As the fundraising environment continues to get harder in 2023, founders & investors are deep into rationalizing business plans & finding ways to cut burn. The first temptation is to follow what I call an “excel sheet” approach – starting with the largest expense items without enough strategic thinking around the revised set of goals, business constraints in this new environment, what is working well right now, & how capital should be most efficiently allocated going-forward.
As opposed to big companies, startups operate with a finite runway, trying to address significant customer problems that remain unaddressed by large incumbents. This requires constant innovation – essentially doing hard, non-consensus things across the stack, everything from technology & design to customer experience & business model, that incumbents aren’t doing.
While big companies can afford to be relatively unscientific in cutting costs & still tide through tough macros with the help of their existing PMF, startups unfortunately, have no option but to play offense at all times in order to continue innovating & thereby, give themselves a chance to survive & succeed. In financial terms, this implies investing incremental $$ into innovation that drives more revenue (& profit), which is what will ultimately save a startup, not investor cash sitting in the bank.
So how should founders think about playing offense while being capital-constrained? I would like to propose a thinking tool called the “Focus Canvas“:
As a first step, rather than focusing on P&L line items, break down your business into specific buckets. These could include customer segments (eg. Individual, SMB, Enterprise etc.), product lines (eg. shrink-wrapped, custom deployment, pure services etc.), platforms (eg. desktop app, iOS, Android, browser extensions etc.), distribution channels (eg. self-serve, inside sales, direct sales, channel partners etc.), geographies (eg. US, EU, India etc.), teams by function/ type (eg. engg., product, design, sales, marketing, offshore contractors, agencies etc.) & other buckets that are relevant for your business.
Arrange all the relevant buckets & their constituent elements on a single page. This is your “Focus Canvas“.
On the top-left corner, list the most updated business goals for this year that all stakeholders in the company have aligned on. These could be things like “hit $1Mn ARR”, “show x% retention”, “start fundraising in Q4” etc.
On the top-right corner, list all the business constraints you expect to face this year. These could be things like “12 months runway left”, “only 2 backend engineers”, “sales cycle taking 6+ months to close” etc.
Now, as you are looking at this Focus Canvas, try and answer the question “what is working well right now?”*. You need to define “working well” for each bucket as per your specific context, also taking into account the above goals & constraints. It could be driven by one or more of revenue growth, most profitable, highest ROI, generating the most valuable feedback, creating the most differentiation, highest team productivity etc. *Note: this step is well-suited for a team workshop/ brainstorming session.
The most important step – for each bucket, put a ✅ in front of the element(s) you believe is your best bet to achieve this year’s business goals while navigating expected constraints. Then, ❌ out all other elements in the bucket. This is where ruthless focus is extremely important for the Canvas to do its job well – ideally, force yourself to ✅ only your #1 focus element. In the case of most startups, that’s probably all you can afford to execute anyway.
Finally, take the ✅ element from each bucket & weave them into a simple, 1-2 paragraph Focus Narrative. An example to illustrate this – “In 2023, we will focus on the Enterprise customer segment & offer them the standard product suite with a billable custom deployment services wrapper. The product roadmap will focus on the desktop app. We will double down on the internal sales model for distribution, with founders pitching in for strategic logos. To increase our team’s efficiency, we will significantly reduce contractor headcount & re-allocate them to full-time hires in engineering & internal sales.”
This Focus Canvas now provides a clear & strategic view of opportunities to both cut burn & re-allocate resources, while staying on track to achieve business goals & making progress toward PMF. The Focus Narrative can be used to socialize the going-forward strategy across teams in an easy-to-remember way. If used well (read: with ruthless focus), this approach can help startups in playing offense even in a tough economic environment.
PS: sharing a Focus Canvas template that you can use as a starting point. Feel free to download a copy & modify it as per your requirements.
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2022 definitely felt like the end of an era. A decade-long party for US tech, fueled by low-interest rates -> increased availability of risk capital -> price inflation across asset classes.
The last chapter of this post-GFC era was perhaps the craziest – an unprecedented pandemic -> widespread lockdowns -> more fiscal stimulus -> injecting more air into already inflated asset bubbles.
With inflation crossing 7%, the Fed finally started increasing interest rates last year and is expected to continue quantitative tightening over the next few quarters. Public market valuations expectedly turned south (valuations are based on DCF, so as discount rates go up, valuations go down), with tech growth stocks correcting by as much as 80-90%.
The following dynamics are currently at play:
Large tech: shrinking macro-demand + adverse public markets -> pressure on companies to reduce costs to bring them in line with lower growth projections -> drastic cost-cutting measures, including major layoffs.
VentureInvestors: public market corrections -> LPs cut back on venture allocations + downward revision of expected returns on exit -> venture activity slows down + any deals that happen, happen at much lower valuations given new public market comps.
Startups: less capital available + higher bar in private markets -> startups need to cut costs to survive -> layoffs in high-cost/ non-core functions + pause hiring unless absolutely essential.
