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Why Copying the Silicon Valley Playbook is a Mistake in India | Arjun Malhotra (Good Capital)
212 Plays9 months ago
About Arjun Malhotra
Arjun Malhotra is the General Partner at Good Capital, an India-focused, seed-stage venture capital fund that he co-founded with his late brother, Rohan Malhotra. Before becoming a full-time investor, Arjun co-founded Investopad, a startup incubator that became a vibrant community hub for entrepreneurs. The 12 angel investments made during this time, including in the future unicorn Meesho, formed a portfolio that generated a 138% IRR and has since returned over 50 times the initial capital. Recognized by Forbes 30 Under 30, Arjun has led Good Capital to build a portfolio of over 25 startups, achieve successful exits like Simsim's acquisition by Google, and is now deploying a fund targeting over $50 million to back the next generation of Indian founders.
Key Insights from the Conversation
- The Contrarian Thesis: Good Capital's strategy is a direct rebuttal to the Silicon Valley playbook; it focuses on empowering India's massive network of intermediaries (agents, resellers, local stores) with technology rather than trying to replace them.
- The Power of Constraints: Capital constraints in their early days forced a highly disciplined, high-conviction investment model, which Arjun now sees as a strategic advantage against the "silent killer" of making too many low-conviction bets.
- Founder-Problem Fit: Arjun prioritizes founders who are "deeply entrenched in the problem statement" and on a "journey of learning," often preferring them over seasoned experts who might be constrained by conventional wisdom.
- Betting on Unique Behaviors: Instead of top-down market sizing, Good Capital looks for unique, counterintuitive user behaviors that, if extrapolated, could unlock massive, previously unseen markets, as was the case with Meesho.
- AI as an Augmentation Tool: The firm's focus is on startups that use AI to "supercharge" human intermediaries—handling tasks they aren't good at—thereby combining human trust with technological efficiency.
YouTube Chapters & Timestamps
[00:00] - An "Accidental" Journey into Venture Capital
[02:29] - The Investopad Experiment: From "Terrible Ideas" to Community Hub
[10:02] - Becoming Angel Investors & Building a 50x-Return Portfolio
[14:14] - The VC Playbook: Good Capital's Network-Driven Strategy
[25:06] - The "Silent Killer" of Optionality & The Launch of Fund I
[33:19] - The Art of Fundraising: Pitching LPs on a "Blind Pool" of Capital
[38:39] - The Contrarian Thesis: Why Good Capital Bets on Middlemen
[54:15] - How to Build High Conviction: Evaluating Founders, Ideas, and Markets
[1:04:16] - Learning from Mistakes: The "Anti-Portfolio" & Borrowed Conviction
[1:09:15] - The VC Mindset: How to Stay Sharp and Keep Learning
YouTube Hashtags
#FounderThesis #ArjunMalhotra #GoodCapital #VentureCapital #StartupIndia #IndianStartups #Entrepreneurship #FounderJourney #StartupFunding #InvestmentStrategy #Meesho #ProductMarketFit #AngelInvesting #SeedFunding #MakeInIndia #StartupPodcast #VC #TechIndia #Investopad
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Transcript
Introduction and Arjun's Journey
00:00:00
Speaker
Hi, I'm Arjun Mughal, founder and GP at Good Capital.
00:00:17
Speaker
Some of the best interviews on founder thesis podcasts have been ones in which we feature founders with VC funds, and this one is no different. Arjun Malhotra is the founder and general partner of Good Capital, a high-conviction, early-stage VC fund. Arjun has gone through his own journey of pivots in building Good Capital with some unexpected turns along the way.
Strategic Choices in VC Funds
00:00:37
Speaker
In this candid chat with Akshay Dutt, Arjun not only shares how they built up Good Capital,
00:00:42
Speaker
but also explains the strategic choices in front of VC funds which ultimately determines the kind of companies they invest in. He talks about his process of building conviction in a startup and some of the hits and misses in his journey as an investor. Stay tuned and subscribe to the Founder Thesis Podcast if you want to learn some of the best-kept insider secrets of startup ecosystem.
Arjun's Background and Education
00:01:02
Speaker
Welcome to the founder thesis podcast Arjun. Did you grow up in India? Where did you grow up? I grew up in India until I was about 13. And then I was in boarding school in the UK and university in the UK. So but but back and forth along.
00:01:18
Speaker
And how did that happen? like ah getting to you Did your parents ah move there or something? No, actually totally my where I'm from an army family, but my father got into the education business and he sort of romanticized the idea of a British boarding school education. And so it was his dream that we'd, my brother and I would go get sent to a British boarding school, um which was a fantastic experience. But I think that was just from his time in the education business with the global educators conferences. And he wanted us to have that experience. And so once we were there at school, it was pretty natural to have university and everything else abroad as well.
Internship Experience and Interests
00:01:59
Speaker
and So how did you end up being a GP of a venture fund in India, being an entrepreneur in India?
00:02:06
Speaker
Well, I mean, I was much more interested in the product side of things. So it was a little accidental in the sense that through my time at university, I ended up interning at and being at a fund called Capricorn, which was Jeff's goal, the eBay co-founder of his private investment fund ah based in Palo Alto. And so I was in my early 20s, absolutely blown away by what was happening in the consumer internet at that point. that was 2010 to 2012, 2013 or so. So that's really when the consumer platforms that we use today that are the incumbents were early scalers. Some companies like Facebook, Twitter were still um in their very early days. And so it was a pretty special experience being in Silicon Valley at that point.
00:02:56
Speaker
um and What kind of deals did you see? Well, you know, the fund was a lot more focused on clean tech. So they were the first investors in Tesla, SpaceX, Planet Labs, um Electric Hydrogen, Joby Aviation, a bunch of incredible companies. But my excitement was the consumer side. So how I ended up then being a GP was I decided to come back to India in 2013. And we started Investopad as a
The Investopad Journey
00:03:22
Speaker
product studio. So we were co building products. um But eventually we just the ecosystem was so early. the product studio. yeah Did you see examples of that in the US? Is there a like a product studio example just to relate to it? Yeah, there's there's quite a few. There's beta works, there's idea labs. I mean, Rocket Internet was doing it in a way, but which probably wasn't as original as some of the other ones, but it's not a model, X-PA is another one, but it's not a model that scales so much to be honest with you. Why is that?
00:03:55
Speaker
Well, I think for, I can speak for us, right? Because some of the names I mentioned have been a lot more successful than we were. For us, what ended up happening was we were so early and so plugged into the ecosystem that we'd meet other people who were already doing startups and they don't want to co-burn things with you. So there's an adverse selection problem.
00:04:13
Speaker
which is the best entrepreneurs don't ask for permission, they're already doing interesting things. And so if you're looking to co-build with different teams, you're then not necessarily bringing on, it's it's a little harder to find talent to do it. um And that's sort of how we ended up in investing accidentally, which is that we had these great founders already doing things that we were seeing were working. We weren't investors, but we were sort of competitive to put a little bit of money into what they were doing.
00:04:40
Speaker
and we did that for four or five years before we realized that actually now we should do it more for the time is a venture studio the same thing as a product studio i think venture firms probably do venture studios now uh whereas product studio so i don't think that it's the exact thing um just because of how a fund is deploying capital so you just set aside an allocation on your kind of investing out of it into external entrepreneurs. And I think the difference with the product studio is your core team is builders. So you're trying to build something and then scale it by hiring talent and putting talent and and bringing in talent to pretty senior level. So it's more like we're co-founding the company together. And instead of a 10 to 12%, 15% ESOP pool, it's a 50, 60% ESOP pool in a venture studio model.
