-driven, perhaps a truly “founder-first” venture investing style (backed by a humble admission that it’s hard to predict how markets will evolve over the next decade and which products are likely to eventually win) is better poised to do well.
Founder-first style + looking for category-creation plays = Alpha?
6/ Value-Add
What founders need help with the most is customer intros…
BUT…few investors can repeatably & scalably help with this.
ALTHOUGH…investors can introduce you to connected cliques who in turn, can potentially connect you to customers through a chain of intros.
THEREFORE…a major value add investors can bring to the table is connections to cliques that founders can then mine.
7/ Top 5 Learnings From A Decade Of Angel Investing
(1) Choose a “strategy” ➡️ many can work, focus where you have an edge.
(2) Take enough “shots-on-goal” ➡️ adequate diversification/ portfolio size but watch out for “di-worsification”.
(3) Respect “power law” (few winners will account for the majority of the returns) ➡️ hence, Point (2) is important.
(4) “Access” is everything ➡️ watch out for adverse selection.
(5) Brace for long periods (10+ yrs) of illiquidity to let compounding kick in ➡️ Knowing “when to sell” is going to be super-important, and unfortunately, it is an art rather than a science.
PS: for your own good, see this chart once daily 👇🏽(Source: David Clark of VenCap).
One nuance though is that smaller pre-seed/seed firms can start returning DPI in phases through secondaries in growth rounds, while still holding on to a chunk for harvesting during the eventual main exit (IPO or M&A event).
“Your Fund size is your strategy” holds truer than ever before.
9/ “Access” vs “Picking”
In a venture upcycle, “access” becomes more important.
In a venture downcycle, “picking” becomes more important.
Currently, we are in the latter.
10/ Power Law
Venture Capital is all about “finding the best companies”, not just “doing deals”. The power law is so extreme that the latter almost guarantees failure.
11/ TAM Fallacy
Having very rigid views on TAM at seed stage is a classic VC fallacy. The best founders either create new markets or expand to adjacent markets over time. So the TAM keeps growing.
If a startup remains sub-scale, in most cases it tends to be due to founder motivation, quality of execution and team/culture issues, rather than available market.
At the seed stage, better aspects to evaluate include 1) founder-market fit and 2) competitive differentiation/ right to win (I call it “non-incrementality”).
12/ LP Updates
In an undistorted venture market, valuation markups should always follow operating progress toward PMF. This order got reversed during ZIRP, where markups happened in anticipation of progress.
The right logical structure should ideally, also be reflected in LP update emails from VCs.
The primary section upfront should cover operating updates from the portfolio [revenue, ACVs, product releases, key logos, churn, patents, team additions, etc.].
This should be followed by a “financial” section, positioned as an enabler of the operating progress. This can cover follow-on rounds, mark-ups, runways, etc.
The last 2 years have shown that private valuation mark-ups are transitory anyway. Core operations are the real building blocks that stay and continue to compound across cycles.
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Chapter 3: Economy
1/ Top vs Bottom
With the S&P500 hitting ATHs post the election results, many are wondering if we are at the top.
Sharing my post from last year wherein I covered John Templeton’s framework of thinking about market cycles. As we stand today, it seems to be playing out perfectly. Stage 2 (“grow on skepticism”) seems to have ended and we seem to be at the beginning of Stage 3 (“mature on optimism”). This stage can last a few years, till we reach the “point of euphoria” (the last one being Nov 2021).
I follow the mental models of Charlie Munger and therefore, know that the future is unknowable and predictions have little value. However, I also follow Howard Marks and believe that it’s still useful to estimate where we are in the market cycle.
Enjoy Stage 3 of the cycle!
2/ Liquidity Cycles
The way the world works…
When you really need the capital, no one is ready to give it to you. And when you really don’t need it, they trip over each other to hand you the cheques.
This is the way liquidity cycles work.
Source: hard knocks from multiple cycles.
3/ Mean Reversion
Mean reversion is one of those laws that’s so powerful and yet, is actively utilized as a mental model by only a few. One can see it in everything from stock multiples and startup valuations to BigTech headcount.
If understood and used well, it’s a really powerful tool for scenario analysis and being prepared for various eventualities.
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Chapter 4: Careers
1/ PMF Approach To Careers
My career arc started changing the moment I started trying to figure out:
1) What I am uniquely good at, relative to competition
2) What’s the best way to bring that unique value to the world
3) Who will pay me for it and how much
The key is to approach it like a PMF-finding process for a product, indexing more on “discovery” and “inputs”, as opposed to “outputs” like compensation, title, and career trajectory.
The key is to get the input strategy right, align your mindset, lifestyle, and family goals to it, and be patient enough to execute it for decades, taking feedback and iterating along the way.
As simple as that.
2/ Networking
Whether one likes it or not, networking (I prefer the words “relationship-building”) is a key skill to succeed at anything in the real world, particularly as a founder.
During Web 1.0 and 2.0, the Internet rewarded “volume” of content. But now with AI, anyone can churn volume.
So, what matters now? Hypothesis:
(1) Targeting sharply-defined niches
(2) Going deep into concepts
(3) Keeping a high bar on quality
(4) Sustaining adequate volume while doing #1-3
4/ Clarity
Speed is an outcome of Focus.
Focus is an outcome of Clarity.
Seek Clarity of Thinking.
5/ Make It Interesting
Even if you are writing what you believe is the most helpful (or technical) content on a topic, you still got to make it interesting for readers.
Helpful but boring content won’t work at scale.
6/ Getting On A Plane
Getting on a plane to meet people you are doing business with is an execution superpower that is accessible to everyone.
7/ Urgency
A sense of urgency is a superpower not just for founders but also investors. Unfortunately, while it’s a standard expectation from the former, I don’t see much of it in the latter.
8/ Superpowers
The best career advice can essentially be distilled down into one sentence:
“Find your superpower and double down on it.”
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Chapter 5: Life
1/ Personal Burn
The person/business with the lowest burn usually ends up winning.
2/ Life Is A Marathon
Quick note to all youngsters out there:
Based on what I have seen across the world in my life so far, you should assume that achieving reasonable success at any endeavor in life will most likely require a decade of focused work on that craft.
