Most investors try to “slot” startups in their heads, whereas extraordinary venture outcomes lie in the “slot violations”.
A few weeks back, I was helping a portfolio founder put together the story and deck for raising the next round. This company is one of the true category-creators I have seen in my career and has now reached a PMF tipping point that will lead to explosive growth going forward. Customers and channel partners are literally pulling the product out of the company’s hands, and all metrics are going up and to the right.
Despite this, the founder was sharing how difficult it still is for him to explain the business, the market opportunity, and how this is an extremely differentiated play to investors. Having seen this startup’s thesis play out as an existing investor, my conviction on it is 200% but despite powerful operating signals, it’s still non-trivial to put together a narrative that investors “get” immediately.
This isn’t a new pattern. I have seen this repeatedly play out with truly groundbreaking companies, simply because most investors prima facie, try to “slot” the company in their heads within the first few minutes of the 1st meeting. These slots are pre-existing buckets created by years of pattern-matching, and not surprisingly, 90% of startups can easily fit into one or more of these slots – eg. big company exec stepping out to start an enterprise company, young engineers hacking a dev tool, repeat founder building in the same market, generalist founders executing really fast in SaaS etc.
The issue is this – history tells us that extraordinary venture outcomes are created in the narrative violations (or what I now call “slot violations”). These are companies that are hard to understand in the present moment, being built by founders who are quirky and/or with non-obvious backgrounds, or resulting from messy pivots. Well-known examples include:
When Evan Williams was shutting down Odeo and hacking around with a micro-blogging tool (which eventually became Twitter), it had no business model even in the foreseeable future.
Imagine how Canva looked as a deal when the founders came to the Valley to fundraise – an Australian couple, no revenue, competing with Adobe, raising at $25Mn cap.
Uber had massive regulatory risks that most investors couldn’t get their heads around.
Almost every major VC has mentioned Pinterest as a big miss. It was totally unclear how Pinterest could be a “business”. Ben Silbermann talks here about “why every VC passed on Pinterest“.
As a venture investor, I think a lot about what mental models to use in order to spot these slot violations. Thinking through the earlier discussion with the portfolio founder, it was clear that even though investors might struggle to slot the company at this moment, the market was clearly resonating with the product. In a way, the early adopters in the market had been educated by the founder and therefore, were already bought into the “insight”, whereas the existing mental models of investors were lagging in their appreciation of this insight.
I call this “Insight Arbitrage” – the delta between the market’s and investors’ understanding of a startup’s unique insight. At the pre-seed stage, this market understanding will be mostly qualitative and anecdotal. At the seed stage, this understanding will still be likely on a very small base of users.
Because a majority of investors find it hard to build conviction in the above two scenarios, an Insight Arbitrage continues to perpetually exist in the venture world. And I believe that this is where an opportunity lies for investors like myself to generate alpha, provided we show the courage to trust this arbitrage and put our money behind it.
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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Even the most well-intentioned founders often end up with a bad cap table. It wreaks havoc on everything from future fundraising to internal team dynamics.
I feel strongly about this topic & have been at its negative receiving end several times. Therefore, consciously dropping some harsh truth bombs in this post.
During my recent India trip, I was introduced to this amazing founding team building in the edtech space. Yes, I know! Byju’s and all. What can I say – I am a true contrarian.
This is a truly gritty team that’s been grinding in the space for several years (starting from their undergrad days at IIT) with minimal capital and seems to have now hit on a game-changing opportunity. They have signed a highly lucrative commercial contract, something that even massively funded companies in their space have been unable to crack.
This team is arguably the perfect example of the founder persona I believe in the most. In fact, these are the kinds of backstories I wait for. Intelligent founders with authentic passion for a large TAM, unique customer insights earned via frugal execution and strong leading signals of perseverance.
As I went through my investing checklist, this deal checked all boxes EXCEPT one. The one whose real importance I have learned only by burning my hands many times. In fact, this item is so important that I ultimately had to pass on investing in this startup because of it.