2023 appears to be the “year of transition”, as both the overall macroeconomic cycle, as well as the technology sector within it, move into a new paradigm. I see the following ten big ideas for 2023:
Leaner-and-meaner big tech
For anyone working in tech over the last decade, we have witnessed first-hand the level of entitlement & cultural complacency that has grown within large tech companies like Google & Meta. With more challenging times ahead, I expect large tech companies to take drastic steps towards re-wiring their cultures & operating models. Layoffs are just one piece of the puzzle – expect significant changes to compensation policies, KPI/ OKR philosophies, org. structures, functional locations, work-from-home policies, contractor hiring, operating routines etc., all with the aim to make execution more efficient.
Founder-led companies (eg. Meta, Salesforce, Shopify, Coinbase etc.) will take quicker & braver calls to re-invent themselves, compared to those run by professional management teams (eg. Google). In the latter case, I expect shareholders to put considerable pressure on these professional CEOs to take corrective measures. In fact, I won’t be surprised if some of the big tech CEOs get unexpectedly replaced as many of them come across as peacetime CEOs who will struggle in wartime.
2. Capital efficiency over growth for startups
The last decade in tech startups was all about growth. This year, expect investing thesis & operating models to decisively shift towards capital efficiency. Mirroring the demands for margin improvement by public markets, I expect private market investors to significantly raise their expectations on operating efficiency.
Founders will have to react fast and in several cases, give a 1800 turn to their culture & business models. A silver lining – founders who were heads-down amidst the craziness of 2020-21, building their companies in a capital-efficient way, will have an enviable opportunity (& deservedly so!) to play offense both with customers & investors.
3. Bay Area bounces back
Remote work boomed during the pandemic, as tech companies grew at unprecedented rates. However, we saw signs of a comeback-to-office across both big companies & startups last year. With current headwinds, I expect factors like teams getting together to drive execution & in-person networking to become increasingly important.
With rampant layoffs, tech professionals will also feel more insecure & would need more access & optionality to get their careers back on track. All this bodes well for the Bay Area – I expect significant migration to the region, especially for people in their 20s to mid-30s. In terms of the sheer depth of the tech ecosystem, the Bay Area remains unparalleled. As emerging areas like AI, health-tech & EVs gain strength, they will provide even more reasons for talent to be physically here.
4. “De-angelification” of the startup ecosystem
Amidst the post-pandemic investing frenzy, liquidity-rich, over-optimistic, FOMO-driven tech professionals started dabbling in angel investing. Becoming an angel in a “hot deal” became a status symbol, & rapid paper-markups made everyone feel like a winner.
A majority of newbie angels from this vintage neither understand the nuances of this asset class nor have the depth of resources to play the game effectively over the long term.
As more startups start shutting down this year, combined with layoffs & decreasing compensations courtesy dwindling value of RSUs, I expect a massive churn in 2020-21 vintage angels. In my experience, tourist angels typically drop out of the game around the 4-6 deals/ 24 months mark, as they see portfolio companies starting to shut down & their hard-earned money vaporizing into thin air.
5. More pain in Crypto
If you thought 2022 was brutal for Crypto, brace yourself! FTX implosion is only the beginning of a much-needed cleanup in the space. I expect many more tokens to go to zero, projects to shut down & low-conviction talent to move out. Given the scale of the FTX fraud, am expecting even more regulatory oversight & ramifications for the overall sector this year.
Personally, I do believe there is a kernel of truth in the Web3 opportunity. The faster this cleanup happens, the sooner the next chapter can begin & we can make tangible progress towards discovering its real-world use cases.
On BTC and ETH, I expect both to remain flat at best, & significantly down from current levels in the bear case.
6. The FOMO shifts to AI
Whenever there is too much consensus around a trend or an asset class, I get worried! It was clean-tech pre-GFC, then Blockchain & Crypto pre-pandemic, moving to Web3 & future-of-work post-pandemic. Based on my Twitter feed, I can safely say that with the rise of OpenAI & launch of ChatGPT, the FOMO has now shifted from Web3 to AI. I am expecting the space to see a lot of hype, investor interest & startups being launched in 2023.
Studying how the previous FOMO waves evolved gives a fair understanding of what to expect – those without first-principles conviction & a long-term strategy are more likely to get their hands burned. Those who were anyway committed to the space & were quietly building behind the scenes over the last few years stand to disproportionately benefit from the increased availability of risk capital & talent.
7. The return of “moats” (& rise of deeptech)
As the perpetual-growth era of software ends, I expect the question around “moats” to re-appear in the diligence checklist of investors. The lifecycle of companies like Netflix & Robinhood has clearly shown how hard it is to have a sustainable competitive advantage in tech (one reason why Warren Buffet stays away from investing in it!).
As the likelihood of purely growth-driven exits goes down, I expect venture investors to start looking at deeptech verticals with inherent moats much more seriously. These include space-tech, health-tech (including lifesciences), energy, climate etc.
