Tag: Venture Capital

How to Raise When Bay Area VCs Expect Hypergrowth

If you don’t have a hockey stick, talk about revenue quality, capital efficiency and IP instead.

There is a common thread between my X feed and conversations I have had with follow-on VCs in the Bay Area.

Their revenue growth expectations for doing the next round seem extremely steep, even to me as a seed investor.

Many claim that they are regularly seeing startups that are meeting these kinds of expectations, even in the Enterprise AI world. Which, personally, I find hard to believe! But then, I see startups on X that every week are claiming 0 to $500K ARR in 30 days, “we are the fastest growing startup ever in X/Y/Z”, and investors like Paul Graham sharing hockey stick graphs of a variety of colors.

Anyway, for now, let’s park the discussion of sustainability, unit economics, dodgy revenue math, etc. Let’s say as a founder, you have some solid early traction but don’t have these ridiculous growth numbers to show. How should you then tell the story, especially while pitching in the Valley?

I am typically advising folks to explore combining one or more of the following 3 elements:

(1) Focus on “quality” of revenue – signals include customer scale/ tier, how happy they are (low/zero churn), and whether there is a land-and-expand motion happening even with 1-2 names, especially if there is evidence of ACV expansion.

(2) Capital efficiency of early execution – lead with “look at how much we have accomplished with such limited capital”, which highlights resourcefulness, strategic & iterative thinking, street-smart execution, and naturally leads to the line of thought that goes “what could this team achieve when armed with capital”? This is a great point to get investors to start imagining.

(3) If applicable, deep work around IP and building hard things around the product – don’t be shy to talk about the deep, grindy, and non-trivial work that’s gone into building behind the scenes to get the product to this stage. Ideally, have a compelling argument as to why this work can’t be just “bought” with capital and why a new YC batch company can’t just copy it.

These arguments might still not do the trick for the momentum VCs. But remember that only a handful of large investors are positioned to play that game anyway (the ones who have been saying “triple, triple, double, double is dead” for the last year or so on every podcast).

There is a large variety of capital pools, definitely across the US & even in the Bay Area, that structurally don’t play this game. Hopefully, these arguments should help you land your story better in front of them.

Resolving Uncertainty for Founders & GPs

A founder’s job is to convert uncertainty into risk, one milestone at a time. The same applies to emerging fund managers, with DPI as the ultimate uncertainty resolver.

Recently listened to an insightful Origins Podcast episode with Alec Litowitz, founder of Magnetar Capital and previously founding partner of Citadel.

Alec drew a fascinating distinction between “Uncertainty” and “Risk” and explained how people often confuse the two. PS: I can clearly see that this framing has emerged from his extensive experience in public markets.

Risk is something where the possible outcomes and their probabilities are both known eg. what number is likely to come up when you throw a dice. Because the odds are relatively known, risk can be priced.

The other end of the spectrum is where both outcomes and probabilities are unknown – these are Taleb’s Black Swan events like COVID.

In the middle of both is Uncertainty – where outcomes are known but probabilities are unknown. This is where most of life unfolds eg. going on a date, hiring an employee, etc.

Any new early-stage business operates with uncertainty, not risk. And the main job of a founder is to resolve this uncertainty to discover probabilities of possible outcomes of the business that can then be priced.

In other words, a founder’s job is to convert Uncertainty to Risk, which can then be priced and bet big on by capital providers.

Btw, founders do this by following the classic YC/ Lean Startup approach of fast & iterative feedback loops aimed at making something people want. As simple as that.

For founders, this is an important framing for fundraising and managing runway. You should be very clear about the exact derisking milestones that need to be achieved with each capital raise. Also, articulating that to investors during fundraising helps build extra confidence that the capital will be used well.

Also, this is a good behavioral heuristic too that can help reduce the pressure on founders during fundraising. Every investor will have their own threshold of the current level of uncertainty that they are willing to tolerate. So, a “No” should be taken as a reflection of their appetite, rather than a personal reflection on the founder.