The deal-breaking reason is a messed-up cap table! Here’s the situation – with product-market-fit still being some distance away even after multiple iterations, the founders have already diluted 30%+ to 3 angel syndicates, even before an institutional round has been raised.
To add further pain, even the current round is being done at a relatively low valuation, mainly because of insufficient traction in the business as well as young founders lacking leverage in fundraising discussions. This round will make founder dilution even worse!
Based on my past experience with other portfolio companies, these highly diluted cap tables lead to 2 types of issues:
1/ External – follow-on VCs hate to see these type of cap tables. While they are themselves looking for 20-40% ownership in an institutional round, VCs also want to ensure founders have enough skin-in-the-game (equity ownership) to be incentivized to build the company for next 7-10 years. In addition to this, a 10-20% ESOP pool is also typically required to attract & retain talent.
Structuring an optimal cap table that balances the ownerships of founders, investors & employees requires having enough “space” in the cap table to begin with. Having a pre-PMF cap table where angels own 30-40% of the company leaves no room for this.
In fact, cap tables are such a big issue that I have seen financing rounds of my portfolio companies get nipped in the bud, even though the business itself was on a strong path.
It’s important to add another nuance here. In teams with multiple co-founders (3+), follow-on investors also care about the individual ownership of each founder. Especially, the ones considered “mission-critical” for the business (eg. the market-facing “CEO”, the one who has built the technology & is managing it “CTO”). Therefore, having large founding teams can add additional structuring risk to the cap table.
2/ Internal – messed-up cap tables don’t piss of just VCs. I have first-hand seen them creating internal issues amongst the founders, around misaligned incentives. A few real-world examples from my experience:
1 of the 3 founders is pulling much more weight compared to the other 2. As they start getting increasingly diluted in situations like above, resentment starts to surface regarding ownership % of specific individuals not accurately reflecting the value they are creating/ not creating. A zero-sum mindset sets in, where the % of the pie starts mattering more than the size of it.
Because angels own a significant portion of the business as a block (often larger than each of the individual founders), they feel they can dictate how the business should be run operationally & start meddling in execution, creating unnecessary overhead for the founders.
Because earlier rounds have been done at low valuations, both founders & existing angels go into a dilution-insensitive mindset. It manifests in many adverse ways including internal bridge rounds being done at relatively high dilutions, taking low prices for small external rounds etc.
1 of the 2 co-founders starts losing interest in the business (happens especially when fundraising has been hard). While this founder is checked-out & is just going through the motions, the person still doesn’t want to let go of any of his equity. This causes resentment in the other founder, who continues to believe in the business & wants to build it over the long term.
The excessive dilution scenario of the edtech startup is just one type of messed-up cap table I have seen in my investing career. Some other real examples include:
Unbalanced ownership between founders – Eg. 2 so-called “co-founders”, one owns 80%, other owns 20%.
The other extreme of unbalanced ownership, where an equal co-founder isn’t creating equal value. Eg. a close friend of the founders being given equal ownership, even though the person has no specific skillset or value-add to offer for the business.
Non-operating co-founders with material ownership – Eg. someone who helped get the company off the ground, perhaps incubated it in some way, but has no operating role in the company. Yet, continues to hold founder-level equity.
Too many non-institutional/ unsophisticated actors on the cap table – Eg. multiple angel networks, AngelList syndicates, individual angels & advisors crowding on the cap table.
I often get push back from founders that they can solve these cap table issues relatively easily. Some statements I hear:
“[FOUNDER] We can find an investor to buy out all the angel networks on our cap table.”
“[FOUNDER] I am already talking to XYZ to relinquish his balance equity”.
“[FOUNDER] Having that non-operating founder on the cap table is not a big deal. He is willing to sell in the next round.”
“[ANGEL NETWORK] If the company gets a term sheet from a VC, we will claw back some equity to the founders.”
[FOUNDER] It doesn’t matter if angels own 40% of the company. Ultimately, the founders are running it.”