00:05:32
Speaker
Um, sorry in a product studio model whereas an avenger studio model. It's almost a way just to scout from this Oh, okay. Got it. carard Okay. I'm not sure these are not super established ideas, you know, the sample size of these is very small Right, right the the industry evolves very fast as well. Um, so you Like, did you build a team of coders and UI UX designers? I mean, to build a product you essentially need like people who write code, and people who design, yeah product managers. you You built that whole team. We went more product specific. So we started a product first, then we built a team around it. And then the idea would be to move on to subsequent products. But the truth is that after two,
00:06:15
Speaker
um we were basically just spending more. What was the first one? yeah just The first one in your was something called direction. waila And so the way it worked is that if it was like before the mobile internet was so good, if you wanted to get somewhere, um you would like people would always call 10 minutes before being like, okay, how do I get to the office? yeah seka they left in i han securityga and So it would then tie up local guys in the neighborhood.
00:06:43
Speaker
like the guy at the Kirana store or the guy who was going to touch the stand or something and you put a phone number in your calendar and write or you just have this toll free number that you'd call it would redirect to someone locally within the vicinity who'd visually know where you could be, have a conversation with you and then direct you to where to go. yeah
Challenges and Shifts at Investopad
00:07:03
Speaker
Okay. yeah I mean, these were these were terrible ideas to be honest with you. Yeah, yeah I was trying to politely say that. Thank God it didn't work out. Okay, and what was the next one? The next one was equally terrible. Actually, I still think something like it could exist, but it's like the standard alert thing that anyone is trying to build a tech product for the first time tries to build, which is it would look at ah like different, it's
00:07:32
Speaker
Any guy who has started to build a tech product, one of the first things they'll try and build is something that helps you find out that your friends have been in the same place. So it was one of those things where it's like, have you been in the same area before and they'll ping you if you overlapped or are overlapping at that time.
00:07:49
Speaker
um Like a check-in location. Kind of. And we were doing it more at a city level than a hyper-local level. so it was I mean, it felt like a better identified segment of people who travel more, but yeah, no.
00:08:05
Speaker
yeah ah How were you funding the development of these two products? and ah ah because You were not intending to raise external capital for this until it reached, let's say, post-PMF kind of a stage. yeah ah yeah And you spent four years in the product studio model. How did you find those four years? Well, ah firstly, I didn't get paid is a big part of it. And me and my brother were the founding teams. So we didn't we didn't pay ourselves. And then when we like part of starting the studio was about how do you attract talent? And so what we then wanted to do this is before even cool working spaces where it's a
00:08:45
Speaker
was we said, how do we create a hub that attracts talent? um And so Investopat in Gurgaon was the first physical place to do it. And we subsidized um the capital that would go into creating some of these products by bringing on larger scale startups and charging them for the co-working side of things.
00:09:04
Speaker
And again, those incentives are not well aligned, so the business for us just didn't make sense. I think we'd we'd have been a lot better served if we could have raised a ton of capital for it, been able to hire a large enough team, rather than being too sensitive about equity valuation at that point.
00:09:22
Speaker
So you essentially ended up running a co-working space, being involved in all the operational challenges, which that brings with it. You know, I was frankly and not too involved with the operational challenges event. But yeah, I think like half the business ended up basically being a co-working space. And we shut that down over the next few years.
00:09:43
Speaker
um But i I tried to focus my energies more on and the product side of things. but But yeah, I think you can't really have split focus when you're trying to do one thing. So it definitely made it difficult. oh These two products, when did you realize that they're not working out? Very early. And then you move on to the next one. And how many products total did you do?
00:10:10
Speaker
There were a lot of smaller things that we would have hacked together. So in total, I would think probably eight to 10 or so. These are the two that we probably more meaningfully stuck out for a longer period of time. But you know, then the other thing we start to do is that the promising startups that were coming to invest, okay, we'd start helping them a little bit. So we'd help them with go to market.
00:10:31
Speaker
We met a lot of people in the ecosystem quite early on and got entrenched quite early. So we were able to have them raise capital. So we weren't really sure what we were going to end up doing. Right. And so it was more just about being quite open minded about finding interesting things and getting our hands dirty. That finally led us to say that, you know, it turns out after um making 12 investments over those four years, that the portfolio was quite good. And maybe we had some kind of a skill in investing.
00:11:03
Speaker
how did How did you get so networked in the startup ecosystem?
Community Building at Investopad
00:11:08
Speaker
Was it because you were offering a place, like a co-working place for startups before any v-work or any such option existed, purely because of that, or you were just good at networking and or because you were helping in fundraise and so that would have automatically I think a big part of it was just being early, right? And then the second part of it is, you know, the co-working was a small aspect of what was happening at Investopad. At that time, there were a lot of enthusiasts about tech and about startups, and they didn't have anywhere to really meet like-minded people um or find co-founders or even do stuff like hackathon. So we hosted a bunch of
00:11:43
Speaker
these things and it's the weekends and evenings that were busier than the weekdays and so it kind of became a hub of activity and because of that we were a pretty central node in order what was going on and so it became easier if your mindset is to connect like-minded people who are doing interesting things and you do that over even two or three years at that stage of the ecosystem it went a really long way.
00:12:08
Speaker
ah So essentially what investor pad gave you more than anything was a community play. Yeah, it helped us. It helped us really build our impact with there, I think.
00:12:20
Speaker
Like not like a formal thing, but essentially you build a community of startup enthusiasts by hosting regular events and meetups and stuff like that. Totally. And like for me, that was a big learning from being in the Valley, which is that if you've got a lot of smart people who are doing interesting things and you're just putting them all against, you're putting them all together, it creates a lot of opportunity and things just start to happen. It's not a.
00:12:45
Speaker
it's It's not a predictable formula, but the more you do it, the greater of the odds that something interesting will happen. Okay. ah When did you finally decide to exit the co-working part of the business? ah It was phased, you know, like I said, because it didn't take up a lot of my time personally over the years. It kept running until relatively recently. um I think 2019 is probably when we shut down the majority of it, um but I wasn't spending more than a day, every couple of months on it, even at that point.
00:13:22
Speaker
Did you give up the space also or does the space continue as a... We had three studios. We had Gurgaon, we had Delhi, right opposite IIT Delhi main gate. And then we had one in Koramangla in Bangalore.
00:13:37
Speaker
And we got, so actually we shut it down sort of accidentally because we and there was a sewage leak in the building in on 80 feet road. And so we said, we're going to change we're going to change buildings. And so we shut it down. And as you were looking for a new one, it was probably around when the pandemic happened. And so we just never got around to it. So maybe closer to 2020.
00:14:00
Speaker
um And then the SDA one was where our team was. And I think in 2018, maybe four people. um And we just grew. And so we just stopped taking new people in. And I think it's now been probably four years since anyone else was in there. And the SDA one is exclusively our office. And then go to the ground, wound down maybe, yeah, like three or four years ago. I hadn't even there in a while at that point.
00:14:27
Speaker
I've been exclusively focused on investing for a long time by then.
Good Capital's Network-driven Approach
00:14:32
Speaker
Okay. Okay. I mean, you know, what I'm trying to understand is, is community your USB?