Account for these timelines as you plan your career (& life).
3/ Immigrant Mindset
As immigrants, we have no choice but to be brutally driven and almost emotionless while making important life decisions.
The reason is that we and those around us have sacrificed way too much. We literally can’t afford this not working out.
4/ Courage
The real arbitrage in the world is “courage”.
Those with courage become owners.
Those without courage serve the owners and make them rich.
5/ Name Dropping
Life has taught me to instantly get my guard up when someone starts name-dropping in the first few mins of a conversation.
6/ Winning
Winning in the short term vs winning in the long term – two totally different things!
7/ Opportunities
As a founder/ employee/ investor, you will likely stumble upon only 2-3 truly asymmetric-upside opportunities in your lifetime. So when you know you have one, try your best to make it count.
Rest of the time is spent grinding towards creating a funnel that hopefully, someday, will get you to these 2-3 opportunities.
8/ Upper Middle Class
The upper-middle-class are the true suckers in an economy:
(1) High enough income to get royally taxed. Yet low enough to keep them on the treadmill.
(2) Not large enough economic outcomes so need to keep aspiring for downside protection for kids (eg Ivy League education). But just enough assets to be able to afford this protection (keep saving in 529 plans for 18 years).
(3) Just enough W2 to put a downpayment and get a mortgage on a “stretch” house. Yet, slow income growth so keep paying the mortgage for 30 years.
A decade back, all Indian VCs were flipping their portfolio companies, especially those in the SaaS/ enterprise space, to the US (Inventus Law was a big beneficiary of this move).
Then, as YC doubled down on India, everyone stopped discussing this issue. Whether consumer or enterprise, if you went to YC, you did a Delaware C-Corp.
Now in the last few years, with Indian public markets ripping and showing a major appetite for IPOs (including SME/mid-sized ones), founders are getting blanket advice to domicile in India to take advantage of this market.
A few things to consider on this topic:
Even in the Valley, IPO outcomes are rare and outliers. Most exits happen via M&A. If you are playing the odds, this is an important idea to keep in mind as global acquirers are generally reticent to acquire Indian-domiciled companies, especially in software. This could change, and I hope this changes going forward, but this is the present state of things.
Indian public markets being gung-ho right now doesn’t guarantee how they will behave after 5-10 years or when you are ready to go public. Though, it’s reasonable to expect that macro secular tailwinds will continue over the next decade.
It makes sense for domestic consumer companies like Razorpay and Groww to re-domicile to India, given their business is domestic consumption-based and they are already late stage/ IPO ready.
Indian public market demand for domestic consumption themes might not necessarily translate to other areas/ sectors in the future. Would Indian markets have an appetite for your specific deep tech or enterprise business N years down the road? Something to think about…
Right now, there seems to be more than enough INR/domestic capital demand for consumption-themed companies across the early->growth->late stage/pre-IPO spectrum of VC/PE. But is that the same case for enterprise and deep tech? Would these companies have a higher reliance on global growth capital in Series C and beyond rounds?
This is a highly nuanced topic and I am not a legal or tax expert. But what I will say is that like most things in business, your specific context as a startup is very important. And many of these calls are extremely hard and expensive to reverse later on.
So, while I can’t offer broad-based/ cookie-cutter answers on this topic, I would definitely encourage both Indian founders and VCs to avoid thinking in broad strokes on this matter, and partner with cross-functional experts to together explore the nuances of each case.
2/ India’s Seed VC Landscape in 2024
From what I am seeing in my deal flow over the last few months (and my focus is (1) enterprise software and (2) deep tech), I feel there is almost a dearth of quality, structured & consistent angel/pre-seed/seed capital in India right now.
From what Founders are telling me, almost all major Indian VC firms seem to be holding out & looking for late-seed/pre-Series A levels of traction even to start a real conversation. The proverbial $1Mn+ ARR, 2-3x y-o-y growth…
Anecdotally, it looks like only previously successful repeat founders are mopping up large seed rounds from these firms at the idea/pre-product stage. Pre-seed/seed seems to be significantly tighter for first-time founders.
Genuine question for myself and many India-based enterprise & deep tech founders out there who are fundraising – who are the angels/ seed firms in India that are comfortable in CONSISTENTLY writing checks at the true early stages in enterprise software and deep tech (idea/pre-product/MVP/design partner/some usage stage)? And by consistent, I mean doing 10-12 deals per year.
3/ Indian Elections 2024
The 2024 Indian elections almost turned out to be another 2004 “India Shining”. Probably the delta this time was the personal charisma of the PM.
The Indian economy is already close to a tipping point so the current govt getting an opportunity to continue the work it started in 2014, for another 5 years is a good sign.
Finally, this election just goes to show that this economy is underpinned by a vibrant democracy that has all the checks-and-balances that the likes of China continue to struggle with.
To global investors – India will continue to lift millions out of poverty, put more disposable income in the pockets of its citizens, build world-class infrastructure and digital public goods, export innovation via its tech startups, and deliver growth that is sustainable for all stakeholders.
4/ Domestic Hardware
Wanted to throw out a challenge for Indian founders – in this next generation of the ecosystem, can we aim to build our own domestic smart EVs to compete with BYD and Xiaomi?
In the last cycle, I had a ringside view into how in smartphones, Indian companies like Micromax and Lava had massive dependence on Chinese OEMs and ultimately, ended up bowing out to OnePlus and Xiaomi.
Given the ambitious goals we are setting for the Indian economy, it’s time we invest towards controlling the hardware stack too. From what I am hearing about all the work already happening in semiconductors, automotive, space and manufacturing in general, this is totally doable if we have the courage.
I also believe that there is enough global capital available that is positive on India and will be ready to back this courage. Or perhaps our Indian conglomerates can also step in there with INR capital?
The role model here is how Sachin Bansal and Binny Bansal stood up to US and Chinese competition in eCommerce, ultimately ensuring a homegrown & enduring market leader Flipkart continues to thrive to this day.
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Chapter 7: Other People’s Ideas
1/ Network Density
As always, massive insight-per-sentence from Fred Wilson on how “density” matters a lot while building networks.