Time for some harsh truth bombs here:
Most VCs filter out startups with messed-up cap tables at the initial stage itself. Forget getting a term sheet, you are unlikely to even enter diligence.
Secondary deals are really hard to pull off, unless the fundraising market is red hot and/ or the business is hitting it out of the park.
Once any person or entity has equity in the company, it’s extremely hard to get them to give up even a small portion of it.
History is riddled with countless examples of large public & private companies where a person or entity with even a small % ownershipwill assert selfish authority during tough times & at key decision points.
To summarize, founders & early-stage investors need to be aware of cap table risks & their downstream impact on the company’s future. During any financing round, while it’s understandable that everyone’s top priority is survival & getting the cash to be able to live & fight another day, it’s also important to be strategic & think through the long-term consequences of the dilution being undertaken, as well as both the type & quantity of new actors entering the cap table.
Closing out with something I frequently tell founders on this topic – “Every time you are considering a new dilution on the cap table, think of it like getting a tattoo on the face. You have to live with its consequences every day going forward.”
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This Generative AI wave is both a tremendous opportunity over the long term and a ticking bomb in the short term.
Sharing a framework to navigate & eventually thrive in this hype cycle as a tech investor.
As the Generative AI fire rages on with full force, I have been thinking through the best approach for me as an operator-angel to navigate the current environment.
What makes this AI wave particularly challenging for venture investors is that it’s full of contradictions depending on what time horizon you choose to view it from.
In the short term…
But over the long term…
The space is clearly in the early stages of the hype cycle.
It’s perhaps the most defining technology shift of our lifetime, likely to drive a socio-economic change like the agrarian ➡ industrial age transition.
Though AI is “consensus” in Silicon Valley, the agreeing crowd has a track record of being right quite often.
The only way to generate outlier returns is to be “non-consensus-and-right”.
Early entrants are likely to attract significant venture capital, potentially generating quick mark-ups for early investors.
Like previous platform shifts (eg. Web and Mobile), early entrants are unlikely to be the eventual winners (there were at least 8 major search engines before Google came along).
Pre-product stage startups commanding rich valuations is perhaps justified, given investor-demand & the hockey stick growth potential of the space.
The best way to generate above-average returns is investing in the best companies at reasonable valuations.
Clearly, there is a time horizon tension at play here. As an investor, one doesn’t want to miss out (or appear to have missed out) on the earliest stages of the greatest platform shift in our lifetimes. At the same time, as the recent Web3 wave taught us, maintaining discipline during hype cycles is key to ultimately realizing cash-on-cash returns.
To manage this tension & navigate this wave in a risk-adjusted manner, I have been using a framework I like to call “Macro-Optimism, Micro-Skepticism”. This approach involves always keeping two opposing emotions in your mind while evaluating opportunities:
Macro-Optimism – a strong belief that AI is going to be a super-powerful force of positive change in our lifetimes. Having this belief should translate to an immense yearning to learn as much as possible while the tech is still embryonic. It should also translate to keeping an open mind about its possibilities & having the imagination to think about “if it works in this way, what could this idea become?”.
It should lead to a low-ego & eyes-wide-open mindset while meeting founders working on the frontiers of AI. It should also lead to having the awareness to not underestimate any person or idea, no matter how divergent it sounds within your current lens.
Micro-Skepticism – realizing that in the initial stages of a hype cycle:
(1) most ideas will turn out to be invalid, as how a major platform shift shapes the future is, to quote Brad Gerstner of Altimeter Capital, “unknown & unknowable”. And;
(2) the space will initially attract a lot of low-quality actors, including scammy founders, tourist investors & others with a get-rich-quick mindset.
Realizing this should translate to looking at each new investment opportunity with default-skepticism – keeping the bar high, asking hard, intellectually honest questions & calling BS when you see it. This approach requires running a rigorous conviction building process, keeping FOMO at Bay & staying true to your investing value system.