Of course, with every incremental unit of de-risking, your business gets closer to meeting this tolerable threshold of uncertainty, which will ultimately reflect in your fundraising conversion rate going up.

Hence, it’s important to survive long enough to be able to demonstrate adequate de-risking such that access to capital and other resources like talent keeps getting easier with time. This is the driver of compounding in progress that we often see with businesses once they have product-market-fit.

For businesses, this uncertainty resolution is an infinite game, an ongoing journey. That’s why various parts of the capital stack exist – angels, VCs, PE, public markets, debt providers, etc. Each has a mandated uncertainty threshold that they like to operate at, and therefore, are likely to become participants in a business only when that threshold is reached. This will also reflect in how they do asset allocation & portfolio construction.

Taking my own context, this concept of resolving uncertainty also applies to emerging managers who are relatively early in their journeys (Funds I-III). GP fundraising is a slow burn, extremely long enterprise sales process. Following this framework of trying to reduce as much uncertainty on multiple fronts related to the Fund can perhaps help sustain multi-year momentum through this grueling process.

Alec mentions that the ultimate uncertainty resolver for a GP is DPI – it converts all the uncertainty into cash. And this is the reason why he pushes all his portfolio GPs to get into DPI as quickly as possible.

Investing in the “Real India”

While many Indian VCs are chasing Bay Area deals, I’m finding some of the most compelling opportunities in India-based founders building unsexy hardtech products with global ambitions.

This tweet from Anand Lunia (IndiaQuotient) really got me thinking last week.

Here was my response to him:

I think Anand is bang on here. Based on my interactions with several large US-India cross-border VCs, they are all looking to invest in the Valley and are mostly on the lookout to back Indian-origin founders.

This, of course, is a great way to ride the current AI momentum in the Bay Area. At Operators Studio, this founder persona is also one of my core focus areas in AI/ enterprise software, having backed the likes of Loop (AI for Restaurants), Confido Health (Healthcare AI), Noon (AI for Designers), Soulside (Behavioral Health), Muro AI (Construction AI), and Guard0 (Cybersecurity).

However, these are also some of the most coveted and competitive deals. The Valley-immersed Indian founder isn’t an unknown or undiscovered phenomenon today, unlike, say, when the likes of Nexus Venture Partners started focusing on it in the 2010s.

For smaller, operator-led funds like Operators Studio that write $100-300K collaborative checks, I still have a shot at winning over the founder with a sharply-defined value-add. But for larger funds that are looking to lead rounds/ put sizable capital to work in these Valley deals despite being largely offshore brands, their right-to-win against Valley competitors is unclear.

But then, how do they play AI? I understand their predicament.

One of my core beliefs about venture is that the greatest alpha lies in backing undiscovered founders, the non-consensus teams and companies that eventually turn out to be “right”. I have written about this idea before in multiple posts, including An Investing Framework to Find Startup Diamonds, A Talent Scout Mindset For VC, and One Person’s Conviction For Easier Fundraising.

Ergo, my investing strategy has two pillars – in addition to backing Indian diaspora founders in the US, I also back founders based in India but building for global markets.

Double-clicking on the latter bucket, in terms of markets, I am most excited about hardtech products that are not only core building blocks for the Indian economy, but also have the potential to be exported eventually.

These startups are being built in the “Real India”, as Anand puts it. These founders aren’t necessarily hanging out at Third Wave and Beanlore in Bangalore in their hoodies. They are building messy businesses, require workshops & facilities to be created in far-flung areas, and require hiring & financing strategies that look quite different from the classic Bay Area or Bangalore playbooks.

To illustrate this, let me give you a sample of companies I have recently invested in or am deeply evaluating as we speak:

  • Naxatra Labs – motor-tech that can beat Chinese and European products. Manufacturing in Ahmedabad.
  • Astrophel Aerospace – space propulsion engine components like valves & pumps. Developed and manufactured on the outskirts of Pune.
  • Planet Material Labs – new-age composites for logistics boxes and containers. Developed and manufactured on the outskirts of Gurgaon.
  • Climate & materials startup that has developed a low-carbon, cement-alternative material for concrete mixing. The concrete unit is on the outskirts of Bangalore, and so dusty that one needs a layer of masks just to breathe.
  • Battery-tech startup in Ahmednagar (3 hrs from Pune) for new-age use cases like Robotics, Defense, and Power Tools.