Each of the above markets seems to be getting unlocked in its own unique way & while these companies can be more capital-intensive & have higher technical risk compared to say SaaS or Social, the resulting market leaders have much more defensible competitive positions & hence command healthy valuation multiples.
8. EVs taking over the transportation stack
EVs are seeing major progress on both the supply & demand side. On the supply side, most major auto companies have an EV product in the market, with use cases evolving from urban sedans to SUVs, pickup trucks & now, even semi-trucks.
On the demand side, record-high gasoline prices have acted as a key unlock. This is visible in the rising hybridization of the latest gasoline car models. With non-Tesla EV products rapidly expanding, consumers have more choices across use cases & price points. I wrote a post a few months back on how I warmed up to EVs & Tesla, in particular. I expect EV penetration to have significant growth momentum this year.
9. Digitization of mainstream healthcare
A positive side-effect of the pandemic has been consumers getting increasingly comfortable with digitally-delivered healthcare services. In my case, interacting with healthcare providers over Zoom and accessing services such as Carbon Health & One Medical via their apps (including getting advice via chat) has really opened my eyes to its value. Even beyond that, I work-out with my trainer via video & our family nutritionist is in India with all interactions happening via Whatsapp.
I expect the overall healthcare stack, including mainstream services, to digitize at an even faster rate in the coming year. These tech platforms will also open up opportunities for niche services to exist eg. virtual monitoring & consultations for chronic patients, pre & post-natal advice, nutrition guidance etc.
10. India as a global greenshoot
Amidst an unstable China, weakening EU, war-torn Russia, one-dimensional Middle East, fiscally-unstable LatAm & fragmented Africa, India appears to be a solid greenshoot both geo-politically & economically. A stable & reformist govt. has worked hard to put together core growth pillars over the last 8 years – from building physical infrastructure & a national digital payments network to ensuring economic development at the grassroots & supporting tech startup activity in the country. India is poised to now reap the dividends of all this hard work, and similar to China, grow its per-capita income from ~$2k at present to ~$10k over the next 20 years, all in a democratic environment.
India’s tech ecosystem has also come of age in the last 5 years. The mega question of “can exits of venture-backed companies happen in India?” has been progressively answered, beginning with the acquisition of Flipkart by Walmart, followed by IPOs of consumer companies like Paytm, Nykaa & Zomato in domestic public markets, & the IPO of Freshworks in the from-India SaaS space on Nasdaq. There is a growing pool of startup talent, courtesy of a decade-long Mobile & software wave, which will fuel the country’s tech ecosystem over the next decade.
The above ideas are making me super-excited for 2023, both as an angel investor & operator. After a 2.5-year hiatus, I returned to angel investing in 2022, doing 3 deals in Q4. With the turning cycle & above ideas as a backdrop, my goal is to make 2023 my most active year yet as an angel, while also keeping a high bar on quality. Excited to collaborate with all founders, angels, VCs & operators out there 👊🏽
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Recently, I was in a shareholder’s meeting of a portfolio company. It has been a gut-wrenching last 3 years for the leadership. Unfortunately, the company’s market pretty much shut down during Covid. Significant liabilities built up & the team saw significant churn. To survive, the company had to raise a bridge at a major haircut.
During the meeting, the management team walked us through their journey of turning the business around from this dire situation. After the lockdown was over, customer demand got re-ignited. The company drastically cut costs, improved operating metrics to get revenue back on track, re-negotiated long-term vendor contracts, and cleared-off short-term liabilities, all while retaining the core manpower, many of whom had to take salary cuts.
As a result, the company is now PBT-profitable & growing through internal accruals. Btw this turnaround was achieved on a ~$13Mn revenue base. As an operator & ex-founder, I was blown away by this execution story & the team’s grit.
But then, I put my investor’s hat on – despite all this progress, early investors are deeply out-of-money & are likely to remain so for a while. During 2017-19, the company raised equity at aggressive valuations that were misaligned with both the maturity of the business as well as the underlying multiples the sector trades at. In boom times, startups get valued at hyper-growth tech multiples. However, as soon as the cycle resets, follow-on investors revert to valuing them on realistic sectoral comps.
The good news is, courtesy of the awesome restructuring efforts, the business is on a profitable growth path. But given the extent of divergence between our entry valuations & current market comps, it’s going to be a long road toward generating healthy returns for early investors. And even if we get there, the sheer time taken will negatively impact IRRs.
As an angel, this is the part I really struggle to get my head around – how important is the entry price? Bill Gurley says in this 20VC podcast with Harry Stebbings – “the market sets the price on a deal-by-deal basis but as an investor, you have to keep an eye out for the price you are paying at a portfolio level”. This becomes especially hard for angels, who typically have to adhere to the price set either by the founder (SAFEs) or an institutional lead. In this era of fragmented checks via syndicates, SPVs & RUVs, I frequently see valuations that aren’t correlated to the underlying risk in the business & smaller check investors unable to push back. Ultimately, everyone ends up toeing the line.