00:14:40
Speaker
that you have a community-first approach to building a VC fund? Is that a USB? Or that was how you got started, builder build credibility by getting a good portfolio together, and now you are a more serious VC like the other VC funds? I think more than community, it's a network-driven approach that's really supported us, even at the beginning as well as now. And I'll explain how that is. So I think as a Tech focused we see people talk about tech as if it's a vertical it's not it's horizontal growing because growing across every single industry and so if you're an early stage investor and you're specialized in tech, you need to, you could need to know everything what every single vertical or build a huge team where you've got specialists that are doing that.
00:15:29
Speaker
Or if you're very early stage, then you kind of need to be a generalist. And so our network became a huge advantage because we'd come across people who we thought were incredibly talented, doing incredibly interesting things. Now, did we know whether what they were building had legs?
00:15:44
Speaker
we weren't sure about that because that then becomes a vertical specific question. And so it became natural to say that, hey, we know this other person who spent the last 15 years building a business in this space and these three other people who've dealt with the same issues around like the chicken and egg of the supply side liquidity of marketplaces, for instance. So why don't you go talk to those people? And so that would help the entrepreneurs What we didn't realize initially was that it would also help us get an insider's view on the company and give us the conviction we needed to be able to invest in those companies. So that approach very much remains the case today as well, which is
00:16:22
Speaker
We acknowledge very, very early on that we're not going to be the people who know everything about everything, but if we can find um some of the top people in the country who have really done, have a lot of experience in sectors or have dealt with a lot of the current challenges of building and scaling companies, that can be a lot more beneficial to the portfolio than what we as GPs or the team can bring.
00:16:47
Speaker
And that wasn't the initial idea. The initial idea was as we moved towards building a venture fund, and would we build these huge platform teams and portfolio services teams? That's what made sense to me, but I don't think that's what happened.
00:17:01
Speaker
Okay, okay. what What are these platform teams, portfolio services teams? What do they do? Just help me understand what is the org chart of a fund? I mean, functions it depends on what the model is, right? A lot of VC funds go off to different models. So the Andreessen Horowitz model is to have huge platform teams. um They'll have salespeople who are- What is a platform team? Yeah, so a platform team can be across different verticals. It can be, they'll have a recruitment function.
00:17:29
Speaker
Our platform team is basically a centralized team that's treating the portfolio in the old sense of a really conglomerate, almost as if they were subsidiaries or divisions within a large company. But you're centralizing a lot of the core aspects of the business, advertising those costs. Like a shared services. Shared services. and And some of them have done it really well, right? So Andreessen Horowitz, as I was talking about, has a huge recruitment team. They've almost got an independent recruitment business inside Andreessen Horowitz. They've also got huge sales teams.
00:17:59
Speaker
So they've got people within different sectors of different industries who are attending all of the conferences, who are out there, they are known by industry players. So if you're an Andreessen Horowitz portfolio company, they can help you with a lot of your larger sales. um You can also have shared services like like UI, UX, design, like marketing, almost agency kind of stuff as well.
00:18:24
Speaker
um so i in In the early days, I used to think that that is the right way to build a venture capital firm, be able to offer a lot of these shared services to portfolio companies. But then you also have other venture capital models. So you have much more specialized ones where the GP group remains really small. Every GP is an independent decision maker. And they each run their own portfolio of companies.
00:18:54
Speaker
um and they're just kind of a group of people who meld well together, but are maybe focused on different sectors. um And then the third model you have is similarly very focused on the GPs, um but the when you raise from a fund like that, you're not stuck with a relationship through just one GP. You can have five or six different ones. and okay Okay, okay, interesting, interesting.
00:19:23
Speaker
um In India, which are the funds which have like ah which are invested in platforms? ah like You gave me Anderson Horowitz from the US. yeah what are like I believe Peak 15 has done it to a certain extent. um Elevation ah does it to a certain extent as well. In the way Elevation, I've i've noticed it more with Elevation because we have a couple of core investments with them.
00:19:50
Speaker
So they do a couple of things that are actually really helpful for companies, mainly around setting up their financial systems. ah So one of the things that early stage founders will proceed seeing going towards an A, always have to reckon with is how do I build my financial systems? ah So not just creating my MIRs, but how does information, um like actual transaction flows from the business get updated in close to real time so that I can have a live handle on what's happening in the business.
00:20:20
Speaker
um And I've seen them help with that in the past. um But yeah, I don't think in India, anyone's doing it in anywhere as involved a way as Andreessen Horowitz does.
00:20:36
Speaker
Is there a merit in one approach over the other approach? so And I'll just recap my understanding. So one approach sounds like the Berkshire Hathaway approach, yeah you know where Berkshire Hathaway is not doing anything except for capital allocation, choosing maybe the leaders and maybe and setting up an incentive plan, ah but they're very hands-off. And the second is, that as you said, the conglomerate approach. yeah what's What's your take between these two approaches? and I don't think one is better than the other, but they're very different games. So I think in order to do this shared services approach, you need to be a mega multi-stage fund. It doesn't make sense to do if you're going to stay focused as an early stage fund. There are economies of scale involved in doing it. um And if you try and do it at a sub-scale, it doesn't really work because you're not able to bring on the best talent to be able to do it. um And also then,
00:21:34
Speaker
What you're doing is a venture fund changes. your When you're a mega fund that's multi-stage, you're running a business. You're not an investment firm. You happen to have a team that invests. But actually, there's so many other aspects of running a VC fund, which really are not in the industry as deeply kind of seen or talked about, um but I think ah shared services are something that makes sense at a lot more scale, which is why there's also, I mean, at the other other end of the spectrum, you have this solo GP model that emerged over the last few years as well, where you had either fast GPs at funds or founders turned investors who are raising capital and are able to raise a meaningful amount of capital, that they're just investing without a team, they've outsourced all of
00:22:22
Speaker
the compliance, the operations to an angel list or to a car tower to to some other platforms. You're seeing those two sort of emerge as well. I think it depends a lot on what the GPs want and what their vision is and what kind of business they want. Like, do they want to run the business or do they want to run? Do they want to be investors?
00:22:44
Speaker
okay okay Okay, interesting. interesting um okay So let's talk about the evolution from investor path to yeah capital.
Reflections on Angel Investments
00:22:52
Speaker
ah By the time you decided to do your fund one, yeah how many investments had you done? What were some prominent names? We've done 12 investments.
00:23:01
Speaker
So these are like your personal capacity. Yeah, personal capacity. So small investments. We did 12 until 2018 and we'd started doing them in twenty late 2014 or so. So now the problem with them was that we had a limited amount of capital to invest. And so for us to write a check was like a huge opportunity cost of where it could go. It was pretty much ah it was a zero sum game in that sense.
00:23:29
Speaker
um And so I think looking back at that portfolio 2014 to 2018, it meant that the kind of conviction we had to get to, to build a portfolio was incredibly high. And what I felt was a big problem with that portfolio while investing was that it was going to be really small. It was always going to be 10 to 12 companies. And the idea that made sense to me when you think about angel investing is that you make lots of little investments. And then when the company starts to do really well on breakout, you double down in the winners meaningfully.
00:24:00
Speaker
And we were doing the opposite, not because we wanted to. I wanted to do the lots of little bets model, but because we had no other option. And by the time we got around to 2017, 2018, I became increasingly convinced that this was the right model to do rather than the spray and tray kind of a approach.
