In part 2 of our 5-series blog post on Blume founder Karthik Reddy’s conversation with Deepak Jayaraman on the Play to Potential podcast, Karthik talks about what it takes to be an effective venture capitalist. The full conversation is here.
What are the must haves and or nice to have both in terms of experiences and traits for people to succeed in this profession, and specifically I am curious about what’s different here versus investing at different points of maturity, let us say PE investing or Seed investing; what’s your take on recipe for success?
So, I think Seed and VC are somewhat similar. Traits are about the same. I think the weightages are different and what I mean by that is…I am a strong subscriber and I think broadly the whole world will agree to the same traits; that in Seed and Venture you pretty much have to have a grip on…the market view becomes important because market sizing is very important. In Seed and Venture, you are playing a lot of high risk bets and hoping that some become massive, which means you can’t ignore market sizing anymore; Angel is very different. In Angel, you are playing for your own money so I don’t mind putting money in a beer house which gives me 10 times of the money, but if that journey was 10 crores to 100 crores as a VC totally I am interested because I am not looking for a predictable small multipliers, in dollar terms; that’s the difference; which by the way is more like private equity investing, so I will come back…so if you are doing seed and venture therefore, you are playing every bet you are making you are hoping that you shooting for the moon, relatively speaking, one could be a 100 million dollar moon, one could be a billion dollar moon; but there is nothing like a 10 million dollar moon in the venture business. So when you are shooting for that then you have to truly want and enjoy shaping your views from the market, and where the world is going. You can’t sit in a corner and say I am distanced from everything and I can build despite that; everything, all market forces influence you, customers, regulators, who will put money into your companies next, IPO markets eventually and then of course what every VC on the planet will tell you – founders-team, founders-team, founders-team etc. so your entire judgment is on judging people and which is what I have realized is a super tough job, then judging where people might be 5, 7 years from now in terms of their maturity, their ability to scale an organization, (e.g.,) do you see this guy as a CEO of a 100% (owned) company? Because reality is 9 out of 10 times that is the odds you are playing for. You are not going to get enough professional CEOs at that level and it is not about him and two buddies somehow figuring it out; can you scale to that? And those are not trivial is what I have realized. In Private Equity all these risks are just stripped out; you are not playing for any of these risks actually. You are just playing for the business model risk, founder integrity, because you are giving him a boatload of money, and in India the fear typically is, people when they are giving their money to these founders they have figured out that the founder got here without too much money; he knows how to cut every corner so can I trust him? Can I trust him to use my money wisely or only in his self interest? And that arguably is a problem everywhere but I am just saying the value systems and the ethics and lines are greyer in some parts of the world than in other parts, and there are not as many black and whites in India and so private equity then becomes understanding competition, understanding whether this business model is viable, understanding whether I can grow 3x, 4x and also knowing that I never want to lose money on this so look at this mindset shift: I am actually modeling an excel model showing it to my LPs and saying I will lose money 4 out of 10 times, it is built into the P&L, and there are guys who say that they can’t lose money in 1 out of 10 bets. I have spoken to three or four PE investors and that’s what they told me.
When you are investing in an idea which is so nascent, how do you even mathematically model for risk, just out of curiosity: is there an art? How much of it is an Art versus a science?
It is all art actually, in the sense that the art is in the estimation. The science is in the fact that we are also shamelessly feeding off existing data, we are not geniuses that we are contemplating how this can be kept there, so as much as people might say that around a Facebook, there was a proxy in Google, they might not have thought Facebook might make that much money in advertising, but you have to make that proxy bet in your head so at least at the certain point; in the early days you are essentially saying – the US does that far better than us and that’s why they are the mothership of venture capital – is they are able to take this punt that, if this is so sticky, if people are willing to spend time with something, eventually somebody will pay, so if you tell me is there’s a science to it, of course, there is a science to it. But is there an ability to know exactly how to value it, that’s an art form. That’s a punt and it’s market specific. No disrespect to anyone in India, firstly you won’t be able to build those kinds of companies in India because we are not able to think that way. It takes 40, 50 years of evolution to think that way, so even if you did think, and now with no disrespect to my US peers, there’s no way I would pay the same value in an Indian Market because the market conditions are different, right? Your ability to monetize, that’s the science, right? So apples to apples, same company, I will pay half the value in India and a lot of entrepreneurs crib and say oh that’s not fair my peers are getting 2x there, so (I say) just go build in the Valley, you will get it, you are that good right? How many Indians have emigrated, they are co-founders in 1/3rd of the Valley companies from what I hear. So go do it there. You are playing for these conditions. You also get a driver (here) in 15,000 rupees right? So these are life choices, truly. There you will figure out, you will drive in an Uber you don’t need a driver but that’s a life choice. You can’t ask the VC ecosystem to adjust for the different market absurdity that exists in some other market, so it is what it is and so when people crib that oh VCs don’t get anything here (compared to) the private equity guys, it is an unfair comparison. When cycles play out people get bowled out and that’s actually the art again. It evolves constantly because it is an art form. So, today the rules of thumb since you asked that question when I am paying some guy more than 10-15 crores of valuation, firstly where does that number come from? It is basically actually how valuable is the founders time? How good are they? They are committing three-four years to it, how solid is the idea? But it is not about that; it is about how much you dilute the guy, how much money does he need to get there, so this is all scientific in some sense and then you are working backward and saying ok whatever they do with my three four crores of money, can they prove enough traction that they can get beyond 60 70 crores of premoney in the next round, they cant; so why would I pay more than 20? I want a 3x that’s my risk matrix, that differs from me to the next guy to the next guy. So those are the art forms which evolve. we all learn, iterate, learn, iterate. It is all heuristics. In a nutshell that is the right way to look at it. There is a market heuristic, there is a firm heuristic. And everybody plays by that.