2/ ACV Expansion
The key to ACV expansion 👇🏽
3/ Emerging Managers
For all emerging managers out there who are trying to understand the world of LPs:
This 10X Capital episode on How to Pick Top Decile Venture GPs is awesome. Albert Azout of Level Ventures candidly shares some amazing insights on how LPs evaluate emerging managers, what separates the best GPs from the rest, common pitching pitfalls etc.
4/ Talk Less
This is a very, very important and practical insight for fundraising, or any sales process for that matter. Thanks Hugh Geiger for putting this out there!
(1) “Doing more with less” by leveraging creative thinking.
(2) Moving fast with campaigns to keep up with the speed of culture vs getting caught up in analysis-paralysis and bureaucratic over-planning.
6/ Stay In The Game
If you are going to read one thing today, please read this (especially if you are a parent).
7/ An LP’s Perspective On VC
Nice convo between David Clark (VenCap) and Jason Calacanis. Was interesting to hear a top LP’s perspective on venture capital, manager performance and portfolio construction.
Across a sample of 12,000 companies that VenCap analyzed, only 1% were “fund returners”. Power law in venture is intense.
Venture is a game of finding outliers. The best managers aren’t afraid of high loss ratios. In fact, loss ratios are surprisingly similar across various percentiles of funds. Even the best strike out a lot.
The best managers have the confidence to let their winners run. You might have 1 fund returning outcome in a portfolio of 50 companies so if you don’t let it run, it is a bigger sin than not having invested in it at all.
Breakout private companies with real businesses tend to hold their value. But when these companies go public, VenCap has seen the stock going down by a lot in subsequent years in many cases.
In WeWork, the only people that won were Benchmark (exited pre-IPO with a $2Bn outcome) and Adam Neumann (via secondary sale).
In venture, less capital is more capital. If you get too big, you become more of a capital allocator than a venture investor.
Under-performing managers tend to put more capital into their under performing companies vs the winners. The opposite is true for the best performing managers.
PS: also check out this amazing X thread where David shared raw insights on power law in venture.
8/ Learnings From Scaling To 10Mn ARR! – via Bessemer Venture Partners
Attended an awesome US-India SaaS event organized by Bessemer Venture Partners in Redwood City. Key takeaways below:
Session 1 – Learnings from a decade of building Manychat
Mike Yan shared candid founder learnings from 8 years of building Manychat (a marketing platform for chat eg. IG DMs, WhatsApp etc.), wherein the company had to be completely reset during Covid before reaching tens of millions in revenue at present.
(1) The art of decision-making with limited data:
One of the key jobs of a founder in the 0-to-1 stage is to take strategic direction bets with very limited data. Eg. Manychat pivoted in a specific direction with only 40 beta customers by asking, “Are what these 40 customers doing representative of millions of other businesses?”.
Being able to develop the right judgment even with limited data comes down to how deeply the founder understands the market. To quote Mike – “your mental neural net has to get to the level where you can say with 80% confidence that this is going to work at scale”.
(2) In the initial stages of building products, it’s important to remember that data acts as a rear-view mirror into the past. It doesn’t necessarily show you the future.
(3) Value of focus:
To compete as a startup, it’s important to sharpen your product and business knife by saying no to a lot of markets, features, geographies etc. That’s how you get to a point where no one can compete with you in your sharp niche.
(4) Importance of Events for demand-gen:
Manychat has found holding flagship events to be very successful in demand-gen. The company works with influencers and paid marketing to drive maximum traffic and sign-ups for these events.
Events are also a good internal forcing function around new product launches, feature rollouts, fresh campaigns etc.
Interestingly, Manychat charges a small registration fee to ensure attendees are invested in the event. Also, all the content gets hosted on the event portal. They have found hundreds of people browsing through it daily many days after the event.
It’s important to note that events only work when a product has a basic resonance with the market.
(5) Key to differentiate in a crowded market:
To differentiate as a startup, it’s important to have a clear ICP and nail down messaging just for that ICP, and no one else.
One common mistake is talking about the technology more than the benefits to the ICP. Eg. while most of Manychat’s competitors were talking about how cool Facebook Messenger was when it was launched and where all they could integrate with it, Moneychat’s messaging focused on what its ICP (email marketers) could do with FB Messenger, how they could run a campaign on it and what outcomes they could drive from it.
Session 2 – Selling to large enterprises
Ashwin Ballal, ex-CIO of Medallia, shared the following insights on what founders should keep in mind while selling to large enterprises:
(1) For a customer CXO to take a startup seriously, you must solve a deep-seated personal problem for the exec. Else, it won’t be important enough to warrant their bandwidth.
(2) Every enterprise shouldn’t be a “customer” for your startup. It is important to be surgical and focus on an ICP.
(3) There are essentially only 2 high-priority problems that any customer is looking to solve – (1) growth and (2) cost optimization. A startup needs to hit the core of these problems. Everything else like productivity improvement is a nice-to-have.
(4) Given weak macros over the last 2 years, cost optimization has become so important that CEOs are mandating the CIO and CFO to work together and bring down costs by being willing to adopt cheaper software even with relatively inferior UX.
A new solution has to create a minimum of 25-30% cost savings to have a chance at displacing the incumbent solution.
Customers look at this potential cost-saving both in terms of being able to boost the bottom line or being able to use it for extra headcount to drive growth.
(5) Large enterprises are increasingly looking to adopt “bundled software” to reduce IT costs. They are also looking to transition from per-seat pricing models to consumption-based pricing. These elements are going against specialist incumbents which turn out to be significantly expensive.
(6) There has been a trend over the last decade where software buying decision-making shifted from the IT/ CIO org to functional teams. Now, with capital becoming scarcer and more expensive, cost reduction is back at the forefront, and therefore, CIO/ IT orgs. are again becoming important stakeholders.
Startups often make the mistake of not looping in the CIO org early on in the deal and not building relationships within that team. This often derails deals at late stages. In addition to functional champions, important to have a parallel champion within the CIO org too.
(7/) Nobody is doing AI in production at scale. Most projects are still POC stage so long way to go in the space.
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About the Author
I am Soumitra, a venture investor focused on the US-India corridor. I invest in Global Indian founders via my Fund Operators Studio.