It’s ironic that while Indian VCs are shuttling to the Bay Area, trying to invest in deals here, as an SF-based fund, Operators Studio is actively investing in India-based founders building real, no-nonsense, unsexy hardtech products with massive cross-sectoral local and global TAMs and market demand that needs no validation.

One final point – while I actively co-invest with several major domestic and global funds in India, specifically in this second pillar of “India-based hardtech founders”, my worldview has resonated the most with Rainmatter, the prop money fund of Zerodha founders.

From what I have observed, the Rainmatter team is smartly identifying problem statements that are core gaps in the Indian economy and society, and backing founders that have an authentic commitment, passion & and domain-fit with these problems. An unsolicited kudos to the team!

Large funds have a tendency to go top-down in venture capital, spending a lot of time understanding markets and building thesis & maps. While this probably helps in Series B & beyond, my view is that at Seed and Series A, going bottoms-up is more beneficial. And founders are the best suited to observe and identify these opportunities.

At least this is the approach I am taking at Operators Studio while looking to back India-based hardtech companies with global ambitions.

Are Solo Founders Venture Backable?

With prevailing startup (particularly accelerator) dogma around solo vs multiple co-founders, the reality of how businesses actually get built the world over is quite different.

In various contexts, both in terms of new deals I am evaluating as well as some recent developments in the portfolio, I have been mulling over how I should be thinking about backing solo founders.

Classical VC guardrails tell me to stay away from solo founders. YCombinator has almost made the classic “two co-founders” team into startup dogma. In my past venture roles, I was taught to filter out solo founders in the first pitch meeting itself.

However, my lived experience of my own portfolio, as well as observing many more startups in various situations, tells me that this discussion deserves much more nuance:

1/ Anecdotally, at the pre-seed/seed stage, I have noticed that at least 20-30% of founding teams end up separating in the first 24-36 months.

Btw, this number aligns with the below analysis ChatGPT put together on this question:

So the reality is, as a seed investor, while you might be drawing comfort in backing the classical 2-person, “technical + GTM” co-founding team, it’s very likely to be a false signal, and if the company ends up surviving the valley of death, it will most likely fall back on one founder.

2/ Even in classical 2-3 person co-founding teams, one founder is usually the Alpha, the lead who inspires the core of the trust & conviction that investors build around the company. In almost all cases, the Alpha is also the CEO of the company (if the Alpha isn’t the CEO, then the team has bigger problems).

In my experience, until the Alpha doesn’t give up on the company, we all stay in the game, as even after team splits, the Alpha has the vision, tenacity, and storytelling skills to hire new talent, and even onboard another set of earned co-founders.

So, with the probability of founders splitting being significantly high, even while backing a full-stack founding team, the reality is that we as seed investors are really betting on the sole Alpha founder as the core kernel of the company.

3/ This is the one I have a real pet peeve with – another YC dogma that founders should always split the equity 50-50.

I understand what YC is trying to say by propagating this idea, and maybe it even makes sense in the specific context of its target persona: young, out-of-college people ganging up together on short notice to “attempt a startup”.

In my experience, this notion of a 50-50 split has turned out to be entirely disconnected from the overarching ground realities of how businesses the world over get built, how teams get structured as per both the risk each person takes as well as the tangible value they bring to the table.

One of my driving principles around early-stage investing is that, irrespective of tech or non-tech, AI or non-AI, Silicon Valley or India, some fundamental principles of “how to build a new business” never change. Things like you need to target a very clear customer persona, your value proposition should achieve both the job-to-be-done and do it in a differentiated way against competition, the core unit economics of your business should be profitable, you need to be present where your customer is to drive distribution, the lowest cost producer will always have an advantage, etc.

