The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch
20VC: Index's Shardul Shah on Why Market Size is a Trap | Biggest Lessons on Pricing from Leading Rounds in Wiz & Datadog | Why Benchmarks & Averages in VC are BS | How Index Makes Decisions and Why Growth & Early are the Same Investing Style
Mon, 16 Sep 2024
Shardul Shah is a Partner at Index Ventures and one of the greatest cyber security investors of the last two decades. Among his many wins, Shardul has led rounds in Datadog, Wiz, Duo Security, Coalition and more. Shardul is also the only Partner investing at Index to have worked in every single Index office from London, to SF, to NYC to Geneva. Prior to Index, Shardul worked with Summit Partners, focusing on healthcare and internet technologies. In Today's Episode with Shardul Shah We Discuss: 1. Investing Lessons from Wiz and Datadog: Why does Shardul believe that TAM (total addressable market) is BS? Why does Shardul believe that every great deal will be expensive? How does Shardul evaluate when to double down and concentrate capital vs when to let someone else come in and lead a round in an existing company? How does Shardul think about when is the right time to sell a position in a company? 2. How the Best VCs Make Decisions: How does Shardul and Index create an environment of truth-seeking together, that is optimised for the best decision-making to take place? What are the biggest mistakes in how VCs make decisions today? Why does Shardul believe that all first meetings should be 30 mins not 60 mins? Why does Shardul believe it is so much harder to make investment decisions when partnerships are remote? What is better remote? 3. The Core Pillars of Venture: Sourcing, Selecting, Securing and Servicing: Which one does Shardul believe he is best at? What is he worst at? Does Shardul believe with the downturn we have moved into a world of selection and not just winning every new deal? Does Shardul believe that VCs provide any value? What are the biggest misnomers when it comes to "VC value add"? 4. Lessons from the Best Investors in the World: Who is the best board member that Shardul sits on a board with? What has Shardul learned from Gili Raanan and Doug Leone on being a good board member? What have been some of Shardul's biggest investing lessons from Danny Rimer? Why does Shardul hate benchmarks when it comes to investing?
The lessons to learn are don't be cute on price. Don't underestimate fantastic founders and don't overthink it. TAM is a trap. Go back and look at the S1s of some of the biggest public companies today. Their market caps are bigger than what they thought the TAM would be. The best founders find and expand market opportunities. We are in the business of finding fund returners.
The power law dominates our business. Not being in a $10, $20, $50, $100 billion company is actually painful.
This is 20VC with me, Harry Stebbings, and I'm so excited to welcome today one of the best investors of the last 20 years. Few VCs have not one, but two $20 billion plus companies to their name. Shardul Shah, partner at Index Ventures and one of the best cyber investors in the business. Shardul has led rounds in Datadog, Wiz, Coalition, Duo Security, and many more incredible names.
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So to learn more about the number one most active law firm representing VC-backed companies going public, head over to cooley.com and also cooleygo.com, Cooley's award-winning free legal resource for entrepreneurs. You have now arrived at your destination. Shardul, dude, it has been so long since we did our last chat. I have aged incessantly, but thank you so much for joining me today, my friend.
Thanks for having me back. Tell me, in all of the time you've spent interviewing so many people, what's the number one lesson you've learned? There's no right way to de-adventure.
After 2,700 shows, I've learned that one of the biggest mistakes people make is they try and copy someone's style. Totally. That's not authentically theirs and think that's the right one. And actually it's about finding where you are uniquely great in the three pillars of venture, sourcing, selecting, and servicing, and really leaning into one over others. Actually, that's been my biggest lesson.
Yeah, it took me a long time to figure that out. Growing up, I grew up outside of Chicago. And so my childhood hero was Michael Jordan. And all of the advertisements are, be like Mike. Like be yourself is actually the message in life and as an investor.
Do you think that's possible though in venture firms? Like if you are a young person trying to scale the greasy ladder of a venture firm, as much as one might hate to say it, with internal politics like many have, you have to adjust yourself to the firm to be promoted. It's a game of strategic promotion.
No way. I think, you know, I learned this from Josh Mata, who's the founder of Coalition, sent me The annual reports from Stone Ridge, which is a hedge fund and everywhere, kind of a Warren Buffett style kind of annual report comes out. And in one of the reports, founder alluded to a culture of belonging and the spirit of belonging. is for people to be themselves and not to assimilate.
If your goal is to be the best version of yourself and your firm's goal is to be the best firm on the planet, there's no room for assimilation and confirmation conforming to other norms. So I think it's absolutely wrong. I think if you try to assimilate to be someone who you're not, you're setting yourself up for failure.