I like to say that “I am a writer in the costume of a VC”. I write about Startups, Investing and Life on An Operator’s Blog. Also check out the AOB Podcast on YouTube.
This one is intentionally short and sweet. Minimum words, maximum impact.
Here are my top 5 learnings from more than a decade of angel investing:
(1) Choose a “strategy” ➡️ many can work, focus where you have an edge.
(2) Take enough “shots-on-goal” ➡️ adequate diversification/ portfolio size but watch out for “di-worsification”.
(3) Respect “power law” (few winners will account for the majority of the returns) ➡️ hence, Point (2) is important.
(4) “Access” is everything ➡️ watch out for adverse selection.
(5) Brace for long periods (10+ yrs) of illiquidity to let compounding kick in ➡️ Knowing “when to sell” is going to be super-important, and unfortunately, it is an art rather than a science.
PS: for your own good, see this chart once daily 👇🏽(Source: David Clark of VenCap).
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As a founder, it’s easy to start seeking positive validation by onboarding any type of customer that’s ready to buy. However, in the long run, the strategic risk of onboarding the wrong customer often far outweighs any perceived short-term benefits.
Ruthless but fair “customer qualification” can help founders manage this risk.
One of the main pieces of advice that founders get is the importance of “talking to customers”. Everyone from Paul Graham to Eric Ries & Steve Blank has championed listening to customers as the bedrock of building new products. But what if all customers aren’t created equal? And that listening to some could lead you astray?
This point came up during separate conversations I recently had with two enterprise founders. In the first case, the founder is an India-based SaaS company that has most of its initial customers locally and is now looking to expand in the US. In the second case, the founder runs a deep tech software company, also India based and similar to the first one, having initial customers local and now looking to expand in Western markets.
Both founders mentioned something interesting – looking back on their ~2-year journeys of building their products from scratch, they feel that building for their initial set of customers hasn’t given them the clarity they were hoping for and in many ways, might have even sent them down the wrong path.
In the SaaS case, to paraphrase the founder:
“Even today, I have no idea why these customers are buying my product or requesting a particular feature. It’s like they are asking for a buffet & choosing from it in a way that’s completely unclear to me.
On top of it, the exec buyer isn’t even bothering to check whether the teams are using the features being asked for.
Essentially, besides some small revenue, I am not getting any feedback or learning that can help me craft the roadmap. It’s all noise, no signal.”
As I was digesting this, I heard a similar sentiment from the deep tech founder just a couple of days after. To paraphrase again:
“Even though we are having lots of conversations with potential customers, given this space is super early in India, these companies have almost no useful feedback to share. The depth in understanding & appreciating the problem statement we are going after is just isn’t there.
Even though we have converted some of them to paid customers, I feel the way forward is still fuzzy.”
If you look at both these startups from the outside, they are doing all the right things – talking to customers, building what they are asking for & getting paid for it. They are hustling on the ground, iterating quickly, shipping features & doing everything that say a YC would have told them to do.
But on a closer look, both founders have an uncomfortable feeling that these customers aren’t taking them in the direction they need to go in (which is building a product that can scale globally).
What’s your next Base Camp?
I had previously written about Vinod Khosla’s concept of “Base Camps” – that any startup’s execution needs to take it from where it’s today to the next Basecamp. This is a strategic place of progress, de-risking, recuperation, and reflection. A milestone where the team consolidates & re-strategizes for the next phase.
The idea is not to hike aimlessly, but to execute a specific, long-term mission to reach the peak of Mount Everest, with Base Camps interspersed on the way. In the earlier examples, the current sets of customers seem to be taking the founders down random trails, giving them the high of working hard & burning calories on a hike, but not necessarily taking them closer to the next Basecamp on their respective Missions.
Importance of customer qualification
Peeling the onion on this philosophy a bit more, the idea of “customer qualification” becomes really important in this context. Founders need to deeply think through what their next Basecamp is, what they are trying to test & accomplish on the way, and what type of customers would get them there.
All customers aren’t created equal – some are more likely to be strong design partners as you build the initial product, while others might have deeper pockets but will also demand a lot of organizational bandwidth. Some might not be in your ideal target geo but can help you bootstrap & get market credibility. Others might be in your ideal geo but require a long sales cycle that could consume a significant part of your runway.
Also, these are dynamic situations. As the startup evolves, a customer that made sense to onboard 18 months back, may no longer fit the company strategy. Or the “purpose” the customer serves in the startup’s larger Mission might have evolved. Maybe it was a great design partner logo to have then, but can now only serve the limited purpose of being a cash cow to keep the lights on while a pivot is being executed.
Customer qualification needs to be an ongoing strategic priority in the go-to-market plan & serve as a critical gating factor in how resources are being allocated.
What’s key to qualifying customers at the earliest stages?
Three words come to mind here – judgment, courage & creativity.
1/ Judgment
If there is clarity around company/ product strategy & as an outcome of it, what the next Basecamp looks like (“where you need to go”), founders need to use their judgment & figure out what types of customers are likely to make or not make sense (“how to get there”).
These won’t be black-and-white calls in most cases, so investors & advisors on the cap table should closely support the founder in rigorously thinking through the approach, especially given the resources (capital & talent) either already at hand or what can be realistically gathered from the market (“what gets you there”).
2/ Courage
Once there is sufficient clarity around what types of customers are your best bet to reach the next Basecamp, it’s time to ruthlessly execute that clarity. It could involve resetting expectations with existing customers, saying no to new feature requests, or even gently “firing” specific customers.
The courage to have tough, honest & transparent conversations will be a critical part of execution here. And as a founder dealing with an ambitious mission, limited resources, and high expectations of the team & stakeholders, you don’t need to be apologetic about this. In fact, you owe this to yourself & the company. And given most startups are default-dead anyway, what do you have to fear?
3/ Creativity
A quick disclaimer here – I am by no means advocating treating customers unfairly or dumping them without remorse. In fact, I have seen so many cases of enterprise customers being at the receiving end of a startup shutting down on short notice that I fully empathize with them being wary of engaging with really early-stage startups.