These are principles that keep getting repeated across generations – from Charlie Munger & Warren Buffett to Sam Walton and Jeff Bezos. You can almost call them “Business Laws of Nature”.

I have repeatedly stress-tested and validated these principles both as a repeat founder myself as well as a venture investor for more than 15 years now. Each and every time, I have found these principles to be true, and whenever anyone has tried to pitch, argue, or sell any notion that violates any of them, the person has lost, and the principles have held their ground.

A dogmatic 50-50 equity split rule is in violation of these business laws. I haven’t heard even one generational founder, be it 1st-generation or a family business, ever talk about it. These people have built companies that have stood the test of time and delivered true value for decades to both customers, employees, and shareholders. If this isn’t something that they have acted on or professed, I am inclined to believe that this 50-50 split is more of a Valley YC dogma and shouldn’t be taken as set-in-stone advice.

In fact, let me give you a different, and might I say radical, perspective from the non-tech, real operating business world. In his amazing book with a super-cheesy title – “How to Get Rich”, OG media founder Felix Dennis (who started as a college dropout, with no family money, created a publishing empire, founded Maxim magazine, & made himself one of the richest people in the UK) had this to say on ownership (sharing excerpts):

To become rich, every single percentage point of anything you own is crucial. It is worth fighting for, tooth and claw. It is worth suing for. It is worth shouting and banging on the table for. It is worth begging for and groveling for….

…Never, never, never, never hand over a single share of anything you have acquired or created if you can help it. Nothing. Not one share. To no one. No matter what the reason—unless you genuinely have to.

So, if you refuse to believe in the 50-50 equity split startup dogma, implicit in this is the argument that, more than solo or multiple founders, what really matters is whether the ownership split between the starting bunch of individuals makes sense from the perspective of the fundamental business laws of nature.

TLDR: the devil is in the details…

Therefore, my working POV is not to discount single founders straight-up. Especially if the founder is a compelling Alpha, has shown the ability to hire top talent, and execute on the business, it makes sense to dive deeper into the L2 and L3 level details around the genesis history, why the founder has chosen this operating model, what it says about their behavior patterns, and what their go-forward thinking is on this topic.

Note: if you are intrigued by this topic, check out one of my earlier posts – ‘Co-founder Breakups’, wherein I share some insights/patterns from various co-founder breakups I have witnessed over the years.

My Blindspots As A VC

On misreading founders, moving too fast, and why portfolio construction is my safety net.

Over the past few weeks, I have been doing a retrospective analysis of the Operators Studio portfolio. Given that I have adopted a “founder-first” investing style, I have been specifically trying to analyze cases where I got a wrong read on the founder.

Startups can struggle/ fail for N number of reasons. Especially as a seed investor, most of these externalities are out of your hands. Therefore, while doing such analysis, I like to keep reminding myself not to fall into the “Resulting” trap.

Annie Duke defines Resulting as “the cognitive bias of judging a decision’s quality solely by its outcome, rather than the decision-making process itself”. Top poker players are really good at avoiding Resulting while studying their plays post-facto.

So when outcomes turn out to be negative in a seed investment, rather than fixating on “why the company failed?”, it’s more useful to ask “how should the investing process be improved for future deals?”. And in my context, it’s typically the process of evaluating the founder.

Coming back to the retro analysis I have been doing on my deals, I have been able to identify a couple of blind spots that seem to be showing up repeatedly. Here’s a deep-dive on each of them:

1/ Getting blindsided by the founders’ pedigree

Sometimes, founders show up with just a jaw-dropping pedigree – IIT Bombay Computer Science, Stanford PhD, top leader at Big Tech etc. This pedigree is typically also accompanied by a strong show during the pitch meeting, demonstrating differentiated access & networks, and just overall self-belief that screams “I am awesome!”.

Looking back on such pitch meetings, it’s very easy as an investor to get carried away by this pedigree & show. However, as I am learning with some pain, pedigree doesn’t automatically translate to the many enablers of eventual success in a founder – grit, the ability to pound pavements selling stuff, controlling your ego, resolving conflicts, and frankly, eating glass during tough times.