As an investor, I always have the option of not participating in a highly-priced round. But then enters the other side of the coin – power law ensures very few companies drive a majority of venture returns. Therefore, angel investing is the game of accessing the “best” companies, which often requires paying up to get in. An argument frequently made is “if the company ends up as an outlier, it doesn’t matter what price you got in at”. I get this line of thinking but an “outlier return” is very contextual. Eg. a 10x return potential over a 5-7 year period is very solid for an angel, though might not meet the deal hurdle for a large fund. There are cases in my own portfolio wherein early angels are sitting on a 5-10x unrealized return because we entered at sub-$10Mn valuations and frankly, the likelihood of a startup hitting a $50-100Mn valuation is significantly higher than becoming a unicorn.
Over a 20+ angel portfolio built over 8+ years, I still struggle with thinking about entry valuations the right way. Presently, am taking it deal-by-deal with the guiding North Star of discovering & backing the best founders I can find, while also accepting the reality that angels will usually be price-takers that are prone to macro sentiments & the whims of lead investors. As Bill Gurley advises, maintaining perspective & discipline around portfolio-wide avg. entry price seems to be a smart way to play a balanced game.
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Starting the 2010s as a fresh b-school grad, the last decade has been grueling, challenging, uncomfortable, full of highs & lows but significantly net positive on professional & personal satisfaction. Post-facto, if I have to give it a theme for myself, it would be “taking risk & embracing change”.
I distinctly remember watching the legendary Steve Jobs Stanford commencement speech on YouTube in mid-2010, while I was going through a phase of disillusionment and feeling a strong disconnect with the way I perceived the world to be operating. As I saw him speak, for the first time, I got a life-approach framework that finally made sense to me — my job was to execute on my “voice” (instinct/ conviction/ belief/ interests/ enjoyment), create enough “dots” (businesses/ opportunities/ relationships/ products/ investments) and trust the universe that these dots will all connect in hindsight and reveal the overall picture much later in life.
Following this approach, I consciously put myself through a series of diverse experiences that positioned me to create enough of these dots. These spanned various sectors & functions (investment banking, venture capital, startup operator, big tech, angel investor & now, founder) as well as markets (US, India, China, SEA). Over the last decade, I lived/ spent considerable time in Hyderabad, Chicago, Mumbai, Bangalore, Hangzhou, and San Francisco. Of course, a lot of this was a result of spotting & reacting to opportunities that presented themselves in an organic flow of life, but there was always a strong underlying intent behind taking risks, stretching limits, keeping oneself uncomfortable & embracing change.
I have been fortunate that in this last decade, this approach has resulted in several professional dots — investing in the first Internet wave of India, VC portfolio companies going public/ getting acquired, being part of $2Bn+ of tech investments from angel to late-stage, taking businesses global out of the US and China, being part of products that have touched 100s of millions of users globally, supporting & working alongside so many world-class founders, investors & colleagues, working under the leadership of the likes of Jack Ma and Joe Tsai, traveling the world and operating across cultures to get things done. My hope is that all these dots will start connecting in the next decade, and a worth-while picture shall emerge at some point.
Given the last decade has been a “foundation” phase for me professionally, I thought it will be useful to pen down my experiential learnings, with the hope that it might benefit you. The caveat is that these are all very specific from my context. I hate generalizing and therefore, will request that you absorb these for what you feel they are worth to you. Also, rather than making an overall list, I will capture the top points for each functional phase of my career during the last decade, so you can pick & choose what is contextually relevant for you. I have also ordered the sections chronologically, from the earliest to most recent.
Top professional learnings for the decade of 2010s:
A. As a VC
Identifying & backing awesome founders as early as possible is still the main driver of returns.
High-quality & timely “deal access” is key to VC success, as is identifying the winners early and doubling down on them.
As a VC professional, if top-quality founders want to take your check and have you onboard irrespective of the firm brand behind you, that’s when you know you are doing a good job.
Trusting your conviction on the “fundamental value” of a company and holding on to it even during chasms, leads to potentially outsized returns.
It takes a long period of time (min. 5 to a max. of 10+ years) for value to accrue & then get realized.
There is space for many different types of funds & investing strategies. The key is to survive the bad times.
In good times & bad times, the flywheel of “raise-deploy-exit-raise” needs to continue. Capital has to keep churning.
Important to create a few but really deep co-investor relationships, to be able to partner & grow together.
Creating an authentic & consistent personal brand (digital + offline word-of-mouth) is a source of significant professional leverage as a VC.
The world is a big place and there are many sources of capital with varying belief systems. Sometimes, just one person needs to bite the bullet for a company to be king-made.
Finally, however smart you think you are, it’s still extraordinarily hard to pick. Important to still maintain a diversified portfolio.
B. As a startup operator
Despite how much capital or how large a team the company has, it’s still damn hard to build & regularly ship a decent working product that customers like.