Of course, parallel processing these opposing ideas is easier said than done. As I wrote in my recent post “Investing Landmines”, we are susceptible to many biases that get further exaggerated during hype cycles. Some ways to get better at managing them include:
1/ Leveraging complementary peers or team members that can keep you honest & call out your blind spots.
2/ Using some sort of light-weight system to ensure you are asking all critical questions & spotting typical pitfalls. As an example, learning from the likes of Atul Gawande & Mohnish Pabrai, I have found simple checklists to be helpful.
3/ Consciously sleeping on a deal before pulling the trigger, giving the ‘think-slow’ part of your mind enough time to digest facts.
Ultimately, am excited at the opportunity this AI wave is providing for investors with a growth-mindset to test & fine tune their systems. While I have no doubt that all of us in the tech ecosystem will benefit from this platform shift one way or another, I also hope some of us emerge wiser from it.
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Successful investing, be it in stocks or venture capital, requires avoiding behavioral landmines at every step of the way.
Here are the major ones that every investor should have top-of-mind.
Successful investing outcomes, be it in public or private markets, are typically the result of the following sequence of events:
#1 Real world research and/ or experience germinates a non-consensus view.
#2 A conviction-building process for this view helps in getting to a probabilistic distribution of future outcomes.
#3 Courage helps in putting real money behind the view.
#4 If all goes well, the non-consensus view starts turning out to be right (non-consensus ➡ non-consensus-and-right).
#5 After a certain hold-out period, the market provides a liquidity opportunity that is attractive-enough for the investor to cash out.
Investors have to fight specific pitfalls at each step of this sequence:
For #1, it’s the herd mindset that evolution has deeply wired into our psychology. We seek comfort in others validating our views, which is the exact opposite of what contrarian thinking entails.
A by-product of herd mindset is FOMO, which has quickly become the dominant driving emotion of modern urban life.
For #2, it’s hasty bias-to-action. Individuals have a tendency to overcommit & get positively biased very quickly, often even before adequate investigation. Every investing action releases dopamine, which makes individuals feel powerful & good about themselves. Therefore, even sophisticated individuals are quite trigger-happy & demonstrate a tendency to “just do it”.
Running a solid investing process calls for a scientific approach that starts with default skepticism, generating a hypothesis & then putting in the work to approve/ disapprove it with intellectual honesty. PS: check out more about bias from consistency & commitment tendency in this amazing write-up by Charlie Munger on Farnam Street.
For #3, it’s fear. Fear of losing money, of losing face, of future distress. Am sure we all have seen many examples around us of folks who did a decent job at #1 and #2, but never pushed chips on the table. That friend who spotted Google at the earliest stages. Or who had heard of Bitcoin from credible sources before everyone else. Or who was seeing East Bay become the new South Bay or Gurgaon become the new Delhi.
Am also confident that as children, each of us saw our parents hold a non-consensus view for those times & not act on it, which in hindsight, would have led to asymmetric gains.
For #4, it’s lack of patience. Markets typically take time to appreciate & subsequently reward non-consensus views. This period can range from a couple of years to sometimes more than a decade. Holding out with a view that doesn’t match the crowd for long periods of time is extremely hard psychologically for even the most experienced investors.
Humans by nature seek thrill & quick rewards. While a lucky few are born with the delayed gratification gene (like this Nevada’s Pension Fund Manager), for others like us, we have to train ourselves to get better at it.
For #5, it’s greed. Once the market slowly starts appreciating your non-consensus view, given its pendulum nature, it then starts gradually moving towards the other extreme. At a certain point in time, it will soon provide windows where very attractive, & sometimes egregious, returns can be booked. Case in point: after the Nvidia stock stayed flat for several years, the recent AI-fueled stock run-up is finally providing an opportunity for insiders to cash-out.
But then, greed starts kicking in. Maybe hold-out longer for even better returns? This is where the discipline of taking chips off the table & booking profits becomes really important. However, this is really hard to do when investors have faced a long lean period & are now starting to see things finally go up. As legendary fund manager Mohnish Pabrai often says – the art of when to sell is the most difficult.