One of my key maxims learned over a long venture career is to always distinguish whether the person is a strong professional or a (potentially) strong founder. Both are very different things.

Even with this hard-earned insight, it turns out that executing this day in and day out is extremely hard. Even the best of us get swayed by past track records.

This retrospective is a self-reminder to bring back this maxim as part of the core of my investing process.

2/ Pulling the trigger without spending enough 1:1 time with the founder

My natural style as an investor is highly instinctive. This often manifests in quick Yes’s during the first pitch meeting itself.

Over a long career, this has mostly benefited me. Almost all my major wins were quick Yes’s. But there is a difference between “moving with a pure initial instinct” and “being trigger-happy”.

In a few cases, I have pulled the trigger without spending enough 1:1 time to peel the layers on a founder. If I go one level deeper, in most cases, this was due to some fear – fear of being on the wrong side of deal heat & not getting allocation, fear of feeling disadvantaged as a relatively small check writer, fear of deployment pressure (“I need to do a deal this month”).

These fears are particularly amplified by the current investing environment, where seed deals move in days, where lead VCs have particularly sharp elbows, and where many founders fall prey to becoming over-transactional during the fundraising process.

I have come to realize that these fears are incredibly counterproductive to a long & sustainable venture career. Seed investing is at least a decade-long journey that is full of ups and downs. An important way to create a strong initial foundation that then delivers a consistently good experience to both the founder and the investor over multiple years is to dedicate enough effort upfront to build trust & a mutual connection.

When this trust & connection exists, the wins taste exponentially sweeter, and the pain of losses gets blunted.

Any diversified enough venture portfolio of decent quality is highly likely to catch at least a couple of winners. But the key to amplifying success over decades, both as a founder and as an investor, is to play repeated games with a set of highly trusted people. The starting point of these relationships is almost always the foundation of trust built during the first-ever transaction between two people.

Even empirically, if I study all my deals since 2011, whenever I have built a strong mutual connection with a founder upfront, the eventual outcomes have almost always been positive economically and/or experientially (the randomness has only been in “how positive?”).

Therefore, this is again a self-reminder that I should ensure I am devoting enough upfront time to build trust & a mutual connection with new founders I meet. And once I have built an informed instinct around a new person, given I now have 15 years of on-ground data on how it usually pans out, I should default to trusting & following my judgment without any fear.

The final line of defense against these blind spots…

Even at our most introspective and self-aware selves, we still have the same monkey brain that has been wired by hundreds of thousands of years of evolution. Even the best of us should expect to keep falling prey to various kinds of cognitive biases and blind spots across multiple deals.

The mark of growing up as a venture investor is accepting this truth and then acknowledging at a deep, internal level that the only line of defense against our own foolishness is portfolio construction.

As a young VC Associate way back in 2011, I used to always wonder why OG VC GPs kept harping on portfolio construction, spending hours poring over Excel sheets that frankly, had most of the numbers pulled out of thin air (an undeniable fact of any financial modeling efforts in early-stage venture).

Similarly, when I decided to come back into venture in 2023, I kept hearing how LPs care a lot about portfolio construction. And that it is the difference between someone being just an investor vs being a professional fund manager.

Studying my still fledgling portfolio today, I can already see how following even a rudimentary portfolio construction strategy has saved my a** several times already, and its impact will manifest in major ways over the remaining Fund life.

When you experience something working in real life, your buy-in starts growing organically, giving it higher chances of eventually becoming a sustainable habit. I can see this playing out with my rapidly growing appreciation of all the beauty and nuances of portfolio construction.

In fact, I can guarantee that 2026 will see my study and obsession with VC portfolio construction go many levels higher, and thankfully, I don’t need a New Year’s resolution to make it happen.

Note: My next post will be on some portfolio construction insights I have gleaned from listening to Roger Ehrenberg, Founder of IA Ventures. Stay tuned for that!

The “Mission-Pitch”

To break through AI noise in the Bay Area right now, figure out your “why should anyone care?” pitch.