So you do not think that actually individuals and people who want to scale in a venture firm should kind of play the game on the field, know where they can get angles to get promoted and focus on that. As I said, like you have to fix problems in firms. If you return the fund, don't worry about it. Sure. But it takes eight to 10 years for them to know. Often there's a messy middle.
You were in Figma for years. Figma did not look like a winner. It is not always apparent. And actually often in the early years, you have managing partners with great deal flow or partners with great flow who need assistance. It's about being a plate remover. And so doing the diligence, doing the grunt work in some cases is the strategic move to get promoted.
I don't know. What can I tell you? I've been with Index for 20 years. So I don't have actually a lot of experience with other venture cultures. At Index, there's this deep acknowledgement of the importance of mentorship and apprenticeship. That's how you evolve in your career. And I've been super lucky to have seven mentors in my career. Not once was I coached or not once did I play
a game around doing X to climb up a corporate ladder. Like every time I was promoted, I was surprised. So maybe you're right. Like if you're in a institution, you know, of 200, 300 people, perhaps there's like machinery that you need to navigate. But in my home at Index, it's about finding fund returns.
Danny's been a big shaper on me. How did Danny shape you?
How did Danny shape you?
Oh, so many ways, but how I think about building great partnerships, how I think about incentivizing partnerships, how I think about LP management, those would be the biggest. Also, I would really say with Danny, actually for me, focus. Like there is a lot of things that I could do. He always reiterates to me about the importance of keeping the main thing, the main thing.
I think if I had to distill it to the essence, it's intentionality. I've become much more intentional with my time. I've become much more intentional with my communication.
Where did you spend time that you now with more focus don't?
When I started my career, every meeting default was an hour. Danny reminded me that I probably know the answer in 15 minutes. And so now the default first meeting I have is 30 minutes. That's huge time savings across the number of meetings I have.
What's your initial filtering on a do I meet them or do I give to another team member? I know it sounds blunt and harsh, but you have a certain number of hours in the day. You have to have leverage with more team members, more junior team members. What's the filtering process between I will meet them versus, you know what, interesting, but I don't have time for it?
Every meeting, ideally, would have two people in it. So that's a super high bar for taking any meeting. I'm asking to prioritize someone else's time in addition to mine, which means the threshold for a meeting is super high. Now, in terms of handing off a meeting to someone else, I only do that if I believe one of my colleagues will have more chemistry or is more relevant.
Like we were talking about vertical SaaS. Like if you're starting a vertical SaaS company, you ought to talk to Nina or Paris. They're geniuses. I don't know anything about vertical SaaS. We go for two people in a meeting.
Why do you like majors? You specialize in cyber and you said that you don't particularly specialize like vertical SaaS. Can you just unpack your thinking to me around why it's important to have a major in venture? And does that mean the future of venture is specialization?
Little nuance. I'm a liberal arts graduate from University of Chicago. So I believe in concentrations, not majors. That being said, yeah, I kind of fell into cyber. One of the areas I actually started in at Index was biotech. So I think there's a lot of utility in each of the three competencies that you think about, like selection,
you know, winning and supporting by having some amount of focus, especially for me, but similarly at index, I wouldn't recommend this to the vast majority of investors. Each of us is stage agnostic, right? We're investing at seed venture and growth stages. The vast majority of investors on the planet specialize by stage.
Do you not find it difficult to adjust your mental plasticity with stage? You know, at pre-seed and seed, you have to get very comfortable at making decisions without much data or any data at all. And then at series B, you have a lot more data. How do you think about that mental plasticity with stage?
Starting point is actually the same across stages, right? It's all about the founders. Like there's this canonical question, I think, in our industry. Is it the market or is it the team, right? And many great firms would argue that it's market. In my view, it's very clearly the team.
And as a consequence, when you're trying to think about even paying high prices at late stage businesses, you're still fundamentally taking a view that that team will find adjacent market opportunities. Over time and so the in some sense the plasticity required to evaluate a team at stage is not a requirement How has what you love to see in founders changed over time?
And so an example for me would be I place a lot more emphasis now on finding entrepreneurial talent early in one's career and One of the biggest determinants I found of success from interviewing 500 founders is actually that the best always start early. So I spend a lot of time on childhood and not much time on the business.