00:24:18
Speaker
ah The prominent companies, so there were 12 companies in that portfolio. We had, I believe, two shutdown. We have two that we're still holding, including a third that has, and a third that was acquired by someone else. The two that are we're still holding in some kind of scale are Hypertrac and Micho. And then there were eight others, which were either acquisitions or secondary sales.
00:24:47
Speaker
And how much did you make in these eight? like Did it more than return the entire corpus? It returned the entire corpus within the first four years. Within the first four years from the first investment.
00:25:01
Speaker
So by the end of 2018, we returned everything we'd invested across all of the companies in cash from the acquisitions. um And then obviously beyond that companies like Amisho have been you know close to like 1000 mixes on the investments. So it's quite nice. Like a blended, what would be the blended? The blended portfolio stands at 50 times what we invested today.
00:25:26
Speaker
Wow. yeah the inys were totally embrace And hopefully this like there's a couple more multiples to come from that too. Okay, amazing, amazing, amazing. So the there's like a constraints forcing a certain business model, which actually ended up totally the right model. Totally. And so I've been a big believer in constraints in general, and it's a constraint we've tried to hold on to. And so the way we do it now is we limit us the number of investments we make every year to force the same kind of conviction, because you know we come across, we look at
00:26:02
Speaker
I think it's something like 160, 170 deals a month, um which is okay very late like on the lower end, it's that. ah And so you come across a lot of really interesting companies and you want to be able to invest in them. And the problem is if you're in that not even in disciplined, like if you are just A curious person, the biggest problem you're going to have is you're going to have five or six that you fall in love with. But then you also have another 2025 where they make a lot of sense. You're not quite sure. And if you're sitting on a $50 million fund, like why do I not? Why shouldn't I put a hundred thousand dollars into this? Let's see what happens and we'll come back to it. And so optionality is like a pretty silent killer then I think because you end up doing lots of that.
00:26:51
Speaker
Okay, nice, nice. That's very counterintuitive advice about the the pitfalls of optionality. Amazing. Okay. um So when did you formally launch a fund?
Fundraising Challenges and Strategies
00:27:05
Speaker
2019. July 2019 is when we launched good capital fund one. um And we did first close, it was supposed to be a 20 supposed to be a $20ish million dollar fund. we did The way fundraisers work now is unlike a company raising around is when a company goes out to raise, they get all their commitments from investors. They raise, they do a dilution for equity ah standard.
00:27:29
Speaker
With a fund, you're raising a pool of capital that you're going to invest into companies. And so we raise from LPs, and you're allowed to raise over a longer period of time. So we do something called a first close, which would fund one meter at 16 million. And then you can start investing. And then you normally get 12 months where you can take more capital in. So the more risk averse LPs then start to come in in those ensuing 12 months, because you say,
00:27:58
Speaker
Like to the first group you say, this is my strategy. This is why I'm good at sourcing. This is my track record. Here's how I see the world. Here's what's exciting bunch of like narrative stuff. Whereas with the second group, you say, look, I told you all of that. Now I'm showing you another five or six companies. This is what they do. Here's why they're interesting. And we think this company will go on to raise more capital in the next six months at this price.
00:28:21
Speaker
um So that's typically how you do a fund fundraise. Now the problem for us was with Fundone, we did this first close at 16 million, and then fundraising was going really well. So you're like, you know what? Initial target was 20 to 25. I think we can do 30. And so we got a bunch of verbal commitments. We didn't hold a second close. And then the pandemic happened.
00:28:44
Speaker
and anyone who had verbally committed to us but had not signed anything was suddenly balls were up in the air and it was March 2020 and our final closed deadline was the first week of July 2020 so that wasn't enough even though the sentiment changed pretty drastically after that there was that two or three month window which really caught us out and so we were then stuck with a 16 million dollar fund and we had been making our first four investments were I think million dollars each Um, and so we had a very skewed portfolio and then kind of had to deal with how do you reshape the construction of that fund? Why, why is a million dollar reach investment causing it to be skewed 16 million? So you can invest in 16 companies over a four year period. Yeah. it's kind of
00:29:32
Speaker
So typically what happens with a fund is you have a in a $16 million dollars fund, let's say you have a 2% management fee. So it's 2% annually. That's 20% taken away over the 10 year period. and you You might have a few more expenses.
00:29:48
Speaker
um And so that brings you down by 3.2 million in that situation. And then you also want to leave some capital to follow on into companies. You don't just make a one shot. Like it's very rare that a fund will, its entire portfolio construction is zero reserves. So reserves is what percentage of your fund that you're reserving for follow on, whether that's pro-rata, whether that's leading future rounds, whatever that may be.
00:30:14
Speaker
In fact, most funds have a higher percentage of their fund be reserves than initial investments. So we are unusual in that sense, like our reserves are probably 35% or so. For most funds, it'll be well over 60-65%. This would again sound like a very newbie question, but If you are taking a bigger stake early on, aren't you getting more multiples? At a 5 million valuation, if I invest 1 million, I get 20%. Whereas at a 15 million valuation, I invest 1 million. So and I mean, when you come in later, I assume the 5 would have become 15. No, that's that's exactly right. and That's why we put the majority of our investment in the first checks that we write. And again, that's why I believe
00:31:02
Speaker
an approach where you have a high percentage of the fund and reserves um is a tougher approach because then every early check you write is like an optionality check where you start it and start investing in the company. And then as it starts to do well, the multiple actually goes up and then you invest the majority of the capital. So we don't do that. like When I was saying it was a problem for us that our first few checks were million dollar checks,
00:31:26
Speaker
It's because the total investable corpus was smaller and our average check size should have probably been half of that. And so then we had to overcorrect. But actually, it ended up working out quite well. The reason it ended up working out quite well was we went back to our LPs and we said, look, our strategy has been a really concentrated fund. And now if we have 12 million left out of 16, and we've still got two and a half years of investing to do. um Either we can change our strategy a little bit, write smaller checks into more companies, or if we want to be the lead investors in these companies, which was always the goal, then you guys give us capital outside of the fund to co-invest into these companies. And so even though the fund was only 16 million, we actually invested 45 million over our vintage, and we were able to put more capital into each of those companies.
00:32:19
Speaker
ah okay okay okay ah who who Who are those ah companies in front of them? The first investment was a company called SimSim. um And SimSim was an interesting one because we had our verbal commitments from the fund quite early. By the end of 2018, we had 16 million committed. It just took a long time to structure all the way we were dealing with new things. And so we committed to our first few investments. I think our first four or five investments we committed.
00:32:51
Speaker
months before the fund was actually set up already to deploy capital. And I looked back at the paperwork and I think with Simpson, we'd made the commitment like six or seven months before we'd signed documents. And so we were really fortunate that they were good to us and structured the investment in a way that our capital could come a little bit later.
00:33:15
Speaker
um Simpson was a really prominent one because that was acquired by Google a year later actually. um oh well Yeah. So they were doing social commerce, video based social commerce. There's another company called entry, which does local language education. um And I think they're doing incredibly well as well.
Good Capital's Early Portfolio
00:33:35
Speaker
um There's a company called Weldy, which is building a platform to help people become wealth managers. um And they give them the software to be able to manage their own roster of clients.
00:33:47
Speaker
um Solar Square is a company that we invested in as well, which and I interviewed. three i the squarefounded Oh, really? Yes. Nice. Nice. Nice. Yeah. So these were some of the early ones.