To summarize, the key to successful investing is recognizing and working towards actively avoiding the above landmines at every step of the way, most of which are behavioral.
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In venture investing, there are obvious stars in the portfolio that generate returns. But what about the ones that are struggling?
I believe that spending time with the underdogs offers the opportunity to learn & build reputations. Here’s why.
During a recent brainstorming session with one of my VC friends, the topic of bandwidth allocation between high-performing “stars” and struggling “underdog” portfolio companies came up. In the flow of the conversation, I ended up saying this:
Star portfolio companies will likely generate returns, while the struggling underdogs offer the opportunity to learn & build reputations.
There is an inherent dichotomy in managing a venture portfolio – the best-performing companies require little investor bandwidth & yet, have high probability of success while the ones struggling demand an inordinate amount of effort & yet, have low odds of success. Brad Gerstner of Altimeter said this in a different way during a recent fireside chat with Mubadala:
If this founder relies on us to succeed, then we chose the wrong founder. Our job is to increase the probability of success, not create the success.
Brad Gerstner, Altimeter Capital
Given this dynamic, it’s natural that purely from an opportunity cost optimization perspective, venture investors will be drawn to divert bandwidth away from struggling companies & towards forward-looking activities like triaging & protecting likely winners or sourcing new deals.
However, as an operator-investor focused on the pre-seed & seed spectrum of financing, I tend to view this tradeoff differently. Personally, I believe in spending time with struggling portfolio companies & supporting their founders as they guide the ship through choppy waters. Not for emotional or moral reasons, but because it makes execution sense in really early stages of venture investing:
1/ Because it’s unclear who will eventually win: till Series A, which is typically an acknowledgement that the company has reached product-market-fit, both “high performing” & “struggling” are loosely defined, temporal phases of company building. Companies will move in & out of these buckets during the up-and-down journey towards PMF. Only by spending enough operating time can an investor develop independent judgement on each company’s potential, quality of execution & what all stakeholders should be doing to tip the scales & increase the probability of achieving PMF.
I call this “building conviction” – something that Paul Graham clearly did for Airbnb by closely observing how the founders were building & iterating on the ground. This is what gave him the conviction to bat for the team in front of top VCs even when a majority of them were just not seeing it.
The alpha of OG venture investors like Paul Graham is their ability to see the kernel of a “top” company within a “presently struggling” one. This happens only by spending the time to closely track the founder’s execution approach & mindset. Reproducing some of the email exchanges between PG & Fred Wilson of USV, to highlight this (Source: Paul Graham’s post from March 2011)
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2/ Because you learn what is not working: venture investing is a feedback loop business. It’s an infinite game where the goal is to keep improving daily by learning what works & doesn’t as the world evolves & incorporating the lessons back into your systems.
In my experience, spending time with companies in troubled waters helps absorb lessons not available anywhere in the physical or digital world. Be it co-founder conflicts, screwed up cap tables, botched hiring or excess spending, these human experiences are worth their weight in gold, and reflecting them both in front of other portfolio founders as well as in your own investment process going forward, is key to tilting the playing field a few degrees in your favor. Cumulatively, this can add up to a huge competitive advantage over a long period of time.
3/ Because fighting till the last breath is a DNA: while what Brad says above is true, especially for growth stage companies which is where Altimeter operates, even the best founders pre-PMF need a lot of support & coverage for their gaps & blind spots. The best venture investors strive to create delta on the “increase the probability of success” part of the job, which is why while capital is a commodity, individuals GPs that move the needle during a company’s long lifecycle are rare & so in-demand.
I remember listening to Doug Leone of Sequoia at an event a few months back where he mentioned believing in fighting alongside the founder till the last day of the company (also reflects his tough New York Italian upbringing!).