Oh, interesting. I'll try to think more about that. Look, I mean, if I step back, you know, in our industry, there's clearly a power law. Bill Gurley has talked about this at early stages. Lafont did a good job at East Meets West, bringing real attention to how seven companies are driving the returns in public market indexes. So the power law exists, I think, at every stage. That's a pattern.
When it comes to patterns of selection and patterns within people, the only pattern is there is no pattern. Now, to your question of what has evolved, I think I've become much more conscious of two components of my decision making. One is intuition. And the second is an analytical framework. And venture is a craft, and so you're constantly refining it.
And intuition, I have a harder time kind of putting to words. You know, it's a feeling. I know it when I see it. My partners definitely know it when they see it in me. But that intuition and conviction has definitely evolved and grown.
Can you take me to a time when you've had the strongest intuition and it was wrong? And why do you think it was wrong?
At Index, I was once asked to run like a tech offsite. And so I kind of threw the old approach out of the window. And I told all my partners to do the homework. And I asked them each to write a postmortem on a company we could have created a billion of gain or more. And then we distilled kind of the lessons learned. And ultimately, the sins of omission are much greater than the sins of commission.
The sins of omission for us distilled into three lessons. One, don't be cute on price. Two, don't overthink it. And three, Uh, don't pass on generational founders. And so intuition around, like, I'm so smart. Like one of the challenges with being a major concentrator in a domain is you get so smart that you actually think, you know, what you're, uh, what you're doing. Yeah.
And then you might instinctually be dismissive of actually a disruptive idea.
Don't be cute on price. I get it. I completely agree with you. But we're seeing the pains of that now with so many companies looking at valuations going, I don't know how we're going to grow into that. Is there a line between high and a step too high? And how do you think about that? And across different stages? Not when you have conviction, right?
So intuition is one part of it. The other part of it for me is an analytical framework. In founders, I look for folks that have imagination, operational excellence and high quality decision making. And I find that like combination to be rare in one individual. Some of that may come out in kind of childhood trauma like that shapes who someone is and ultimately
it's manifest in the types of decisions and the style of decisions that they make. But when I think about conviction in people at the earliest stages, I think you can be really elastic on price. Late stage, if you have conviction, price is just a representation of future expected free cash flow, right? So You're probably not wrong on price. You're wrong on the investment.
When did you do a deal at a really high price? And actually, it turned out to be a great decision. And the supposedly very high price at the time was not actually high given the outcome.
Every investment in Datadog was at a high price. It's not an outcome yet. of course, but every investment in Wiz has been at a very high price. I feel great about each of those decisions.
Have you ever had a great investment that's been a good deal as well? I don't know. Do you see what I mean by that?
Which is like, often people say, listen, the best are priced high. Yeah, you know, Demir on my team once asked me this question. He's like, Shardul, how did you get comfortable with that price? And I was like, wrong question. I don't seek comfort. You have to be comfortable with being uncomfortable. We're in the business of taking risks. I'm not a value investor, right? I believe in the power law.
I think very few investments and decisions we make will create disproportionate returns. So I'm not seeking average returns. I'm not seeking good deals. I'm looking for outliers.
I completely agree with you on like, hey, you shouldn't be comfortable. When you think about risks that you're willing to take versus risks that you're not willing to take, you've got execution risk, you've got market timing risk, you've got market sizing risk. How do you think about those different risks and your willingness to take them or not take them? Are you a Star Wars fan?
There's this scene. I see the hesitation. I'm the nerd here. There's this guy, General Akbar, who's alien. And at one point, he screams, it's a trap. That is the voice I hear in my head any time someone talks about TAM sizing. TAM is a trap. Go back and look at the S1s of some of the biggest public companies today. their market caps are bigger than what they thought the TAM would be.
The best founders find and expand market opportunities. So I think at Index, we've been really good at overthinking TAM and systematically underestimating the magnitude of our best companies. So no, I never run into market sizing because I don't put effort into it. In terms of market dynamics, I get that wrong all the time.
What do you get wrong in market dynamics? Misunderstanding competition, misunderstanding timing, what elements there?
Here's an example. I thought that the endpoint security market would be totally commoditized by platforms. I thought I use a Chromebook. I thought MacBooks have pretty good security. And as a consequence, the EDR market like which the first generation was McAfee, Symantec, et cetera, would cease to exist.
At least $65 billion that explains I was wrong on CrowdStrike, Cyber Reason, Sentinel One, like this entire category.
If you unpack that, what do you take away from that? Like, what's the subsequent lesson for you there? Don't come to such quick conclusions. How do you change your mindset as a result of that realization?