Despite how much capital or how large a team the company has, it’s still damn hard to achieve product-market fit. You will be surprised by how many well-known and well-funded companies might, in reality, have no PMF.
More often than not, over-capitalization induces bad behavior across multiple levels in a company.
The best way to drive positivity in the culture is rallying people around business momentum (users, revenue, shipping product etc.). No momentum = disillusioned employees + too much time to have negative water-cooler conversations + internal political struggles = screwing-up culture bit-by-bit each day.
Over-hiring is one of the biggest crimes in a startup.
Irrespective of stage & functional skillset, a solid execution ninja will always merit a place on the team.
Rigorous ops & program management is an often under-valued skillset.
In every aspect of the startup — focus, focus, focus.
C. As a big tech operator
Actively chase roles that have the potential for max impact.
Align with most-empowered & internally-influential leaders. You are unlikely to make fast progress under a weak leader.
Focus as much on building internal relationships, as external ones.
Focus as much on building your internal personal brand, as the external one.
Stay away from any role that makes you a paper-pusher.
Identify & double-down on what uniquely sets you apart from the clutter of peers.
Figure out the “game” as soon as possible (it varies for each company and often, even amongst teams). Be ready to play the game, else be prepared to get sidelined. Ideal scenario — if you have the capability & backing, change the “game” itself.
Follow-up —be persistent, don’t take no for an answer, control your ego.
Over-prepare — every meeting is important & needs prep. Every “let’s grab a coffee”, “let’s have a quick call”, “let’s do a quick huddle” will influence your perception & trajectory within the company.
Learn how to position & sell…your vision, your story, your plan, your headcount reqs, your budget, and yourself.
D. As an angel
Have invested in about 18 companies over last 5 years via my investing platform Operators Studio. Here’s what I have learned:
Write checks only of amounts that you can immediately write-off mentally.
No one can pick at an angel stage. Create an extremely diversified portfolio.
Diversify across multiple vectors — sector, vintage, markets, stage.
If you are personally convinced of the sheer ability of a founder, just write a check.
Be reasonable about what operating value-add you can realistically provide. Don’t overpromise.
Assume that in 50% of cases, co-founders will split.
Post 24 months of investment, you will likely lose all touch with founders and receive minimal company updates/ info.
Ideally, have some sort of a broad investing framework. Assume it won’t work in most cases, but will likely improve your odds.
Follow your playbook, but don’t stop being opportunistic. If you are getting a chance to board a potential rocketship, frikkin’ take it.
E. As a founder (still very early days for me)
Still in nascent stages of building Workomo, but here are my recent learnings as a founder:
Doing “0-to-1” is extremely hard.
There is no “playbook”. You have to figure things out and make your own way.
All popular startup narratives & playbooks are post-facto, polished versions of reality. Discount them heavily.
Figuring out what people want is damn hard. Making & shipping it is even harder.
In the first 2–3 years of starting-up, your biggest enemy will be your own mental state (negativity, envy, anger, hopelessness, anxiety, frustration, disappointment). Manage it proactively on a daily basis.
Try to keep your self-worth disconnected from your startup’s progress & outcomes. As Taleb says, outcomes in this world are highly random anyway.
Keep multiple anchors of happiness — family, friends, travel, health, interests, community. Don’t over-index your life on just your startup. It’s a part of your life, not your whole life.
Hope you found these decade-long learnings helpful. Let me know what you think.
Fred Wilson recently wrote a great post on how WeWork’s botched IPO exhibits the stark differences between public and private markets.
As a founder, my major takeaway from the post was that one needs to be crystal clear on the type of company one is building. That should reflect in how you build, take it to market, price, capitalize, grow and eventually exit. North Star Metric reflecting all these being (gross & operating) “margins”.
Fred’s post also offers some critical insights for tech investors. It’s imperative that investors understand what is really the “type” of business being evaluated — differentiation, pricing power, cost of customer acquisition, scalability etc, all ultimately getting reflected in gross & operating margins. Smart investor behavior dictates peeling the onion significantly on all these issues.
Any business solving a real problem for the world, and if executed on well, has “value”. It isn’t about Uber, WeWork or Peloton being good or bad. They are solving a problem and that’s why customers use them. The key is to value them appropriately, based on fundamentals.
As Graham/Buffet say — “any company can be a good buy at the right price”. That’s why people invest in junk bonds, distressed assets etc. The challenge is in figuring out this “right price” in private markets, where information availability is significantly lower. At these stages, there is no perfect pricing mechanism, no feedback loops, no liquidity to correct mistakes.
Unlike public markets, private markets are driven by a bunch of individuals and not “Mr Market”. They are full of irrationalities, driven by emotional drivers like FOMO, personal passions, vision-over-fundamentals etc. Private market valuations aren’t driven by sound financial theory like DCF, Comparables etc. There just isn’t enough data!!