At the same time, it’s a brutal reality that most startups are default-dead & living on thin ice. Therefore, it’s totally the founder’s prerogative to do whatever it takes so that the company can survive.
Balancing the interests of your customers, who were also your earliest believers, as these hard calls are taken is where creativity becomes super important. In all likelihood, there is going to be no path where everyone around the table is going to end up happy. Founders, supported by their investors, need to think of creative ways that can minimize damage to customers.
As an example, a startup I was previously an investor in was making a hard pivot from serving individuals & SMBs to classic, large ACV enterprises. Obviously, the company could no longer afford to service existing customers in the former bucket while also building for the latter. However, the founders also realized that the software was in many ways, mission-critical for existing customers. So instead of turning off the existing product entirely, the company decided to put the product on maintenance mode, only keeping it live “as-is” with no shipping of new features. The founders had transparent 1:1 conversations with each existing customer, explaining the decision & the rationale. Almost all customers were happy to keep using the product.
A few years down the road, the company was being liquidated and the legacy product had to be shut down. The founder then shifted legacy customers to his private cloud so their business wasn’t disrupted. Treating early customers fairly while staying within the context of new business realities was a philosophical call taken by the founders & they stuck with it even after the company ceased to exist.
Closing thoughts…
While running an early-stage startup, it’s easy to fall prey to the pitfall of seeking positive validation by onboarding any type of customer that’s ready to buy. Sometimes when capital is constrained, it even becomes unavoidable. I mean, who can say no to revenue?
However, in the long run, the strategic risk of onboarding a wrong customer often far outweighs any perceived short-term benefits. Founders need to be aware of the next Base Camp they are gunning for, and in order to pave the most efficient path to it, use a combination of judgment, courage & creativity to qualify customers ruthlessly but fairly. And lastly, do not feel apologetic about it!
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As a venture investor dealing with high volume deal flow across sectors, stages, and founder personas, how does one effectively screen for the diamonds amongst the rocks?
Sharing a deal screening framework to help improve any venture investing process.
As an operator-angel, I consciously follow a “tech-generalist, founder-first” style of investing. It both suits my background (which is very cross-sectoral & cross-functional) as well as helps me cast a wide-enough net.
I believe one of the core advantages of being a solo investor is not being boxed in a niche fund strategy or sector focus. As tech evolves rapidly across geos, I like the freedom to be able to seek out the best founders in whatever vertical they might be building in, as well as be opportunistic in terms of participating across stages & in special situations too. This is the model that the likes of Elad Gil & Jason Calacanis have followed.
Of course, one has to still identify the game where one has an “edge” in, to have the best odds of outlier returns. For me, that’s focusing on what I call the“Global Indian” founder persona. It includes:
(1) India based founders building for the world (eg. cross-border SaaS, enterprise, deeptech etc.), and
(2) Indian immigrant/ Indian-origin founders building tech cos. in large markets like the US & SE Asia.
This is the persona where I have high-quality access, where I am able to understand & relate to the founder’s journey & motivations, as well as add value with empathy, given I am myself a Global Indian.
With this strategy, I end up with a massive top-of-the-funnel of deals across a wide variety of sectors, stages, geos & check sizes. Over the last few months, I have been trying to think of some sort of a screening framework to be able to quickly figure out where a new investment opportunity fits in my deal universe. Ideally, this framework should help easily visualize a deal’s preliminary fit with my strategy, before taking it into deeper diligence & running my entire check list on it (my core IP!).
While any such framework can involve many types of vectors, I have been experimenting with a “consensus vs signal” 2×2.
These vectors abstract out 2 important elements of venture investing:
Consensus – what is the investor-crowd’s opinion on whether this startup* makes sense or not.
Signal – what is the quality of people** who believe in the startup & have skin-in-the-game.
*”Startup” here means an amalgamation of team, market & product.
**”People” here includes founders, employees, customers, existing investors etc.
Let’s look at what each of the quadrants in the 2×2 mean:
(1) Low-Signal-Consensus – these companies lack high quality operating signals around the business and who the investor-crowd agrees will find it hard to make it big. A typical example would be an idea stage founder with no educational or career spike, going after an established (highly competitive?) market but with weak founder-market fit, and yet to demonstrate any early validation or traction around the startup’s hypothesis.
These opportunities will usually have negligible investor interest. When I come across such companies, my instinct is to first check if I am seeing any positive signal that the crowd is missing. This could be a behavioral characteristic of the founder, something from their personal backstory or from their startup journey so far. Idea is to see if there is some sort of high-quality leading signal hiding in plain sight.
If I sense a likely positive signal, I try and maintain a thread with the founder over coming months, attempting to see if subsequent execution can help build some conviction.
Note: most cold inbounds on LinkedIn, as well as startups from college incubators/ accelerators/ b-plan competitions fall in this bucket.
(2) High-Signal-Consensus – these companies have high quality signals around team pedigree, investor interest, customer traction etc., and who the investor-crowd agrees are potential winners. A typical example would be a repeat founder building in an established market that is universally understandable, has a large TAM and a past history of large outcomes.
While these deals are understandably hot, high investor FOMO around them creates 2 risks:
High entry valuations, bringing down future returns.
Because these deals look so obviously good on paper, it drives investors to overlook asking hard questions around the business. Does the repeat founder have fit with the space? Is there hubris at play from past success? Is the company being over-capitalized & therefore, not being set up for capital efficiency?
Therefore, whenever I see a High-Signal-Consensus deal, my antennas go up & I consciously try to keep FOMO at bay while increasing the rigor of the evaluation process.
Note: most deals that I see in angel syndicates or groups fall in this bucket.
(3) Low-Signal-Non-Consensus – these companies lack high quality operating signals around the business. But interestingly, the investor-crowd also doesn’t have a consensus yes/ no view on it yet. Reasons could be the space is esoteric so hard to understand, team’s background is non-traditional, or location is non-top-tier, founder is bad at pitching etc.
While looking at these opportunities, I am conscious of these being potential “non-consensus traps” – companies that look good to someone trying to invest against the crowd just for the sake of it, without building first-principles conviction.
I have an inherent positive bias for underestimated founders & overlooked assets. That’s why I try to be consciously careful in this bucket of startups as with experience, I have learned that bad companies are in most cases, just bad companies.