It was not a quick conclusion. Uh, It was the consequence of overthinking it, like rule number two, and not recognizing George Kurtz for the phenom that he is. Those are the lessons from CrowdStrike. Terrible mistake. Did you have the chance to invest? I mean, even if anyone had the opportunity to invest as a public company and still make a tremendous return.
When you think about founders, you mentioned that kind of one, so you missed. Are there any that you believed in that you were wrong about? You don't need to name them, obviously, because that's very harsh to say. But what did you get wrong when you saw something that later turned out to not be true?
You know, there are business models that have real capital needs, right? they can encounter two challenges. Either the founders are unable to raise significant amounts of capital or their distribution model gets in the way of allowing there to be sufficient growth to overcome the capital needs.
And so I overestimated like uncapped market upside, underestimated the capital intensity of a company, voted in favor with high conviction on the investment, And yeah, I think one of my partners is doing a great job of finding a path to returning capital on that investment, but that's certainly not a desired outcome.
Do you think the best founders are the best fundraisers?
No. Unpack that for me. When we invested in Olivier and Alexei's Series A at Datadog, he was not a great fundraiser. Thank God he was not, right? If being a great fundraiser is defined as having multiple opportunities in a short span of time, He evolved into being a tremendous fundraiser over time, but I don't think the best founders begin as the best fundraisers.
We mentioned this company that I'm looking at doing whatever the check size is now, and I'll just leave it there because the founder will kill me if I mention it, and he'll know. It will be an incredibly dilutive company along the way. It will need a lot of cash, and that is a consideration.
How do you think about capital requirements over time, capital intensity, potential future dilution when investing, or do you not think about that?
I probably don't think about it as much as you. The luxury of having a seed venture and growth fund is we can build ownership over time with more capital if the company is performing. That being said, they're definitely business models like in biotech drug discovery. Those are hugely capital intensive, can have binary risk, binary scientific risk on if a
an actual, like a candidate becomes an asset. Those are business models that we won't participate in.
So I spoke to 12 people who've either invested, like invest with you today or like have invested with you in the past. And nine of them said I had to talk to you about conviction building. Just nine? Yeah, just nine. What are the other three talking about? They said you're incredibly difficult to work with generally, always struggle to put the microphone in the frame, just challenging all over.
But I thought it was really interesting. They said you have to ask about the conviction building process. I did want to discuss that on the theme of, hey, you have multiple different funds, and so you can concentrate capital over time. You can. Got to have some big conviction to continuously double down and double down and double down.
How do you approach that conviction building process across stage?
I'm not thinking about incrementally increasing my ownership. I'm building a net new investment case on can I create a fund returner? And with that, I do all the work again. So if I think about companies that I've been involved with, I've rotated shadow partners to help me with an objective view on reassessing the management team. I've redone customer calls. I've redone competitive analysis.
I've rebuilt financial models. I do all the work. Again, because I've doubled down multiple times within a year.
Does the upside requirements change with each stage? And what I mean by that is, you know, when you are a seed or series, that's like, Hey, I need this to be a fun return. And when you get to growth, does it change to be like, we'd like to see a three to five X pathway. How do you think about that? Like upside requirements as it changes across stage?
Yeah. I mean, the observation, when we started our first growth fund, Our hypothesis was probably three to five X over three to five years, right? I'd just come out of a private equity firm, as had some of my colleagues. And so we had that mentality. And when we looked at the performance of the fund, it turned out there's a power law. There were companies that were 5, 10x plus.
There were very few companies that were actually 3 to 5x over 3 to 5 years. And so we kind of accepted the fact that we're not value investors. We're venture investors at growth stages. We're driven by high conviction. And as a consequence, when we're building our investment cases at growth, we never, it's like, it's super dangerous, I think, to say there's a safe 2x. There's no such thing.
And you alluded to this with the memory of all the activity from 2021. There's no such thing as a safe 2x. And so what we're looking for is definitely 5x plus upside, even at growth investments at late stages at high prices.
I had Sam on the show from Greylock, and he said that when you look at Series B and C pricing today, combined with the revenue multiple compression that we're seeing with public markets pricing, Series B and C will just be a terrible performing asset class for this vintage. Do you agree with that, or do you have a different perspective?
I don't know why we're talking about averages. None of us are in the business of mean reversion. If we're making a Series B investment, it's by exception, like Elastic, Series B investment, terrific return, Confluent, Series B investment, terrific return, and the list goes on. So
But if you're seeing series B average entry prices go up by 30, 40, 50, 60% for the best, and then you're seeing compression in terms of public market pricing, even for the best, it is a worse asset class to be in, correct?