My organic investing style is cut from a similar cloth, wherein I focus on bringing a company-building DNA to every cap table I have been a part of. Though, it hasn’t been without some self-doubts, as there is no immediate fruit to show for all the labor this approach demands.
Case in point being an erstwhile portfolio company in queue management software. I was literally the first check into the company as an angel way back in 2015, and also helped syndicate that first round. About 2 years in, the company was out of cash, all employees had to be let go, 2 co-founders jumped off the ship, and the remaining 2 founders were trying to engineer a pivot from a consumer app to an enterprise use case.
On paper, this would look like a dead duck to any sane person barring 3 people – the 2 remaining founders and me! We kept pushing on, literally on fumes. I remember having many late-night operating sessions with the founders every week for almost an year, in parallel to my day job at Alibaba & also being an expecting first-time father. In fact, I remember my better half asking me more than once – “why are you burning yourself up over a small angel check? Is this worth the opportunity cost of your time as a Director at Alibaba?”.
As I now reflect on these questions, I feel it’s all about the DNA of doing whatever it takes alongside founders. Long story short, the company pivoted successfully, crossing $1Mn ARR at high profitability. The business started throwing up so much cash that investors got multiples of their investments back via dividends, with founders also receiving significant cash-payouts, and deservingly so, for their grit & sacrifice. It didn’t become a unicorn or a household name but left everyone net-positive.
This experience left me with many operating learnings & a lifelong friendship with the founders, whose next company I have promised to back again. Even till today, I use the mental model from this investment while looking for both positive & negative leading signals in any new team I meet. I have no doubt this experience is helping me sow the seeds of future success.
After more than a decade of experience both as an institutional & individual investor, I have only now come around to accept my nature of not giving-up on people & companies that are struggling. It’s part of who I am and perhaps, my alpha as an investor.
I don’t know if this is the smart way to do venture investing or not, but I would like to leave you with this idea – fighting for the underdog companies will at the minimum, help you learn some valuable lessons & build your reputation as an investor that in turn, will create future value in more ways than you can imagine.
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In my 1st year as a VC, I was fortunate enough to source 3 of the best enterprise startups built out of India over the last decade.
Reflecting on what these companies looked like before they became massive successes and the lessons that taught me about the best way to approach venture investing.
In my first year as a VC Associate in 2011, I started supporting a GP who was native to Chennai, already had some portfolio companies there and was informally leading coverage for the region. Naturally, I started visiting the city regularly and was perhaps one of the few VCs at the time who was spending significant bandwidth in the ecosystem there. And mind you, this is way before the city became the SaaS powerhouse it is today. I spent the most time in events around IIT Chennai, especially in the Rural Technology & Business Incubator (RTBI) there. This is the time when Zoho wasn’t a household name yet, and a few interesting startups like Stayzilla and Ticketnew had just started to emerge.
Candidly, I used to feel a little foolish every time I boarded the flight to Chennai. Was I just wasting my time by not covering Bangalore & Delhi? Which venture-backable company could I realistically hope to find in an IIT’s incubator, that too one which had the word “rural” in it? While my colleagues were neck deep in sourcing hot eCommerce deals from Tier 1 hubs, was I missing the boat by spending time with boring enterprise software & niche consumer Internet companies started by these humble, grinding-type founder personas?
What I didn’t know at the time was that meeting founders in an under-covered but growing hub like Chennai was actually a competitive advantage, a potential “edge” that was there to be leveraged. It led to me meeting two of the best enterprise software founders from the last decade, at a time when both companies were fledgling – Girish Mathrubootham of Freshworks and Umesh Sachdev of Uniphore. My guess is I was also one of the first VCs to ever meet them.
I met Girish during a really nondescript startup event in Chennai. He wasn’t even pitching there, and the organizer randomly introduced us after the event. I still remember Freshdesk had 25 beta customers at the time. I took the deal back to the senior team; we had one call with him but didn’t end up investing for a variety of reasons. Talk about missing the deal-of-the-century!