(4) High-Signal-Non-Consensus – these are the opportunities we as venture investors live for. They are highly non-consensus, with the investor-crowd struggling to access, understand, evaluate risk and build a positive view on them. Yet, these startups have high-quality leading signals, which could be external and/ or internal.
External – eg. a respected investor, sometimes a domain expert, has taken the time to evaluate & build high conviction around the company. Or a visionary customer is taking a bet, partnering with them in building the early product.
Internal – extraordinary founder-market fit eg. the founder has spent a decade just going deep in the field. Or a backstory that provides an authentic “why” behind pursuing this idea. Or an execution track record in the startup’s arc that is outstanding on important elements like capital-efficiency, iteration velocity or organic customer acquisition.
This quadrant is the hardest to source for and requires having a really differentiated network of relationships (for referrals) and a personal brand that attracts interest from these types of founders.
When I meet startups in this quadrant, I immediately get to work, spending time with the team & together unboxing every facet of the market. Generally, these deals have relatively less investor FOMO so I can take the time to run my conviction-building process with rigor.
The risk in this quadrant, and purely from my personal investing style & behavior perspective, is that I tend to get positively biased on them very quickly. After many such experiences, I now consciously play devil’s advocate during the evaluation process. Btw this is where running a rigorous conviction building process and avoiding a trigger-happy mode really helps.
Hope you found this screening framework interesting & perhaps helpful for your own venture process. Of course, evaluating an early-stage venture opportunity is much more multi-dimensional than this. But having such a framework really helps in effectively allocating bandwidth while managing high volume deal flow.
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As the business world reverts to a blend of remote & in-person, meeting customers IRL is becoming important once again, especially in a slowing economy.
Sharing some thoughts on how jumping on a plane & meeting people could be key to unblocking growth for your business.
I was recently in a brainstorming session with a portfolio company that is struggling with stagnant growth. The company is profitable, has clear PMF as demonstrated by loyal top-tier customers, yet is unable to grow the business fast. It has major logos but the ACVs just aren’t expanding.
Now, as with any startup, stagnant revenue is a symptom & the causes could be many. In order to do a root-cause analysis & subsequently unblock growth, my immediate actionable input to them was simple – “go and meet customers in-person”.
When the bolt of lightning called Covid struck our planet, paradigms of doing business changed overnight. As workers went remote, so did interactions with customers. In fact, as companies were forced to do business with each other over video calls during the lockdown months, people discovered that it was both highly productive and profitable to drive the sales process sitting anywhere in the world with a laptop & a stable Internet connection, engaging customers living thousands of miles away over a shared screen.
As the world is stabilizing into a new-normal, many companies are now realizing that the success of a fully remote sales & BD process is highly contextual. In hindsight, its applicability & effectiveness became extraordinarily broad based in 2020 and 2021, mainly due to:
An excess liquidity fueled, demand-on-steroids environment, and
Altered social norms of human engagement.
Simply put, everyone wanted to buy so badly that the only bar the sales process needed to clear was to show up on a Zoom call. And, it also helped that nobody really wanted to meet a stranger in-person & take the risk of Covid transmission.
Now, as we sit in 2023, both these factors no longer exist:
Demand is contracting across industries, courtesy of the ongoing cycle reset driven by rising interest rates.
Post vaccine, broader social norms have reverted to a blend of remote & in-person. What proportion will they reach at steady state is hard to predict, although with the present return-to-office movements even with Big Tech like Amazon & Meta, my guess is 60% in-person & 40% remote (assuming a continuing trend of 3 days per week in office).
It’s critical for all founders & operators, especially those in early stage startups that typically have finite resources to deal with business headwinds, to quickly embrace this reality. In a 60-40 IRL:remote world with contracting demand, it’s unacceptable if founders & senior leaders aren’t getting on the plane to meet customers & build trust.
Meeting customers IRL has multiple advantages. First, leaders taking the time to travel & spend bandwidth in listening is a strong demonstration of commitment. It’s Strategy 101 that in most cases, it’s easier to grow a current customer vs land a new one. Even in consumer products, product leaders first focus on retaining existing customers + re-activating inactive ones, before filling up the top of funnel with new leads. In any business, growth is possible only when existing customers are happy.
Second, breaking bread with customers builds 1:1 trust with their execs, putting a human face to contracts, transcending beyond employers & current deals to opening up the possibility of these leaders becoming your personal champions for long after.
Third, getting informal feedback about their product experience as well as larger problems & challenges they are facing, & then connecting the dots across multiple such conversations, is the best way to do a root-cause analysis of “why are we not growing fast enough?”.
Going back to the portfolio company I mentioned in the beginning, I gave them a very simple & actionable plan for the next 8 weeks to unblock growth:
One founder to play what I call a ‘Key Accounts’ role.
Literally make an excel sheet of top 5-10 customers, hop on flights, meet key execs IRL, get feedback, hear their problem statements & build a personal rapport via drinks/ dinner.
As an output of each meeting, create a simple roadmap for (1) enhanced customer success, where customers are unhappy and (2) in-account revenue expansion via upsell/ cross-sell, where customers are happy & want to grow.
Finally, and most importantly, partner with relevant teams (product, delivery ops etc.) to unblock & provide execution momentum to these customer-wise revenue roadmaps.
The founder’s role shouldn’t end with token customer visits. Driving results by providing the necessary context, energy & cross-functional unblocking help to operating teams is the real output all stakeholders are looking for.
Btw, as I was working on this draft, star product operator & angel Gokul Rajaram posted this thought yesterday on the importance of building relationships in enterprise sales:
On a side note, willingness to get on a plane often is a career hack I used very successfully at Alibaba & something that I learnt from my then boss. While our international peers in US & EU offices loathed traveling to China & facing all the inconveniences (from jet lag & language to food & other cultural disconnects), me & my team would show up in Hangzhou every month, blending in with our local colleagues & building trust over meals, rice wine & karaoke. Slowly, we came to be known as the “true believers” – the only team willing to make the sacrifice & do a round-the-world trip every month to get s**t done. We gradually earned the right to be ‘insiders’, getting access to unique growth opportunities within the Group.