Important tip for international founders who have recently relocated to SF and are looking to build their networks here for customers & fundraising:

As you meet new people, it’s important to have an abstracted-out, 10-20 second mission pitch that clearly outlines “why should anyone care?”.

More than market analysis, facts & data, this pitch should have a strong underlying emotion that can immediately connect with someone who might have an overlapping world view.

There is immense noise in the Valley right now, and every space/ vertical has tens of startups going after it. All pitches sound similar, most founders have similar backgrounds, and all content looks the same.

Breaking through this clutter is hard, especially for folks who don’t have a high-signal, prior track record in the Bay Area.

In these cases, dialing up the personal authenticity quotient big time, and having a clear “Mission-Pitch” with a strong emotional pull can be extremely helpful in winning over new relationships.

In an ecosystem where every decent startup is flush with capital and early traction, founders need to 1) go deep, 2) go sharp, and 3) manage the psychology of market participants in order to stand out.

Default-Alive

Default-alive vs growth-at-all-costs: how founders can balance survival, PMF, and fundraising windows to play the long game.

As a founder, if you are *truly* in it for the long haul, it’s in your absolute best interest to get to “default-alive” as soon as possible.

Default-alive ensures you can play the right long-term game, adopt an operating strategy that doesn’t over-optimize for the short term, and execute in partnership with stakeholders (employees, customers, partners, investors) that are deeply aligned with you.

And then, when all the pieces of the orchestra are starting to come together in the beginning notes of a beautiful symphony, that’s when you raise maximum capital and step on the gas.

You know what the best part is? In this case, you continue to be the orchestra’s conductor for a long time, with maximum ownership & ultimate value capture.

Now, there is a Catch-22 here. Getting to default-alive usually comes at the cost of rapid growth. And as we all know, VCs index on growth while evaluating startups. So does the company become unfundable while on the default-alive path?

My response is, it depends on the market dynamics, competitive intensity, and progress towards PMF/ how much time & effort will it take to get PMF (eg. h/w vs s/w, large enterprise contracts vs PLG/prosumer etc.).

That’s why it’s a very nuanced and contextual decision that founders need to think through, ideally jointly with seed investors.

Private market windows are fickle and keep opening & shutting down based on sentiment around the domain, progress in the business, the founder’s storytelling etc. As a founder, one has to be able to survive (often at the cost of growth) when the window is shut. And then create momentum & raise again when the window re-opens and/or an inflection point gets reached in the business.

In the majority of cases I have seen, it plays out like this:

Company raises a round -> burns towards finding PMF -> is unable to raise the next round, either due to not hitting adequate milestones and/or market conditions -> founders raise a bridge and continue with less resources.

It can play out in 2 ways from here:

(1) No PMF possible, founder loses conviction, shut down, or

(2) Grind towards early PMF, still have conviction, try to raise again.

In (2), if you can raise, then it’s great. You have a PMF’d business + capital to deploy and accelerate growth.

However, if you aren’t able to raise and you aren’t default-alive, then even after finding that elusive PMF (which 9 out of 10 startups are unable to find ever), you can’t do anything with it and have to shut down.

But, if you have PMF and are default-alive, then you can still continue the journey (perhaps with lower growth) until you either hit another inflection point in the business and/or the private market window opens up for you. In which case, you then raise, accelerate growth, and continue building.

TLDR: If you can be patient and be willing to grind hard upfront without seeking external validation, being default-alive is one of the best ways to live & build!

The Applications layer in AI is getting brutal

This story can play out in many ways.

Each use case has tens of funded companies. Each is churning out features rapidly, getting to parity faster than customers can imagine. Each has early traction and a worthy claim to win.

What will it take to eventually win the game?

1) Will it be about surviving the multiple shakeouts that each vertical/ use case will eventually see? Letting capital-bloated companies implode and letting the “tourists” give up…

2) Will continued product obsession be the key? Essentially refining the product beyond where others give up…

3) Will choosing non-obvious wedges/ ICPs be the way to differentiate & survive? Serve markets that others are choosing to ignore/ finding unviable to serve…

The technology is still so early, and we clearly have a few decades of upside left. Yet, there is a gold rush going on right now, which I am sure will push people to optimize for the short term.