00:34:03
Speaker
okay okay okay and so How easy or hard was it to raise money from LPs? and Did you target your network or did you target institutional, capital, domestic, international?
00:34:18
Speaker
We targeted only international capital because you have to make a decision when you're starting a fund, whether it's going to be India based or foreign. And and most of ah where we felt that there'd be a bigger pool of capital at the time was foreign. So we created a foreign fund and it's easier for them to come into.
00:34:38
Speaker
um into these offshore vehicles. It was a lot harder than I thought. As Singapore? Mauritius is the standard sort of one that everyone uses with India. But it was a lot harder, I think, to raise the first fund than I would have expected. Just because you think that there are people globally who are interested in the India story, and there are, but it depends a lot on I mean a lot of LPs firstly are risk averse. Secondly, the type of LP that you target is completely based on your fund size. So if I'm raising a $25 million dollars fund, I can't go to Silicon Valley and raise money from those angels because those angels write $25,000 checks and you don't want more than 40 investors, let's say, in your fund.
00:35:23
Speaker
um But then again, if I'm raising a 25 million dollar sign, I'm way too small for an endowment or a foundation. um And then the next rung up from that is sovereign investors. And the reason for that is that those guys are sitting on such ah large such large pools of assets under management.
00:35:45
Speaker
that it's an equal amount of work, firstly, whether you're writing a million dollar investment or a $50 million dollars investment, it doesn't change by a 50x. It might change by a 3x, but it doesn't change that really fully. So it doesn't make sense for them to write really small investments. And so for us, we're kind of in that awkward spot where if you're, even today, if you're raising a fund that's between 10 million and 130 million, your target LP is family offices.
00:36:13
Speaker
And family offices are the most opaque part of this LP ecosystem because they are essentially family businesses that are typically generational that are generational that have made capital, have institutionalized a family office. That's managing the capital for now what is the third or fourth generation of the family.
00:36:34
Speaker
So it's quite dispersed. There's maybe like 40 people at that point in the family. So they're not really involved. And then you've got these family offices whose mandate, unlike a sovereign, whose mandate is probably to get returns or an endowment is to continue to kind of beat it returns. With the family office, it's preservation of capital. So it doesn't make sense for them to do incredibly high risk stuff. If you're talking about private equity, that's high risk. If you're talking about venture capital, that's even more high risk. If you're talking about venture capital in India,
00:37:04
Speaker
Like there's very few that can take that kind of risk. And the problem with venture capital investments is when things go wrong, they go wrong within the first three or four years. But when things go right, it takes eight to 10 years for them to actually start to look right.
00:37:20
Speaker
And so if there's a guy who's sitting in Europe writing an investment and doesn't know India very well, to be able to take on that kind of risk really requires a testing, not just to the market, the market risks, the strategy risks, but also the GPs and whether, you know, there's a lot of risks that are led in there that make an interest in a much tougher bet to make.
00:37:46
Speaker
ah How old were you when you were raising in 2019? We started raising in 2017. How you manage to raise $20 million dollars as a 27 year old?
00:38:02
Speaker
but Like you said, you know that GP risk, ah I mean, you know, for someone to give millions of dollars to a 27 year old kid. I mean, you still look very young, you know, you have that boyishness in the way you look. Yeah. so ah yeah Well, I think.
00:38:21
Speaker
It was a couple of things. Firstly, there were one or two people who took really bored risks on us. So in fund one, there's a firm that came in and they put in 5 million and they said that we're going to anchor this fund. And we like what, you know, they came to India, they met all of our portfolio, met everyone we worked with, spent time with us. And they said that we believe in the strategy and we think this is going to work. So we want to help get them in business.
00:38:49
Speaker
and getting that main kind of rock helped everything else catalyze because then you're suddenly saying that this isn't just a strategy that we've made a certain amount of progress against a milestone. The second thing is time. It took a lot of time. We had a huge falls. We had a false start in 2016 as well when we tried to fundraise and someone very quickly gave us indicated the overall commitment of eight or nine million. We were like, okay, great. This is fantastic. This thing's super easy. And then it fell apart pretty quickly. So then we had to go back and start from scratch. So I think time was a big part of it because we spent a lot of time with these people, um meeting them, giving them updates. Like you're running a marketing process. You're taking all of the updates from your portfolio, especially when you're doing a fund one.
00:39:39
Speaker
And you're then transforming it in a manner that's really integral to someone who doesn't understand the industry or the ecosystem and explaining why it's exciting. And also, obviously, the portfolio started to do well. I mean, that being said, a lot of the markups that we have now, we didn't have in 2018, like even the me show was not nearly marked up anywhere near as much as it is now back then.
00:40:02
Speaker
um So I'd say time and a couple of people willing to take big, bold risks on us as well. We're quite lucky in that sense. and This 5 million LP, how did you meet him? What what led to that happening? but Was there some sort of a credibility building that happened through an introduction or was it purely your pitch?
00:40:24
Speaker
No, that we were introduced through someone that we had met through this Investopad ecosystem that we brought in um that had looked at a bunch of companies alongside us. So he knew we were doing interesting work and he knew these people. And so he got in touch with them. And this is a film that had been investing in India until 10 years before and then they hadn't done any anything.
00:40:46
Speaker
And he sort of said that, look, I've known these people for three or four years. um I've seen the work that they're doing. And I don't really understand it, but you guys understand and this ledger capital stuff better. So why don't you, why don't you sort of take a look at that? And so, yeah, that's amazing. The power of community in Europe, both getting new deals, getting new LPs. Amazing. Well, yeah, and totally even now, I mean, a lot of the larger institutional investors that we bring in today,
00:41:16
Speaker
um Short track record is something and strategy and thesis is important, but more important than all of that is when they are, you know, like the difference with us is you're not investing into a business. So I can't give you financial metrics. I can't give you a growth plan. You're en investing into a blind pool of capital that good capital managers.
00:41:41
Speaker
But what they do with it is then totally at their discretion. So it's a huge leap. And so it requires a lot of people who are willing to vote for us and have seen us over the last 10, 11 years. you know What is the difference between strategy and thesis? What's the difference in strategy and
Investment Thesis vs. Strategy
00:42:01
Speaker
thesis? I mean, I am not a huge believer in thesis. I would imagine a thesis would link more towards what is your view of how the world is going to shape up. And so what kinds of companies do you want to invest in based on that?
00:42:21
Speaker
um Like say electrification, like everything will move to electrification throughout. So you invest in EVs and battery companies and lithium ion recyclers. Exactly. okay So that's the thesis. And then the strategy becomes more around how do you source and also how do you do portfolio construction? Like to me, portfolio construction is a really big part of strategy because I think your entire Yeah, your entire strategy is based upon how you choose to construct the fund. So if we were to take a $15 million dollars fund and decide we're going to do 25 investments a year for three years and then double down into five companies every year after that, that's a very different structure from saying I'm only going to make six or seven investments a year for three years um and come in early, take a log stake in those early and then maybe protect my pro rata for the next two rounds. So I think that ties a little bit more into strategy, at least for us.
00:43:19
Speaker
yeah Okay. Okay. Okay. Okay. and Understood. So this high conviction, uh, come in with few checks, but, uh, come in with, uh, that is, that's the strategy. Yeah. Okay. Yeah.
00:43:34
Speaker
our discussion cook it um So what is, so Fund One was 20 million plus total with the co-investment came out to about 45 million. Tell me about the journey of Fund Two. Fund Two was a 25 million first close and will probably end up being about a 45-60 million dollar fund. So we have until September to do that.