No, it's not. I mean, we're mixing two time horizons, right? Like when you invest is not when you exit. So the multiples may evolve and change. It turns out the best companies get premium multiples, and again, are above the average multiples that you might be alluding to with multiples coming down. Second, the best companies that are category defining are going to be far more significant.
And so you can afford to pay up. If you look at the averages, I hear you. But from my perspective, there's no reason to look at the averages.
What's the hardest thing for you when you think about doubling down on winners? When you look at, say, a Wiz or a Datadog, can you just talk to me about, break one down, let's do Wiz. What gave you the conviction with Wiz to continuously put in more and more money?
What's the hardest thing? It's kind of identifying if you're delusional or you have conviction. And sometimes it can feel like a thin line when you have such deep conviction. In what ways can you be delusional? You can be lazy. If you skip the details, if you don't do the work, if you stop asking questions and are surprised by new information, those are symptoms of being delusional.
When you have a culture, like an index, we invite agreeable disagreements, right? And it can actually steal your conviction. When I have so much respect for Danny, who we talked about, for Jan, for Martin, for Adriana, Nina, Carlos, Vlad. When they disagree, you take it really seriously. You sleep on it. And when your conviction is unchanged... it's crystal clear that you need to go deeper.
That said, with Wiz, when we were doubling down, we took multiple approaches to it. Top down, look, the cloud market is on a path to a trillion dollar transformation. There's probably $300 billion of spend on cloud service providers. That'll get accelerated by AI compute data demands, right? So we're talking about a trillion, potentially a trillion dollar plus market opportunity.
In comparable categories, there's 5% to 10% attached to security spend. So the cloud security market could be really significant. If you think about most software, like functional software areas, the market leader commands north of 25% market share.
So you do the math on how big could the winner be, and you can apply various discounts on penetration rates and time and so on and so forth, but you get to really significant numbers. Number two, you look at public comps, CrowdStrike, $50 billion plus business. Palo Alto Networks, I think now is like $100 billion plus business. Bottoms up, you know the business.
In four years, the company has grown faster than any company of all time with unbelievable productivity in different segments, in different geographies. From a team perspective, they've gone from strength to strength, adding most recently Dolly as their COO, who's an absolute beast. And so from every dimension, the story is profound. But I don't think it's obvious, right?
Did you get pushback with each round or not? Yes. On what? Price? Progression of company? On every dimension. Like we beat up investment themes, right? So... people, product, technology, competition, traction, market, like every dimension we debate.
How do you think about finding the truth together? I know it's kind of a weird tangent, but I think about this a lot now as we build our team and have the same discussions. I want to have vigorous debate and have passionate discussion about these elements, but I also don't ever want to put someone off with the forcefulness of a discussion or with just the kind of vigor of discourse.
How do you think about kind of finding the truth together most effectively?
Yeah, that's a really good question. You may have the advantage, if I understand correctly, your team's local, right? They're near you. All in person. The advantage of that is like conflict resolution is much easier. You can go for a walk. I really recommend walking meetings, by the way. I learned this from Steve Ward at the time.
He was the chief security officer of Tia Cref, and then he became CISA of Home Depot. Steve, in a prior life, was Secret Service and protecting 42 Bill Clinton. So he's lots of great Bill and Hillary stories. That said, one time, Bill was in a meeting with, at the time, the first female Secretary of State, Madeleine Albright. And they were at it like loggerheads. They were at a disagreement.
And Bill said, hey, Madeline, let's go for a walk. And she said, I'm old, my knees hurt, I don't want to do this. And Bill was like, if we're walking, at least we're headed in the same direction. So, I think when you have a disagreement or challenging conversation, walking, like movement plus heading in the same direction can actually help. be really stimulating.
So it's actually a really good tool. That said, the fundamentals are, I think, trust, mutual respect, and mutual admiration. There's no shortcut. Trust takes time to build and it's easily fractured. So I think it's fair to be really sensitive to that if you value the culture of your organization to get to high quality decisions, which is what I think you imply in seeking truth.
But it takes a lot of effort to nurture. It's especially hard in a venture firm in light of the power law, right? Again, very few companies are going to create returns, which means there's likely to be concentration among different investors, which suggests that you can have a skew of ego or insecurity, which can really fracture trust, respect, and admiration. So there's no shortcut.
You really have to be conscientious about cultivating it.