In that case, will founders who are truly playing the long game ultimately win? Or is it more important to “surf the wave” in the present?

The former will look unattractive in current times and hence, will be undervalued and “contrarian”. The latter will appear to be imminent winners, yet could flame out.

Just some thoughts running through my head!

Why Cutting Losses Early Is the Hardest—and Most Crucial—Skill in Startups and Venture Capital

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:

Source: This Billionaire Quant Is Turbocharging His Trading Models With ChatGPT-Style AI

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.

Co-founder Breakups

Sharing some insights/patterns from various co-founder breakups I have witnessed over the years.

Recently, I received the sad news of a potentially powerful co-founding team breaking up rather acrimoniously. I had been tracking this team closely for several months now as a potential deal, and this happened right as the company received a seed term sheet from a Tier 1 VC.

Over a 15-year career in venture, I have expectedly seen several co-founder breakups, both in my own portfolio as well as those I have known well/ observed from the sidelines. This recent breakup got me thinking about any patterns/ insights I have noticed over several such instances over the years. Here are a few:

1/ Undergrad batchmates seem to have higher endurance

For some reason, I have repeatedly noticed that teams where the co-founders have been undergrad batchmates tend to survive much longer. Perhaps relationships born in those fledgling, relatively innocent years tend to have higher levels of subconscious trust and, more importantly, a sense of love and tolerance.

While it’s easier to find people with complementary skills and similar pedigrees (both of which look great on paper on the team slide), what keeps co-founders together is also what keeps people together in long-term marriages – having an underlying mutual respect & fondness, which leads to daily hours of fun as well as the willingness to both extend higher levels of tolerance to each other, as well as introspect and evolve to meet the other person midway.

Especially at the seed stage, company missions can evolve with pivots, but this mutual vibe is what keeps co-founders together across multiple iterations and often, multiple companies.

2/ Ex-colleagues and work friends seem to have a higher risk

My hypothesis here is that most people tend to put on a work personality at the job that suits their manager’s preferences as well as the company’s culture. Therefore, even after working with someone as a colleague, it’s very hard to know their real, full personality and values. In many cases, people end up misjudging mutual fit, especially when it comes under the immense pressure of doing a 0-to-1 startup.

Interestingly, this applies to colleagues at both large companies as well as startups. As an investor, I often hear pitches where founders say, “We worked together in the trenches of this early-stage startup and discovered this idea”. While this gives the impression of a strong set of founders germinating inside the cauldron of another startup, I have frequently seen such teams breaking up soon. While they do have the claimed early product and GTM skills they together learned at the startup, the mutual co-founder vibe & grit end up breaking under pressure.

3/ Co-founders coming together via common friends/ relatives, without a strong shared history, is a miss

I see this scenario a lot – one person decides to start up, spreads the word around for a co-founder, connects with someone via a really strong common friend/ relative, and both decide to partner.

In the majority of these cases, there is no shared history, and the team also hasn’t had the opportunity to spend enough time in the trenches going through the ups and downs together. When pitching to seed investors, they usually tell the story of “our skills are perfectly complementary, and both of us have met each other multiple times at this X/Y/Z person’s parties over several years, and developed a shared passion for this idea”.

In most cases, this ends up being a window-dressed story of the co-founding team and lacks the underlying bond & trust needed to grind out the tough times.

4/ “Earned co-founders” are solid

In many cases, folks start as single founders, surround themselves with early founding team members, validate, iterate, and get to early PMF with them, and during this journey, 1-3 people naturally come up and start playing a critical role in the management team. In a sense, they start playing the co-founder role without the title (or the equity).

I call these earned co-founders, and these are solid personas. In many of these cases, I have pushed the solo founder to look at these 1-3 people as core parts of the leadership team, if not as full co-founders, and have it also reflect in their equity at the appropriate time.