00:43:56
Speaker
but we started investing out of it ah in summer last year. I believe we've already done eight investments. So it's a larger fund, but strategy remains the same, which is we come in as the first round investors. And this time we don't make the mistake of not being able to lead deals completely on our own. We make sure we have enough capital.
00:44:20
Speaker
um that we can lead 80% of the round when we come in, whether it's a pre-seed round or a big seed round. So the smallest round, the smallest investment we've done is $100,000 investment. The largest one is about 1.4, 1.5. And in both situations, we've been over 80% of the money invested into the company at that point. and ah Any prominent names in these eight?
00:44:44
Speaker
um
00:44:47
Speaker
I always struggle to see which one is fun, one which one is fun to do. You know, I'm not sure what has announced yet. So I don't know get to what extent I can say. Yeah. And I would be happy to tell you all of them. I just don't want to betray the entrepreneurs who haven't done their side of the storytelling yet.
00:45:10
Speaker
okay so Typically, as an investor, you want to an ounce after give that ah opportunity to the entrepreneur to first figure out how they want to tell the story of
Focus on Unique Opportunities
00:45:20
Speaker
the funding. and then the back it up with your own announcement. Yeah, um I think that in general, I would, if I were, it's not about us at all. I think it's more about what makes more sense for the company. In most situations, I encourage the company to not really do anything about it because
00:45:41
Speaker
We focus, and I can come back to how our strategy forces us to find certain kinds of companies, but it largely forces us to find companies that have very little competition, but have found really unique market niches. um And so if you've done that, you're operating on ah privileged information in a sense. And so I think it makes sense to stay stealth as long as you can as a company.
00:46:07
Speaker
Now, companies often need help with hiring early on or giving, if they're B2B companies, giving their customers the credibility that this is a good company to do business with. And that's where fundraise announcements become really important. If you've got a candidate who's joining you, you should be Google-able and you should know that, okay, here are like four other reputed names who stand by this. So I think those are the only situations, at least at a very early stage, where it makes sense to do press around the fundraise.
00:46:38
Speaker
Interesting. ah How do you build high conviction? You said your strategy forces you towards a particular portfolio choice and the strategy is high conviction. So how does it happen? How do you do? How do you build a high conviction? I mean, it's structural, right? So I think let's take, let's compare the strategy against a typical strategy, which is a fund that's doing 2025 investments here.
00:47:03
Speaker
Now, what happens and also what gets popularized in the sort of tech startup world is everyone's always excited about two or three sectors, whether it's quick commerce, or it used to be N-type or crypto or whatever. um at ah At some point, there's always a couple of hot sectors that everyone's focused on. Now, let's get into why are they hot. They are hot because ah the market is acknowledged as large. right So that's risk. Market risk is often off the table.
00:47:31
Speaker
And because the market is acknowledged as large, there's a lot of capital that comes into it. Now what follows is these are known markets with known large outcomes about to happen. You'll have a ton of competition. You're going to have 20 credible teams going after every kind of opportunity. um And the problem with that then is beyond competition is that a series A, you've only got six funds in India who have major check writing capabilities. So that's a huge kind of filter off. And so if you're a seed stage fund that's making 20, 25 investments a year, you can afford to pay a premium to come into these really hot sectors. Because even if 80% of those bets fail because of the high failure rates going on just from seed to A, but the inherent competition of the sector,
00:48:25
Speaker
There's high failure rates, you can eat those because your total fund over three years is 60 to 75 companies. If my total fund, I'm doing six investments here, if my total fund is 18 companies, I have no business investing in incentives that are that hard because the failure rates would eat me up, they'd cause an existential risk. And so automatically that eliminates like 50% of where the ecosystem's energies are focused in terms of what kind of ideas am I interested in funding. It means I'm not going to be interested in the funding at tech when at tech was hard, quick commerce and quick commerce was hard, social commerce and social commerce was hard. But instead I have to focus on other niches.
00:49:08
Speaker
And there what's ended up happening is our DNA has become to find entrepreneurs who find really interesting counterintuitive behaviors, which if it's real and if extrapolated could actually mean that there's a huge market about to be transformed or a huge market that's emerging. And so I can give you a couple of me show is the company that everyone knows, right?
00:49:34
Speaker
um And Simpson is another good example as well. But let me talk about Meesho. Meesho, I think was late 2016 or so, maybe early 2016 when we met them. At that point, you had Flipkart, you had Snapdeal, and you had Amazon, who were already at a meaningful scale. So a new e-commerce player had no business coming in. And when we met,
00:49:57
Speaker
um Vidit and Sanjeev first, they were building a hyper-local fashion commerce app. You would order clothes from a store near you and they'd deliver it in 30 minutes and you'd pay them cash on delivery.
00:50:09
Speaker
But, and that business wasn't all that interesting, but like Vidip sat in the store for six months and he found a really unique behavior. So he found that the store owner had a son or a nephew with a smartphone who'd take pictures of all the new clothes that came in. And he'd also take all the customers who worked in their phone numbers and he'd send them any new inventory that came on WhatsApp every day.
00:50:32
Speaker
And people weren't leaving these groups. So if you added me in 2016 to a group like that, I'd never seen, now you see them all the time, but at the time I'd never seen this kind of group chart behavior. And so people were just, and people were not leaving the groups, they were interested, they were going back and forth. And then we found that a lot of the people in the groups were actually housewives who had come in.
00:50:54
Speaker
They've created their own pages on Facebook pages and the product was called in. Now it's all migrated to WhatsApp. And they would post the products that were coming and they would sell them. So they were dropshipping these products. And it was fascinating because they weren't dropshipping into the void. They were dropshipping to their first degree and second degree network. So these are known people within communities. And essentially what they were short circuiting was the trust problem.
00:51:22
Speaker
Now people didn't want to buy things online because they didn't trust that it would be as advertised and also that it would be suitable for them or not or not. But now you have someone that you know that is a friend of a friend and kind of knows about you. It's conversational. They're helping you along.
00:51:42
Speaker
And they're dealing with the complexity of going to the website, placing the order, putting the address and making sure it arrives, putting in the payments and all of that. um So I think on the one hand, it was quite interesting on the demand side because the trust problem was being filled. On the supply side, it let you tap into the long tail of these local shops.
00:52:06
Speaker
So people who did well on Amazon Flipkart Snapdeal at the time were, if you look up an item and it appears on the first like top 10 of search results, but the long tail would not thrive on these platforms at all. So suddenly here was ah platform a product, and not even a platform at that time, that was helping you get distribution.
00:52:27
Speaker
And actually, it's funny because we've just invested in the we we just invest in a-local commerce company, which is about two or three years after after it's been a hard sector. And obviously, like Zepto and Blinkit have done incredibly well. But we've come across another approach, which is very similar ah in the sense that it it it aggregates a lot of the long tail which doesn't do well on these major platforms.
00:53:02
Speaker
And what what's it doing for demand? I mean supply and in a marketplace is supply like a competitive advantage. so It's doing interesting things for demand. as i I don't know to what extent I should get into them right now, but essentially it lowers a lot of the friction um ah for a segment of the user audience that's not well-served by a Blinkit or a Zecto. But yeah, I think supply is totally ah it's totally a structural advantage for a business.
00:53:35
Speaker
ah in in the marketplace sector and the reason for that is that India is an economy of really small businesses unlike the US or other developed countries and so structurally strong businesses structurally small businesses will have to be supported.