What are the biggest things that gets lost and gets gained when doing decision-making virtually as well? You have an amazing team in London and in Europe, but then you also make decisions in the US. And I know that you have joint meetings together, obviously, for investment committees. What are the things that get better doing that?
And what gets worse? Better perspective. I'll give you an example. Vlad, who just joined us, has an uncanny ability to read body language over Zoom. He'll literally Zoom in and look at people's facial movements to take a read on how they're reacting to questions and why. It's beautiful. I love having Vlad on Zoom, and it doesn't matter what part of the world I'm in. What are the disadvantages?
they're real ones, right? Like we are in New York, which is where I'm sitting is at the center of 10 time zones, right? There's a 10 hour time zone, which makes San Francisco and London logistically a little challenging to get together. So sometimes we have meetings that are really early in the morning for San Francisco.
And if you're not am shifted, if you're not a morning person, you may not be at your best from a cognitive function standpoint, right? So I moved to New York, which is much more aligned with when I make high quality decisions. So I think trade-offs are logistical.
Can I ask you, going back to the kind of conviction building element, what comes to mind and how did you change as an investor on the back of it?
I really think that the sins of omission are much more significant than the sins of commission. The lessons to learn are don't be cute on price. Don't underestimate fantastic founders and don't overthink it. Those are far more valuable than thinking through how could we have improved on a selection of a company.
There's so much long tail risk in a company that I feel like the exercise around pattern recognition, benchmarking as just like two examples is Risk mitigation is a third. Our exercises in psychological safety. We are in the business of finding fund returners. The power law dominates our business. Not being in a 10, 20, 50, $100 billion company is actually painful.
Do you agree with signaling being a challenge for founders when working with multistage funds? Obviously, we've talked about kind of concentrating capital and winners over time. Do you agree that signaling is something that founders have to be careful around messaging on?
No, I think what happens is in the seed market, most seed investors are are using signaling as part of an objection to work with a multistage fund. Most multistage funds say that signaling doesn't matter and the seed fund doesn't provide any value. So you should work with us. Our strategy is a little bit different.
When I meet a founder at a seed stage, I'll tell him or her, I'll underwrite the entire round. So there's no financing risk, but we should split it into three sleeves. One sleeve is for index. One sleeve is for a seed fund. and the third sleeve is for angels operators because it takes a village. I don't have all of the answers to support a company at the get-go.
They can really benefit from multiple perspectives. I have the opportunity if I deliver value and if the company performs, to increase my ownership over time. And so I give that optionality to founders, which I think is actually super different, but I think is far more critical in development of a company than thinking about signaling. So I love that.
And I completely agree with that perspective. But how do you think about making ownerships work then with those three different sleeves? If you think about index, what do you need? When you're thinking about your initial sleeve, what is that in terms of what you need?
I think the hardest sleeve to accommodate is actually the seed fund, right? Because different folks have different philosophies. I've come across a number of folks that I really respect who are pretty rigid on, I need to have this ownership because I'm going to get diluted. And so, we tend to have a lot more flexibility than seed funds. Angels Operators is probably the most flexible.
I definitely don't encourage founders to have a party round. It ends up being an exercise of herding cats. So tend to be very selective around a few functional leaders, for example, kind of like what you do with your fund strategy in order to support a company in different phases of its development.
Do you have any big piece of advice to founders on how to construct the best angel? an operator segment of that sleeve in terms of like lots of people, small checks, fewer people, bigger checks, filling specific roles, any lessons on mistakes that often is made when filling out that angel slash operator allocation?
Yeah, I think about different kind of flavors, like There might be a chunk for rainy day, like someone who you don't expect or anticipate to call frequently, but when you really need something, they'll be there for you. Second, distribution, product, engineering, like take expertise that you really need. Don't take money from customers, right? It's fraught with a conflict of interest.
And then more to your original question, limit the number of people. I tend not to give advice on the size of the check.
I totally agree. I say don't have minimums because some people can be amazingly helpful with 5K. And so don't rule them out because of that. Because when you look across the different spectrum of venture, you know, we mentioned sourcing. We mentioned selecting. There's securing and there's servicing.
I could be a McKinsey consultant if we have four S's, which is essentially securing, selecting, securing and servicing.
Nice. I think the hardest competency to develop is winning. I think the sourcing competency is nuanced because we're rifle shooters. I'm not actually aiming to see every single opportunity on the planet. If I were, I would construct index in a completely different way, right? I'd have an army or maybe a huge data science team. That's not the goal.
So I think about these competencies perhaps in a different way than others. But if I could wave a magic wand, I'd be great at all three. So why are you best and why are you worst, Shado? I'm probably the best at winning, where I spend the most time thinking about is how can I become better at supporting entrepreneurs?