Now in this new phase of my career as a tech investor, am doubling-down again on this approach. As I ramp up venture investing in the US-India corridor, I am aiming to spend at least 2 weeks per quarter in India & devote more operating time to portfolio founders, grow new deal flow, cement old ecosystem relationships as well as initiate new ones.
Let me end this post with an article from Jason Lemkin of SaaStr that I really like – 10 Things That Always Work in Marketing. This is a must-read for anyone looking to unblock growth in their business. The suggestions go much beyond marketing, touching on all aspects of go-to-market. Reproducing the section on visiting your largest customers:
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As an angel, one of the strongest leading signals I look for in a startup is progress per unit of capital – how much forward movement has the team achieved & the resources it has consumed for it.
My thoughts on why a capital-efficient mindset is so important for early-stage tech founders.
Having seen 1000s of deals across a decade of investing my own as well as institutional money, I rarely cringe while evaluating a new company. As an investor, I have often seen the same goods-and-bads in other deals several times before. As an ex-founder, I have walked the path & made the same unforced errors so almost every time, I can empathize & almost pre-empt why a founder is doing things a certain way.
However, there is one specific thing that is guaranteed to make me cringe – a founder attempting to raise an amount that is totally out-of-sync with where the business is. In many cases, this is accompanied by other precursors:
No intent to bootstrap from idea to “some” traction.
Wasteful handling of the last round.
Coding & building product for months at a stretch without putting anything meaningful in front of customers.
Personally, one of the strongest leading signals I look for in a startup is progress per unit of capital – how much forward movement has the team achieved & the resources it has consumed for it, especially when evaluated relative to other comparable startups.
I remember an interesting learning from my time at IDG Ventures (now Chiratae). Sudhir Sethi, the Managing Partner & the lead investor who had backed Myntra (Zappos of India at that time; was eventually acquired by Flipkart for ~$300Mn in 2014), often cited how when he went to meet Mukesh Bansal (the founder) for the first time at the Myntra office, he observed they were working out of a dingy space in a classic Indian neighborhood market with the ground floor occupied by a fruit & vegetable vendor. Sudhir used this as one of the positive signals for the team’s ability to execute in a cut-throat eCommerce vertical like fashion.
Fast forward a few years, and I got a similar insight yet again in the retail context. While working with Alibaba, I saw how frugal the Group was in terms of saving every dollar of operating cost. eCommerce works on wafer-thin margins, especially in highly competitive & price-conscious markets like Asia. And one could see this by comparing the bare minimum facilities & perks we got at the US HQ in San Mateo vs even well-funded growth startups, which were offering everything from catered meals to draft beer stations at that time.
Why is a capital-efficient mindset so important for early-stage tech founders? It’s because they are playing a game where the odds are hugely stacked against them. Where 9 out of 10 new startups fail on average. Where the starting point and end point of companies are vastly different, with each year choked with iterations, a major pivot every few years, and team members jumping on & off the ship.
Setting yourself up to have even a remote chance of winning such a game requires many shots at the goal, many course corrections, and many resets. At the same time, capital is scarce at the pre-PMF stages even for the best teams. Capitalism is brutally efficient, throttling money when relative risk is high, & opening the faucet once success is highly certain (typically post-PMF).
Building even a decently sized company can take anywhere from 6-8 years, & up to 15+ years. In such a long period, both the overall economy as well as your specific market will go through several cycles. The key is surviving long enough, even with limited capital, to be able to walk this arduous path.
This is what the best founders bring to the table – using investor capital like their own, each dollar wisely deployed towards only what’s truly necessary for the stage, raising each round with specific milestones in mind, and realizing that ownership is everything, with each bps of dilution being the costliest trade shareholders can make. To me, this mindset & building approach is perhaps the biggest signal of perseverance in a team.
Come to think of it, in the non-tech world where starting a business isn’t called “doing a startup”, entrepreneurs typically use their savings to get going, & once there is enough business confidence & profitable revenue flowing-in, grow using either internal accruals or debt. Initial bootstrapping creates skin-in-the-game, profitable revenue creates high confidence that customers want what you are making, & debt creates financial discipline around managing cash flows while preserving the founder’s ownership to compensate for all the risk they have taken.
This model has been used by everyone from Sam Walton to Richard Branson, & continues to survive in all parts of the SMB economy. While the venture capital model definitely works for building tech companies, which are asset-light, highly scalable & operate in winner-takes-all dynamics, I believe the founders who are in it for the long run build with a similar philosophy – planning for the next basecamp & raising conservatively, maintaining discipline around cash & giving high importance to ownership.
On a related note, I wanted to share something I recently wrote on Twitter regarding a fundraising pitfall specifically for serial founders:
Often see serial founders who have seen success before (scale and/ or exit), raise large rounds at high valuations at the idea stage!
From what I have seen, even the most successful founders have operated in phases where a lack of capital could have potentially killed their startup. That’s probably why on the 2nd attempt, they try and take that risk out of the equation at the beginning itself.
Oddly enough though, having a capital-rich Plan B to fall back on reduces the scrappy iterativeness, discipline & underdog mindset that startups usually need to succeed. And which probably contributed to their success the 1st time too.
In asymmetric bets like startups, to reference The Dark Knight Rises, “the way to climb out of the pit is without a rope”.
Hopefully, as this cycle resets, all of us founders & investors will go back to the drawing board & start appreciating Benjamin Franklin’s age-old virtue of frugality as a key to success in business & life.
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Recently came across a fascinating Twitter thread from June 2020 by Dave McClure, ex-founder of 500Startups, where he talks about how “investing with conviction” is a myth. This tweet captures his sentiments well:
I agree with several arguments in this thread:
1/ Picking winners in early-stage investing is really hard. Power laws govern the best venture portfolios, driving down the hitting %. Per Horsley Bridge data, even for a top VC firm like Sequoia, ~4.5% of portfolio companies generate 2/3rd of aggregate returns.
2/ Intelligent venture investing, by its very nature, involves making both Type 1 and Type 2 errors. Therefore, even high-conviction deals are likely to exhibit unexpected outcomes, both positive & negative.