Imagine as a VC, a solid founder coming to you with a disruptive vision but not much execution. Your instinct (“heart”) says this could be big. How do you value this company? In absence of data, your estimate of value will have no choice but to be driven by 1) your “heart”: conviction and how badly you want it, 2) “buy-sell” dynamics: how much are others willing to pay relative to you and 3) comps from past experience. Though sub-optimal, this isn’t particularly bad as, in absence of data, you need some basis to value these companies, so they get funded and execution continues. That’s how game-changing companies will be built.
To summarize,
Valuing assets in public vs private markets is drastically different.
Due to lack of data, private markets value companies based on emotion+past experience+buy-sell dynamics.
Therefore, a valuation reset when IPOs happen should be expected more often than not.
The best private market investors get it right more often, despite playing at the mercy of emotional drivers and market externalities.
This public-private valuation contrast will always exist.
Sustainable, well-run businesses will withstand, adapt & survive.
“Contrarian” is one of the favorite words of Silicon Valley. Investors want to be contrarian in their picks, founders want to be contrarian in their ideas, employees want to be contrarian in the company they choose to join. In today’s age of near-perfect information flow, one has to be a contrarian to generate any sort of “Alpha” as a professional. This is in terms of both spotting opportunities, as well as timing your entry and exits. Of course, just being contrarian isn’t good enough. As Howard Marks (legendary value investor and Founder of Oaktree Capital) cheekily says, “you have to be a contrarian…and you have to be right!!”.
Over my career, I have made several moves that, at least at the time, I thought were fairly contrarian. Left a Partner track VC job to move to the Bay Area and start from scratch as a startup operator in a brand-new ecosystem. Had 2 startup offers — one from a pre-IPO enterprise software company and other from a maverick Series B startup trying to beat Google in search; joined the latter. Left a meaty role at Alibaba to start Workomo at a tricky mid-stage of my career. Invested in several companies at Operators Studio, where the businesses were (and are) considered “unsexy” from a VC perspective. Whether the above moves turn out to be right or wrong, I need a decade more to find out 🙂
Am a believer in what Robin Sharma says “if you do what everybody else is doing, you will get the results that everybody else is getting” (which is, being average). Through-out my career, I have consciously sought risk and tried to keep myself uncomfortable.
Since early 2018, when I started institutionalizing the Operators Studio investing thesis as well as ideating for my startup, I noticed something interesting. When I discussed some of my previous contrarian moves with friends & colleagues, while they perceived them as “hard to understand” or “highly risky”, I was able to naturally see those opportunities as “an obvious gap” or “the downside is really quite limited”. Clearly, these choices were taking me down a different path compared to my peers, and therefore, perhaps I was being contrarian in spotting & evaluating those opportunities. But I hadn’t articulated the mental model that I was intuitively using while making those decisions.
Over last year or so, I have tried to de-construct the above decision-making process, and then put it together again to arrive at what I call my “Zone of Real Contrarianism”. One caveat — this is my deconstruction of how I attempt to act in a contrarian way during big decisions. Not claiming this as a universal mental model but perhaps, you might derive some value out of it.
The diagram is pretty self-explanatory — to me, real contrarianism is at the intersection of what you have really high personal conviction on, and what the majority are unable to see or agree with. However, it’s important that your personal conviction is:
Authentic — needs to come from an authentic place inside you; represents your personality, values, ideals, and what you stand for (not copied or overly influenced/ inspired by others)
On-the-ground — original beliefs result from exhibiting skin-in-the-game in this world; being out there, understanding & playing the game (not deriving ideas & conclusions from being a desk-jockey or paper-pusher)
Execution-led — observing your environment as you execute; the unpredictable, unplanned & idiosyncratic nature of execution makes it a prime breeding ground for non-obvious ideas & gaps
Nassim Nicholas Taleb defines complex systems as where the behavior of individual elements doesn’t explain the behavior of the collective or the ensemble (eg. while people are individually sane, they are prone to exhibiting irrational mob behavior as a collective). My thesis is that due to this very nature, complex systems are a gold-mine for contrarian ideas, provided you operate with skin-in-the-game in it. As a professional, I seek them out proactively (starting companies, venture investing, white space opportunities in large companies, operating in radically-new geographies & markets) to at least have a shot at generating career alpha.
Would love to hear your feedback on this mental model, and your thoughts on how to be a true contrarian in one’s career (& life).
PS: am currently building Workomo, a smart & simple professional relationships management hub for the new-age professional. If you find it intriguing, do sign-up for free private beta access.
Read an excellent article today by Clint Korver of @uluventures on the importance of diversification in venture portfolio construction. Sharing some key highlights that I found really interesting:
Venture returns (R) are driven by 2 main factors — # of investments in a fund (n) AND probability (p) of an investment being an outlier return-generator. [UPDATED] in discussions with a few readers, I realized that a 3rd factor, ownership % in the winners (o), is also a key determinant in eventual returns (this was missed out in the original referenced article). Therefore, have updated the equation to R=f(n, p, o). To optimize R, ’n’, ‘p’ AND ‘o’ need to be optimized for.