Do you think that the best founders need a VC? We've had many, Brian Singerman from Founders Fund on, and they both said literally the best founders do not need VCs, period.
Well, I'm glad they said that. Good luck. You know, look, I think there's, of course, a merit to it. Like if you think about MailChimp, beautiful business, bootstrap, never raised a single dollar, phenomenal founder, great outcome. On the other hand, in very few strategic moments, I think having a valuable board is terrific. That board member may be an investor or could be an independent, right?
But I definitely believe boards are invaluable to businesses that want to dominate categories.
What have you learned about what it takes to be the best board member? Again, I use the show as a pure learning mechanism for me. I want to be the best board member. I acknowledge it's early in my career. What do you know now about what it takes that you'd share with me?
Do less. When I started as a board member, I was really excited about being a board member. There's this black box room. What happens? I want to be part of it. There's probably ego and power and influence, all of these ideas that pop into your mind. And then you want to help. And then you try to help everywhere. Right. There are very, very few things that matter.
One approach I take, which I think can be a useful tool, is to hold up a mirror. Right. So recently we were in a board meeting. Entrepreneur is talking about in a closed session, an executive that he works with. And the board starts going around the table on like what to do when kick the can down the road. And I'm like, hey, I want to hold up a mirror.
I heard you say toxic, irreparable, inevitable. You know your decision. It should be made tomorrow. And we made the decision tomorrow. And I didn't actually contribute perspective. All I did was play back to the entrepreneur what he'd already said. And I think that can be really valuable in asserting high quality decisions, which is a key component of building an important business.
Having the courage to say no to big opportunities requires deep relationships with maybe not every board member, but a few board members. And that's a place where, again, if you're positioned as like the first call, if you're getting calls from your founders on weekends, that's a really important role. Helping with decisions on
hiring executives, not just firing, but hiring executives, where you may have seen a range of sales leaders, or in your case, like the best growth or the best of the best in product, you may be able to create a really nuanced perspective on the performance of an individual, and therefore inform your entrepreneur with perspective that can enable them to make key decisions.
So I think there are very few things that matter.
Are you impressed with the quality of investor board member that you're on boards with?
Yeah, I mean, I'm really fortunate to be working with some of the best in our industry. So I'm absolutely impressed. Who is the best from your perspective outside of Index? Outside of Index, it's really case dependent. Gilly, Renan. Fantastic board member. Doug Leone, great board member in a very, very different way. Mike Spicer, tremendous board member. How is Doug good in a different way?
Doug is incredibly intuitive. He can inspire confidence in a decision, which is really, really different. Grady is also like, I respect Grady. I respect Vishria. Where do you find VCs can be damaging in terms of boards? Yeah. Sometimes VCs put their interests ahead of entrepreneurs, which can be disruptive. And their interests are what? Varied, right?
It could be finding a path to liquidity for themselves. In that path, they may not be clear-eyed on a capital allocation strategy. One of the key things a board should do is help inform the level and direction of capital investment. And if you're seeking near-term liquidity, you might be much more conservative in how much capital is being allocated. That's an example of misalignment. M&A.
It might serve you to encourage a company to have a robust M&A strategy to buy capital fallen seed stage companies, which may be completely antithetical to the appropriate strategy for a business, which I have seen. And through a torpedo ad, investors can be disruptive.
They can. I think it's Vinod Khosa who says that 90% of investors are net negative, which is... Potentially slightly damning. You mentioned there about liquidity situations. How do you think about when's the right time to sell? I think one of my biggest regrets in the last few years is not taking cash off the table when I could have done.
When you think about lessons that you have, how do you think about when's the right time to sell?
I probably am more in the Charlie Munger school of like, the goal is to buy and hold and let other people help inform when to sell. And that's true for kind of the winners that make up the power law contributors, which is the business that we're in to find fund returners. For a non-fund returner, I think what are tools that you can use? If you come across an entrepreneur...
who you believe is on the spectrum of unethical to incompetent, you should sell immediately.
Is there a situation which comes to mind when I think about not selling or selling and it being the wrong decision and it impacting how you think? Have you ever sold and you're like, you know what, we sold way too early and actually I didn't see the next card. I didn't see the next chapter.
We're a large investor in a company. We invested early stage. Company got acquired for about a billion dollars by a public company. And within a week of receiving our proceeds, I asked our team to distribute the whole position. A couple of weeks later, price rocketed up. I got a few phone calls. A couple of months later, stock tanked and I got zero phone calls.