While meeting Girish was more serendipity, I give myself more credit for spotting Umesh. I was the only godforsaken VC who had built a deep relationship with the RTBI team at IIT Chennai. As part of one of my visits, the lead there introduced me to Umesh & Ravi. They were building Uniphore out of the lab there, with the active support & guidance of Prof. Ashok Jhunjhunwala. I don’t remember the exact traction they had at the time, but it was really early. They were building voice technology keeping rural/ vernacular use cases for India hinterland in mind, which was nicely aligned with RTBI’s mission.
While I didn’t get to interact much with Girish, Umesh and I spent a bunch of time together. I brought him in 2 times to meet the Fund’s senior team, once just before I was about to leave VC and move to the Bay Area. Fortunately, Uniphore didn’t become an anti-portfolio like Freshworks. One year after I had left the Fund in early 2014, it ended up investing in Uniphore. Cut to Feb’22, Uniphore raised a $400Mn growth round at a $2.5Bn valuation, becoming a trail-blazing Indian startup story of grit & perseverance.
As I write this, another similar story comes to mind. Again, in my first year of VC, I had a chance to meet Baskar Subramanian, co-founder of Amagi. This was the most non-intuitive play ever. At the time, Amagi’s flagship offering was a platform to insert regional, localized ads in popular TV programming. For example, say during a national TV soap telecast on Sun TV, viewers in Chennai & Coimbatore would see different vernacular ads of local brands from their specific locations.
If one went by the classic VC playbook of pattern matching, Amagi wouldn’t make it beyond the first meeting (perhaps why most funds passed on it at the time). The company’s existing market didn’t seem like it would support a venture outcome. On top of it, Baskar came across as the polar opposite of a typical VC-backed founder archetype. He was a bit nerdy, a bit fidgety, a bit unpolished around the edges but really smart & always with a big smile.
As expected, while the Fund passed on investing, two things stood out to me even then:
Amagi had signs of early product-market-fit in the use case it was going after.
Baskar and team were gritty, grounds-up entrepreneurs with a humble vibe, strong belief in their overall market thesis & the energy to play the long game.
Candidly though, I was still in my 1st year of learning the craft of venture investing & even though I caught these signals from 1st principles, I didn’t have the experience & chops to convert these signals into conviction & fight for the deal internally.
These and many other stories that I have experienced over a decade of early-stage investing, have taught me a valuable lesson – given the inherent randomness in outcomes, a terrible way to do venture investing is to be dogmatic. While frameworks, heuristics & pattern-matching do help evaluate deals more efficiently, you can’t become a slave to them.
Outlier venture outcomes typically come from unintuitive & unpredictable places. If one studies the history of the biggest wins in both public & private markets, they mostly emerge from “non-consensus-and-right” situations. Spotting these, by definition, requires an independent & radically open mind.
Essentially, Bill is saying that at the time, Google was the exact opposite of a classic VC template deal. And that’s exactly what should have pushed him to evaluate it more deeply as a non-consensus bet. In the words of my friend Nakul Mandan of Audacious Ventures – “the pedigreed, buttoned-down, big logo’d, all-bases-covered teams often end up generating a 1.5-2x return while the maverick, underdog, underestimated, headstrong, quirky founder ends up creating the 100x bagger”.
Marc Andreessen has a great expression around the optimal mindset for venture investing (also applies to starting a company) – “Strong opinions, loosely held“. I like to call it having a radically open mind while evaluating any opportunity. In my head, this approach includes:
1/ Turning over every rock to find deals.
2/ Not discounting any vertical/ space upfront, irrespective of general ecosystem biases.
3/ Not underestimating any founder, irrespective of age, pedigree, or track record.
4/ Trying to probe further when the gut feeling is positive but misaligned with VC thumb rules.
5/ Listening to co-investor feedback but making up your mind independently.
6/ Trying to imagine “What if everything goes right?”.
7/ Finally, getting super-excited when a company seems non-consensus.
This is the behavioral North Star I am chasing & where, I believe, the real Alpha in venture investing lies.
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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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