Excellent chart on “chance of an outlier” — x axis has # of investments vs y axis has chance of at least one outlier for a specific portfolio size. Successful VCs need at least one outlier to have a well performing fund.
3. Summary from the chart in below table — to quote “Even the Superstar investor, who is 50 percent better than the top tier VCs, only has a coin flip of a chance of an outlier with a small, concentrated portfolio of only 10 companies.”
4. Interesting that @uluventures has chosen 50 as optimal portfolio size. This is really big, given just 2 investment partners. Strictly by data, assuming they are “top-tier” in terms of picking ability, they believe they have 90% prob. of having at least one portfolio outlier.
5. While 50 is still a huge portfolio, given failure rate of companies, incoming follow-on investors as well as organically graduating to the next stage, @uluventures can still smartly manage their workloads. This has been my experience as well at Operators Studio.
6. Whatever your “picking ability” might be, it’s just a smart choice for any venture fund to adequately diversify. While large firms do it organically by having multiple investment partners to do a sizable # of deals, smaller venture teams would need to do it more consciously.
7. Side-note: loved the reference to @AlignedPartners and their strategy of taking relatively lower risk profile bets (capital efficient, less dependency on external capital, more ownerships for everyone on exit). Resonated a lot with my approach for Operators Studio.
Overall, am a believer in thesis-driven diversification that is done consciously and thoughtfully, especially at the angel and seed stage (where I operate). Of course, if a venture investor can marry diversification (n) with top-notch picking-ability (p), [UPDATED] as well as maintain high ‘o’ in the winners by doubling-down on them, magic happens!
[UPDATED] Remember the brain tattoo R=f(n, p, o)
Would love to hear your thoughts and experiences on diversification of early stage venture portfolios. Are you a believer in diversification? Or do you focus on “being focused”? When does diversification become “spray-and-pray”? How should an angel/ seed investor go about balancing ’n’, ‘p’ and ‘o’ simultaneously?
I am really excited to kick-off 2019 by introducing ‘Operators Studio’ — my endeavor to invest in & support founders globally, by being with them in the trenches right from a really early stage. As you will see on the website, Operators Studio is all about “Backing gritty founders who are solving real problems “ — supporting innovative technology startups through early capital, deep operating expertise, global networks and a personal sounding board.
The Genesis
While I left my Venture Capital career 5 years back to become a full-time operator, I still wanted to keep that one element that I most enjoyed as a VC, in my life — partnering with entrepreneurs to solve really interesting problems and build innovation-driven companies that move the needle for the world. As I transformed myself from an ‘investor’ to a ‘builder’, I also started investing in startups in their angel/ seed rounds, supporting founders at a deep operating level, working with them through their biggest tactical & strategic challenges, as well as most importantly, being a friend & sounding board to them.
Over last 5 years, I ended up investing in & supporting >15 startups across the world, along with my full-time operating stints. As I travel on the path to discovering my own differentiated world-view, investing style and what really excites me both as an operator & investor, I thought this is the perfect time to institutionalize my efforts. Hence, Operators Studio was born!
2. How is the Operators Studio Mandate Unique?
In my experience as a VC, angel and tech operator across US, China and India over last decade, a key gap I have observed is that the entire business & venture environment leans towards only a certain kind of business — that which is attractive to institutional investors. This means characteristics such as potential ‘moonshots’, going after humongous market sizes (as per guesswork), exit potential that moves the needle for institutional funds, and aligning with trends in-vogue (AI, ML, AR, VR, Crypto etc.).
Due to these filters, an entire gamut of tech businesses that are solving true ‘operating’ problems for customers/ users, which are often unsexy and lag behind latest trends, get completely overlooked. By the way, in majority of cases, these customer-centric businesses are highly innovative in their own right, and can often be built to be economically-viable without overt dependence on external capital. And in the process, generate solid financial returns and entrepreneurial gratification for all stakeholders over the long term.
The Mission of Operators Studio is to back exactly these kind of companies — those that put the customer’s problems first, leverage practical tech innovation to solve them, and are founded by tech warriors — entrepreneurs who are visionary, humble, resourceful and believers in deep execution. It doesn’t matter if a space or product is considered unsexy, unattractive or out-of-trend by the financial ecosystem or media — as long as the company is solving a problem that matters for the world, customers/ users are vouching for it, and founders are willing to be in it for the long haul and build the company in a way that’s most suited for realizing their vision, Operators Studio will be a believer in it!
3. How does Operators Studio Add Value to Founders?
a) Early & “patient” capital — will mostly invest in friends & family/ formal angel/ seed rounds; will be flexible from a stage perspective (‘Day 0’ co-founders coming together, pre-PMF, post-PMF to even Series A and beyond).
It takes at least a decade for a business to realize its true potential. We take an “evergreen” approach, supporting founders for whatever time it takes for them to realize their vision.
b) Operating guidance — deep-dive product sessions, go-to-market strategy, hiring, user acquisition, customer introductions, pitch decks, investor connects, exit discussions.
c) Global networks — helping companies go global via access to market knowledge, business expertise and networks across the “tripod” — USA, India and China.