So you're rarely congratulated for making the right call. You do get phone calls if temporarily it looks like you've made the wrong call. But you don't lose any sleep over it when you know you've made the right decision.
Do you think you have asymmetric information? And so when companies go public, you have a better handling of their stock than people who do not have that same information? Or do you just want to distribute to LPs and it is theirs from that point on?
It's a super tough one. We try not to be smarter than Mr. Market and like the invisible hand. That's real. There are people who are professionals at public market trading. That said, I do believe as a venture investor, you can have differentiation in terms of duration of hold. I do think you can have an advantage here.
in terms of understanding the business in more detail, and therefore you have more texture and nuance and context. But again, you've got to always be aware of that line between delusional and conviction. So often people kind of have rose tinted glasses because it's so rare to see a company go from point of investment to a public company that you believe it's going to continue and sustain.
And so we create some guardrails within index. It's not an individual's decision. We have a group of people that help, again, with agreeable disagreement to get to the best possible decision.
Can I just ask you, in terms of the future of venture, I think about this actually a lot when I look forward over the next 10 years. I think it's dominated by Chanel and Walmart. Chanel is benchmark and USV, constrained fund sizes, very specific ICP, and then you have Walmart, which is walls of cash. It's Andreessen, it's Insight, it's Sequoia, it's Index, like big, big pools of cash.
How do you think about the next 10 years and the kind of winners and losers in that respect?
I think you won't be surprised when we talk about Rolex, Swatch, and the Apple Watch. And so I think a little bit less about who are winners or losers. Generally, I believe in a competitive industry, not changing seems... It's not the strategy I would take. If the world around you is changing, adapting seems to make sense.
But given the industry is so driven by the power law, I think people can withstand cycles longer than we probably give them credit for.
Do you think we're entering into a new era of investing in terms of the assets that we invest in? We obviously see defense becoming ever larger as an investable category. We see general catalysts buying hospitals and healthcare really changing as an investable category. We see a lot more physical infrastructure plays.
Do you think we're seeing a very changing landscape in terms of where we find alpha as venture investors?
Yeah, I think we noticed that when we opened up New York, right, 25% of series A's in New York are related to healthcare. That's a really different mix than San Francisco. And so we've redoubled an existing healthcare practice to make many more new healthcare investments. And so
definitely like AI is a draft that's playing into tailwinds for existing markets, as well as enabling us to invest in new ones.
Shadal, I'd love to do a quick fire with you. So Isaiah's short statement, you give me your immediate thoughts. Does that sound okay? Yeah, let's try it. What's the biggest advice for someone who wants to get better at public speaking? I hear that it's something you've been focusing on.
Three elements that I would think about. One, like, have fun. Two, be yourself. And third, probably watch yourself. What do you mean watch yourself? Like, record and then play back. Notice your own tics, how you phrase things. Did you land the point that you wanted? What's the biggest lesson from opening up the New York office? I love Martin. Marty is Captain America.
So principled, sets such a high bar. Although we've worked together for a decade, it's been an incredible experience.
Why so? You were saying this beforehand. What did you see in Martin from this experience with him that you maybe didn't see before being with him virtually?
Every week, there's minutiae of...
decisions that we can make there's complete trust between us in terms of who makes what decision that's completely different and when you're working side by side with somebody in a new office where is the office going to be what's the seating chart going to be what's the color palette what's the art choices and you go on and on and we're completely indifferent to who makes what choices what's your worst trait that's also helped make you successful
I have my fair share of analytical horsepower and that can lend itself to overthinking.
What's the biggest piece of BS that you hear most often in venture shuttle?
It really irritates me when I hear investors say it's an exceptional founder, a plus founder. without any specificity or substantiation.
Biggest mistake you see first-time founders make?
Not firing fast enough. Biggest sin of the zero interest rate environment? The best founders probably didn't grow aggressively enough for investors. investors probably didn't maximize liquidity opportunities.
Shardul, listen, I think it's been like seven or eight years since we did the last one. So I'm going to officially be middle-aged when we do the next one. This has been such a pleasure and thank you for putting up with my prying. You're the best. Thank you, Harry. I have to say, doing shows like that with Shardul is why I love this job so much.
You have to remember, I got into venture because the investing art is one that is my true passion. So getting the chance to sit down with Shardul and discuss what we did today, just incredible. If you want to see the episode, then you can watch it on YouTube by searching for 20VC. That's 20VC. But before we leave you today...
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