00:53:51
Speaker
um because they are the ones that are driving the economy and they are like individual entrepreneurs and SMEs are willing to do a lot of heavy lifting and work really hard for a small amount of sales. And so to engineers, it's often not attractive to build software for a really long tail. And I think generally in markets, what we've seen is the the like where the meat of the Pareto is get saturated first and then the long tail get tapped a little bit later.
00:54:21
Speaker
But the long tail is where like in, in Misho's case, right? In fashion commerce, 90% of fashion um sales in India was unbranded product. So that's all long tail. So the low hanging fruit is the brands and the larger players. But as you develop into a sector, you're going to need to actually tap into the long tail.
Evaluating Consumer Behaviors
00:54:43
Speaker
And I would argue that the long tail is the larger part of the market.
00:54:47
Speaker
Yeah, Shopify is essentially the the product for the long tail and e-covers. Yeah, in in in other markets more so, but yeah, totally. Yeah, in other markets. Yeah. yeah yeah yeah Okay. Interesting. oh how do you ah yeah Do you have a framework that these things need to be in place for us to have high conviction? No, not at all. so Okay.
00:55:16
Speaker
So in every investment, it's like a real deep dive to understand what they're doing and then apply the filter of your own experience of past investments and your understanding of India as a market and then figure out. What is it that you're figuring out? Are you figuring out? Will they raise the next round at a higher valuation? Is that the person you're asking? No. In fact, we end up passing on a lot of companies. where we're like, okay, these guys are doing something interesting. They'll certainly be able to raise the next round. I just don't know whether this is a large enough business at scale. And often that's in sectors that are hot, right? There's just momentum. You can raise capital, but like that peters out at some point. So to your question, I would say, yes, it is a deep dive on each business.
00:56:09
Speaker
It's not as much putting it in the context of what are the structural macro drivers in India? Where does this market go in 10 years? It's more just can you find a really unique behavior that shows you that your understanding of how a huge organized sector operates and is normal.
00:56:30
Speaker
is actually not, it's the total opposite, that people might actually prefer a totally different way of doing things. So in Misho's case, it was the fact that, um ah sure, on there was a huge long tail, that thesis came a little bit later, but the behavior was just interesting that you had someone sitting for four hours a day,
00:56:52
Speaker
taking screenshots of clothes, putting them onto a Facebook pages page, trying to sell it, and then people actually buying it. It showed that people wanted to do commerce this way. For me, I'd rather have gone to a marketplace, type in exactly what I wanted, order it, and not have to think about it in their eyes. Here, people wanted to have two hours, three hours of conversation to buy something.
00:57:14
Speaker
which was a completely different behavior to what would have been expected. And I think retrospectively, I can look back and understand it a little bit better as to why that was. And you draw parallels to how you have self-serve models and then sales assistant models and all of that. But at the time, it's just you find a really unique and strange behavior. And you say, what if we're totally wrong? And mostly people prefer this thing but the whole world has been building the other thing. And people are using the other thing because they didn't know that this is preferred.
00:57:48
Speaker
So I'd say that's kind of a common theme in a lot of our investing. But insight alone does not lead to high conviction. you Can the team build it? is there Is the market large enough? I mean, these things also would be... Yeah, I mean, market sizing is something that is, ah to me, it's a really strange topic because I think it's a really silly question early on when people say, is the market large enough? Because the market's not defined. If you're doing something that's changing the way things work, that's like changing a sector of the world in a way, then obviously there's no heuristics to be able to calculate how large the market is because it hasn't been created yet.
00:58:35
Speaker
retrospectively, you can look back. Like even if you look at something like an OAO, right? That market didn't exist. It was a new model or an Airbnb. It was a new model. Um, and so I don't think you can do that. I think you can find it go forward the sizing approach. with our past on airb be yeah Yeah. Yeah. So I think, um, you find, I think the,
00:58:59
Speaker
Like how latent that behavior is and how strong and sticky it is, is really important. So at that time, when we spoke to Meek Show, there were 32 people who had the Meek Show app and were selling through Meek Show. And so I spoke to a bunch of them and they loved it. And they'd have long conversations about why they would much rather sell on a product like this than a snap dealer in Amazon. And so they were invested in making sure it would be successful.
00:59:24
Speaker
So you certainly have to extrapolate what would the world look like if this behavior is true at some kind of scale. But I think it's hard to start mapping it into a market. say I try never to do any market sizing predictions, to be honest. And what about evaluating the team? Yeah, I mean, look, evaluating the team's capability to build something is an easier one. I feel like if they are mainly what you're screening for is growth. So anyone who's coming to you should already have a prototype, should already have customers. um Even idea stage people should have mockups or something like that. So I think in like, we're fortunate in that in this industry,
01:00:15
Speaker
you're typically dealing with really intelligent people. And so the question that you can't answer is, are they able to grow as people, as managers? And that's stuff that you have to worry about theories being beyond, not really before that.
01:00:33
Speaker
And I think that's so hard to judge that you don't try and judge that. But in terms of are they good enough to build the product, they should have the product to build. you know They should be hacking things around every every week and creating new things. So if if they're not, like if someone is coming with a strategy and pitching a strategy, that's an automat automatic no. If people are pitching a market opportunity and pitching a top down, so they're talking about macro drivers first,
01:01:00
Speaker
and then getting to a solution that's like nine out of 10 times a no. um To me, the most interesting thing is when people are bottom up focused, they're focused on problem much more than solution and on being really um being able to describe the problem really vividly and really deeply.
Entrepreneurial Focus on Problem Understanding
01:01:22
Speaker
That gives you the sense that they understand the customer well, incredibly well. So I think that like that's a good proxy for being able to do it. Okay. Fascinating. Visio has changed their model now, right? From what I read ah in the news, this original model is no longer what they're doing. They're more like a proper full fledged e-commerce business now. Yeah.
01:01:51
Speaker
Yeah, okay yeah yeah yeah i think I think that kind of happens at scale. Business models will keep changing. I think they've had major changes to the business a couple of times and have both times led them onto a more um constructive path and towards a larger outcome than previously imagined. so i think The way I see it is the world is dynamic in the sense that the idea that you start with on day one is not what you're going to scale. We're all going to be heads down and keep scaling there. As you grow um there, like your scale, your structural modes let you do other interesting things. So and if there's the grub.
01:02:35
Speaker
So the first pivot was actually that they started as a, and in fact in my old emails, I looked back and I described it as a product suite to help people sell things on WhatsApp. So ah you would like, cause you would get photos of products and then people would write a description. And so what it did was you could upload all of the photos into the Micho app.
01:03:00
Speaker
along with the description, along with the inventory. And if you wanted to sell it, you click share to WhatsApp, it would create a composite of all of that with the description with a payment link that would come to your account. um But it wasn't didn't have anything on the inventory side, so it didn't have a supply side.
01:03:20
Speaker
So they operated just as the sales enablement product. And then I think maybe a year in the house later, they launched something called Micho Supply, where they started tying up with wholesalers and retailers for those guys to list their inventory. So you would list on Micho Supply, and then the housewives would be on Micho, and they'd see the products listed on the supply side, and they'd choose to market them. so it streamline the supply chain a little bit and then in time they shut down the Meso app and they renamed Meso supply to Meso. That was the early third. And now they're doing direct to customer logistics fulfillment, they've built all of those capabilities.