Operators Studio will be flexible from a mode-of-involvement perspective, as long as its Mission is being fulfilled — in addition to investing directly in companies, this could involve direct ‘Day 0’ incubation, becoming an LP in other funds to get access to the most-promising companies, partnering with high-quality accelerators/ incubators, collaborating with established tech companies to unlock synergies etc.
4. Why This Name?
I have consciously avoided names like ABC Ventures or XYZ Capital. Operators Studio stands for a fresh venture-building approach —to me, this name is very significant as it communicates key tenets of this approach:
Operators — looking for companies that are solving real operating problems for customers/ users, backing entrepreneurs that have a rigorous operating mind-set, supporting founders by adding operating value to companies, helping them work through on-ground operating challenges rather than giving theoretical advice.
Studio — rather than being a conventional investing entity or a personal asset allocator, the vision for Operators Studio is inspired from boutique movie studio models (the likes of Hello Sunshine founded by Reese Witherspoon; Blinding Edge Pictures by M. Night Shyamalan; or Color Yellow Productions by Aanand L Rai). Its ethos is based on how these studios operate — looking for a unique story (problem to be solved) to tell to a specific audience (target customer), assembling/ supporting a team that brings to the table diverse skillsets needed to tell this story most effectively (backing gritty, execution-focused founders) and executing at economics most optimized for the story to be delivered most efficiently (capital efficiency, driving optimal returns).
5. Active Portfolio
My entire portfolio of companies is now under the Operators Studio umbrella. Following are the companies (currently-active) we are proud to have backed so far (in alphabetical order):
1) Artifacia (Toronto/ Bangalore) — AI-powered platform that helps e-commerce brands create and manage shoppable photos
3) Hate2wait (Gurgaon) — queue management product for SMBs and large enterprises
4) Instashift (Estonia) — global peer-to-peer platform to buy/ sell cryptocurrencies
5) Lets Venture (Bangalore) — India’s most trusted platform for angel investing and startup fundraising
6) My Ally (San Francisco Bay Area) — world’s only AI Recruiting solution for fully Automated Interview Scheduling and Recruitment Coordination
7) Scandid (Pune) — eCommerce deals & price comparison platform, now offering omni-channel commerce solutions for the global travel retail market
8) 91Springboard (Delhi) — category-leading co-working space in India
9) Trailze (Tel Aviv/ San Francisco) — making tough-terrain outdoor navigation easy (hikes, trails etc.)
10) Tydy (Gurgaon) — global onboarding & training product suite for the distributed modern workforce, bite-sized+gamified
11) Widget (San Francisco Bay Area) — transforming images and documents into customer communication channels, all without apps, phone nos. or forms
12) Yulu (Bangalore) — re-defining urban mobility in India via smart dockless bike sharing system
6. The Future
Am super-psyched to grow Operators Studio as a passion-driven parallel track, along-side my main operating career. I see tremendous opportunities for using tech innovation to solve really interesting problems and build outstanding companies, in markets as diverse as US, India and China. At the same time, am excited at the growth prospects of the current set of portfolio companies, several of whom are already emerging as category leaders.
Whether you are a founder, startup employee, established tech exec, angel, VC or corp dev professional, am eager to connect with you — for feedback, to exchange notes, collaborate or just brainstorm. You can Email me, as well as connect with me on Twitter and LinkedIn.
I thank all the founders, startup teams, investors as well as other tech ecosystem professionals that I have had the privilege to work with over the past decade. Here’s to leveraging entrepreneurship + tech innovation to solve the world’s most pressing problems over the next 50 years.
PS: for more details on Operators Studio, check out our website.
Have been thinking about a new mental model for early stage investing (angel till Series A; dynamics are different Series B onward) — I call it “Optimistic Arbitrage”.
‘Optimistic’: the art of seeing beyond “what is” and “what is reasonably expected”, to “what if” and “what it could become”. Proof points for the former are traction metrics while the latter is driven by vision, belief and a unique world-view.
‘Arbitrage’: ability to see what the ‘market’ isn’t seeing in an opportunity. In my experience, this can be split at a macro-level into 1) ‘team’ arbitrage — seeing in people what others don’t see, looking beyond traditional pattern matching, recognizing non-obvious talents, and 2) ‘opportunity’ arbitrage — spotting a problem that exists or will exist soon enough, but which isn’t yet obvious or sexy enough for the ‘market’ at large.
One of my realizations is, to effectively pull-off ‘Optimistic Arbitrage’, you of course, need to have a certain kind of personality (positive, believer, low tolerance for cynicism, less complaints and more execution). But more importantly, you need to be enriched by diverse life experiences & exposed to a variety of business, cultural & personal contexts-this essentially, creates a strong ability to connect the dots & look beyond the obvious.