3/ There is a lot of hindsight bias in the way investor narratives are created around companies that turned out to be successful – “Look, I had high conviction on this deal & it turned out exactly as I expected. Ergo, I can predict the future”.
So in games like this where outcomes are random & often uncorrelated with the level of effort that goes in, does it make sense to discard the input process?
Based on more than a decade of venture experience, I tend to view it differently. I believe it’s still important to have a rigorous process of building conviction and to keep improving it bit by bit with each experience. Even though eventual outcomes might still be random, this approach helps tilt the playing field a little in your favor every time. Over a long enough time horizon, as one keeps taking more shots at the goal & with continuously improving odds, the hope is that a home run arrives sooner than later.
Particularly at the earliest stages (angel/ pre-seed/ seed), especially with the advent of small check investments ($1-5k via syndicates/ SPVs) attracting a new generation of 1st-time investors, it’s easy to assume that outcomes are randomized & therefore, fall into the trap of doing spray-and-pray that isn’t backed by an intelligent investment process.
It’s important for new angels to first deeply study the asset class & build their personal investment process – areas of expertise, focus sectors, stages, target founder persona, deal flow engine, unique value-add to get into best deals etc. Post which, the odds of success are significantly better.
While being a champion of a “conviction-building” investment process, I also agree with the 3 takeaways that Dave closes the thread with, regarding having enough shots on goal:
Even with the most intelligent investment process, venture investors need to acknowledge their limited picking ability & therefore, keep taking enough intelligent shots at the goal for the odds to work in their favor. Semil Shah of Haystack wrote a great post titled “Shots on Goal” on this idea a while back.
Equally important as portfolio diversification via numbers, is making asymmetric investments – ensuring that the few winning bets have huge outcomes so that even with a high loss ratio, the returns math still works at the portfolio level. The smartest thing a venture investor can do is to befriend the power law, and work towards being on the right side of it!
To summarize, acknowledging the randomness of venture outcomes doesn’t need to be at odds with running a rigorous & continuously-evolving investing process. In fact, such a system should be intelligently designed to account for this randomness, combined with other considerations like power laws, compounding, economic cyclicality etc. Even a few points of “edge” that is systematically created with each experience, can slowly accumulate into a sizable alpha over the long term.
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SMB SaaS is hard. Getting the positioning right, increasing ACVs, controlling churn – it all becomes harder when your customer is a small business that is resource constrained & perpetually dealing with its own execution challenges.
Despite this, given SMBs are the most frequent early adopters of new products, the reality is that most startups tend to start mid-market. Though, in my experience, a majority get stuck in unfavorable economics of this customer segment & are unable to achieve breakout PMF.
So, what is the secret sauce founders can learn to effectively scale SMB SaaS? Hubspot is a great case study. I recently came across this SaaStr podcast with the HubSpot CEO Yamini Rangan, where she shared some of the company’s SMB strategy & learnings. Here are the key highlights:
Go after a large TAM: given the fragmented nature of SMB verticals, it’s really important to have a large TAM. HubSpot made the smart decision to transition from marketing automation to CRMs, basically going after Salesforces’s lunch.
Mid-market verticals tend to have open opportunities for startups as SMB customers are usually sandwiched between either buying a host of solutions & stitching them together or buying an expensive, enterprise-grade solution. In this context, I had recently posted a Twitter thread about how Zoho followed a similar multi-use case bundling strategy to position itself as an “operating system for SMBs”. This strategy works well as SMBs have a tendency to simplify their tech stack & procurement processes by buying multiple solutions from the same vendor.
2. Customers gravitate towards competitively-priced, mission-critical products: in times of economic uncertainty like today, SMBs tend to become really sensitive about budgets. Customers start asking tough questions internally around (1) where are they spending?, (2) do they have a clear path to getting enough value from the spend? and (3) can they do more with less?
Acting per this analysis, SMB customers are then likely to consolidate their tech stack to a handful of mission-critical platforms that are competitively priced & deliver the most value. This is the bar startup products need to cross while selling in this tough macro environment.
3. PLG-based distribution is king: to achieve break-out growth in SMB SaaS products, startups need to have the widest possible distribution. The front door needs to be big enough so that most people can come in.
For the first 8-9 years, HubSpot was mainly driven by a sales motion comprising Direct Sales & Partner Sales. Around 2016-17, in order to exponentially grow distribution, the founders made a counter-intuitive bet to go from sales motion to product motion. Today, HubSpot has a massive user base of ~1Mn WAUs to monetize off of.
4. A strong “free” product is key to PLG: One of HubSpot’s truly differentiated product strategies has been to offer a strong, full-featured free product. Rather than making a “free” product free just for the sake of it, they have focused on making it really valuable.
Some important benefits of having a strong “free” plan:
Drives high top-of-funnel growth & user engagement, improving the probability of monetization once the value is proven out.
Puts product org. under pressure to deliver enough features at the top, in order to maintain the competitiveness of paid versions.
Forces the product team to maintain a “consumerized” ease of use, which benefits all customers, free or paid.
Irrespective of whether your GTM is sales-led or PLG-led, a founder should never give up on the “free” plan as it’s key to keeping your product competitive.
5. North Star Metric should be Net Revenue Retention: NRR is the best health indicator of an SMB SaaS business given it represents whether or not: (1) you are retaining the customer, (2) you are continuing to drive enough value so they buy more from you and (3) you are protecting yourself from churn.
6. Don’t underestimate the value of a Partner ecosystem: once you reach a certain scale, PLG & Direct sales aren’t enough. A thriving partner ecosystem can be a strong GTM moat. Interestingly, a majority of HubSpot solution partners *only* sell & deploy HubSpot as a CRM, thus creating valuable network effects for the company.
7. In geo-expansion, less is better: PLG-driven companies will always have customers in many countries eg. Hubspot has 130+. But in order to deeply localize for elements like language, currency, customer support etc., it’s important to focus only on a few markets. As an example, HubSpot has chosen 7-8 markets to deeply localize their offerings in, based on factors like TAM, existing installed base, net ARR growth being seen & the company’s ability to serve the market locally.
While SMB SaaS can be a tricky business model, it compounds beautifully once the founders figure out its key levers, as HubSpot has shown.
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