01:04:06
Speaker
Yeah. um I think, look, their structural motives that they have a lot of suppliers um who are local. And so if you're ordering a product, it should show you suppliers who are in regions close to you, rather than coming from across the country, which will add a lot to the shipping costs and things like that. So they have regional supply chains.
01:04:31
Speaker
ah That's why they built their own logistics solution to kind of help the ah help bring in the efficiency of ah local matchmaking. Yeah, I think the more depth you have into how a product is moving across the supply chain, the better you can predict timing and mitigate errors and reduce costs. So and that's sort of the path that they've been, I think that lets them do that. Okay. Okay. Okay. And this would be interesting.
01:05:01
Speaker
oh ah did you know Bad bets that you took, you maybe you don't want to name names, yeah but just as an example of what you learned from that, like you thought this was a good bet because of ABC, but it turned out that ah you were wrong in something and what you learned.
Reflections on Investment Mistakes
01:05:21
Speaker
How many bad bets? Where do I start? Let me try and think of a couple of specific ones so that I can give you a
01:05:30
Speaker
good example without naming it. I think the biggest mistake we've ever made has been to get swept away in the excitement around companies and rely on borrowed conviction.
01:05:45
Speaker
which is the number one thing I talk about not doing, and it's probably as a result of that. And I think another, a less intuitive mistake that we've made a couple of times now is we've come across companies we've liked that are doing something interesting, which we have rising conviction on. And, you know, our approach is to find people in our network who can help these companies, who can also give us an opinion on these companies.
01:06:14
Speaker
And there've been a couple of times where there's people we really trust and have even been founders of portfolio companies that have done really well for us. There's no sector inside out. And because of their in-depth knowledge of a sector, they've given us 10 reasons why something can't work.
01:06:34
Speaker
And then we've listened to that. And so I think that's part of the journey of being- That's your anti-portfolio. Yeah. Where you said, no, even though you thought this is a good investment, but you were influenced by the feedback of somebody from the space. Somebody who knew the space better than we did. So that's what definitely cuts both ways. And I think that's part of the issue, right? As an entrepreneur, I find that the best startups have been from people in their mid to maybe late 20s who are really strong technologists, product people, good to go to market, but may not know the sector as well or the challenges of the sector as well. And so it's this stubborn force of will that eventually just surpasses what would have been problems in the business. So I've seen that a couple of times. ah So that's kind of the part.
01:07:30
Speaker
and a narrow path to try and walk, which is be open to feedback and input, but also know that it comes from, um that each data point is from someone's individual perspective and their own journey. Yeah. I mean, if if you're looking for counterintuitive insights, then possibly and an insider who's been building in that space for a while. Yeah.
01:07:56
Speaker
would not have that insight. yeah Otherwise he would have already built on it. Yeah. so so Well, they definitely don't have that insight, but then are they able to take in something new that's changed? Like can they take in that new piece of information and extrapolate that in and or project that onto the sector and say, could this make sense?
01:08:13
Speaker
And ah like now I've started to find out the comment that the common feedback in those kinds of situations when it's negative, the negative feedback doesn't actually head on, take the approach of the business. It just focuses on other structural problems within the industry. Give me an example. How do I do this without naming? I mean, okay. So like any commerce, for instance, there have been a couple of companies that have tried to do mass You know, you've got the PDD model in China. um Yeah. Group buying. Yeah. Yeah. And so, so group buying is a certain behavior and then part of it also works because you've got really developed logistics infrastructure in China. And so cost of, ah cost of shipment as a share of the total basket value, they're low even for low ticket get items. If your cost of shipping across the country is low in the past, it didn't used to be low in India. And so I've definitely missed.
01:09:12
Speaker
a company that did really well because of where shipping costs were at that point and knowing and feeling like it's feeling like I know that it's not going to come below a certain threshold that makes sense. And combined with the idea that a lot of the products behind the PDD ah came from came from like manufacturing surplus, for instance. So you had a lot of spare product at scale, which manufacturers would be willing to sell at a lower price than what would make sense. And that insight turned to like turned out to not entirely be true and actually create another opportunities. like but That wasn't the thing that stopped a business in that sector for working. Okay, okay, okay. I want to kind of end with
01:10:04
Speaker
You know, an observation which I've made over so many interviews is that the folks who are running VC funds tend to be some of the most ah intelligent people that I've interviewed. Not only intelligence, but it's also the fact that they are So aware, ah how and how does that happen?
Continuous Learning and Insight Gathering
01:10:27
Speaker
like Like how did you get to where you are today where you can talk as fluently about a PDD and apply that example to India? and ah yeah know so So how do you reach that level of but ah you know that level of being able to look at big pictures, zoom into small picture, being able to draw insights, being able to make mental models,
01:10:52
Speaker
Well, you know, I think it's quite a double-edged sword because like I was saying, I mean, if you if you summarize my answer to the last one, a simple, maybe misleading summary of it is that the more you know about a sector, the the less you're going to be able to make good predictions about it. So I think it's a little bit tough and I try not to go too deep on like building expertise within sectors for that reason um and certainly investments I've made that or investments which have not done well have been partly because I've i've understood a prior business maybe better than then or a prior industry better than I should have. I think it's
01:11:41
Speaker
maybe a lot of VCs are good generalists. So they read broadly, they develop mental models from, at least for me, I develop a lot of mental models from other academic disciplines and then you use those to apply to business theory rather than fixating too much on give me Give me an example of this, like taking a mental model from. I mean, for instance, earlier in the conversation, we talked a little bit about you asked about the power of community. And then I talked more about it being a network of nodes and then how you try and build up a network. And if you are generous about bringing
01:12:20
Speaker
um People who are doing interesting things together and just getting them to talk um then then interesting things sort of happen and you can't determine them predictively.
01:12:32
Speaker
But you just know at a macro level that they will happen. And that kind of just goes back to chemistry collision theory, for instance, right? it has like evolutionists like Evolution is a good way to look at how we talked about finding opportunities in niches that are underexploited, but develop something really strange and different. And if that mutation you want to call it is really powerful,
01:12:58
Speaker
then it can proceed past a local maximum to a more global maximum. And that's an interesting option. And so I think a lot of there's a lot of like fundamental things that we learn in school that we forget about, which if you take them outside of their subject and apply them more broadly, I think they get quite interesting.
01:13:18
Speaker
What kind of content do you consume to keep yourself smart and updated? Too much, you know, and I'm having eye trouble now. I've been told by my eye doctor that I'm not, I'm not blinking enough with this and too much in front of a screen. um What kind of content am I consuming? there's so There's so much, I can pull up some of my kind of favorite subscriptions. um There's If you know awareness, pull them out and read out a little bit. I think there's a lot of breadth to this. There's the diff by Bergen Hobart. There's the browser. Yeah, there are a mix of newsletters and RSS feeds.
01:13:58
Speaker
um okay There's the browser, which has nothing to do with tech, but quite broad. ah There's money stuff by Matt Levine. Eric Newcomer does some interesting stuff. um What else do we have? Unsupervised learning is a really fascinating one. There's a firm called NZSCapital, stuff I learned last week. It's called S-I-T-A-L week, which is a great newsletter. Benedict Evans does some tech stuff.
01:14:27
Speaker
well Well, fascinating. Cool. Thank you so much for your time, Arjun. Thank you. I thoroughly enjoyed the conversation. This was fun. This was fun. Thank you for doing it.