Investment Bankers, Stacked-up S-Curves, and Leslie's Compass
Sajith Pai's incorrigibly irregular newsletter #19
Welcome to the latest, and this year’s last, edition of my very very irregular newsletter! Hello and welcome to the 106 new subscribers who have signed up since my last newsletter in October, and who receive their first ever fresh off the tawa Sajith Pai newsletter! How wonderful!
Quick housekeeping announcements. The newsletter has two permanent sections. Writings - where I usually write and / or refer to one or more original pieces, typically about venture or the startup ecosystem, and, Readings - about what I read and learnt about. My reading diet is tilted heavily in favour of podcast transcripts (and of course books) and against articles / newsletters. This will naturally reflect in the reading list.
Writings
I didn’t write any new pieces in the last two months, disappointingly. It is kinda similar to my struggles on the newsletter front, where I have been unable get a regular cadence going (this is only the 7th, and final, issue of the year). A lot of it is attributable to work, and the heavy load I took on in the latter part of the year on identifying and closing new investments, internal writing (our website re-launched earlier this month), team mentoring and research for the PMF Book that I am writing. Personal life also caught up with me towards the last quarter necessitating some travel.
I don’t think the coming year will be anything much better, at least in the first quarter, but it should ease up thereafter, especially in the second half.
Why do early stage founders contracting investment bankers?
I tweeted / posted on LinkedIn an observation on the increasing number of early stage founders who are using investment bankers. As with tweets and posts like this, there were a lot of comments and reactions. On the whole there were more thoughtful takes than not, and I thought I would summarise the discussion here.
My tweet thread’s TLDR was that at the early stage (Where I / Blume typically invest), a banker-led pitch is more often a negative signal than not. It didn’t say we don’t / won’t invest in such banker-referred startups but that we are likely to put a higher bar on such pitches. The better way I said, was for founders to reach us via referrals. My tweets / post were specific to the early stage context.
I felt founders were seeking out bankers primarily to a) widen access to funds and b) save time. On both I felt they were mistaken, as early stage VCs were very open to inbounds and that it was important for founders to invest their own time as “time invested in fundraising helps develop fundraising muscle”.
I ended the tweet thread / post by asking founders why they used bankers and what I was missing.
There were about 15-20 comments on twitter, including two tweet threads, and about 60-70 responses on LinkedIn. Let us double click on these comments.
A minority was from founders supportive of my stance that bankers don’t add value and that it is better for founders to do the fundraising effort. Pranav Ahuja felt most of the banker-referred introductions were irrelevant.
Anuj Jindal felt you get valuable fundraising inputs from setting up and doing pitches yourself, and Ekta Grover felt fundraising helps build a valuable network that can be leveraged through the journey.
Rajesh Mehrotra had an interesting analogy comparing fundraising to early sales and how both provide valuable feedback.
Now to the naysayers.
The vast majority of comments, mostly from founders, and some from bankers and even VCs, disagreed with my views and shared their perspectives on the advantages that bankers offered in early stage fundraising.
Most founders talked about how it was difficult to focus on business and fundraising simultaneously, and hence it made sense to outsource the effort of PowerPoint deck-making and initial outreach to bankers. The time saved could be invested in the business, they said. Here is a representative post (scraped from LinkedIn) on this.
A bunch of founders spoke about how VCs don’t respond to cold mails, and how bankers running the process at least meant the founders got some responses. This was disappointing to read. I do feel every founder deserves at least a brief reply with a comment on why the VC is passing. I also feel for the VC, sharing such feedback succinctly and precisely, develops a picking muscle; and it is humbling and educative to go back once in a while and read the pass mail that you sent an anti-portfolio. That said I can understand why most VCs don’t. The inbounds can really pile up.
Personally, I try to make sure I respond to every inbound I get (yes, I do use templates, but I also customise at least one line of feedback) but it does mean 3-4 hours spent every weekend going through the pileup and responding.
Representative comment; part of a larger tweet thread that was also the best and most nuanced response I received; helped no doubt, by the fact that Aman is an exVC and now founder.
There were some other interesting perspectives too.
Koreel from MDIF mentioned that as a VC / fund that doesn’t have as strong an inbound channel as the more mainstream VCs, the banker channel is useful for getting them access to investments that otherwise would pass them by. So there are VCs who like this channel. For Blume, given we get access to high quality deal flow directly and via referrals, perhaps the banker-led channel may not be as relevant (many of the deals referred to by bankers also reach us through other channels). But this may not hold for other funds, as Koreel shares.
Another interesting perspective was around how bankers are moving into early stage fundraising primarily to build relationship for the next rounds, where the fees are larger.
Romit from Lightspeed mentioned that bankers help widen VC access to founders outside the traditional ecosystem
An interesting point was about the sheer number of funds and the challenges it posed to founders on prioritising outreaches, and how bankers can address this cognitive load.
Varatharajan from iDrive Capital, a banker, mentioned.
In a similar vein, Manish Kumar, founder of RealX says
In addition, I should also highlight three longer and detailed takes, two tweet threads and one, a Linkedin Post.
The first was from DK Agarwal of Dexter Capital, an early stage banker. Naturally his thread reflects Dexter’s interests; that said it is a useful read to get the opposing perspective. His key take is that banker’s widen access, and can even tap non-traditional sources of capital. He has cited several examples in his thread.
The second was from Aman Mehta, a VC turned founder. His was the most nuanced and balanced take on this, covering poor response rates from VCs, the opportunity cost of fundraising and finally the narrative shaping and other inputs that good bankers provide.
The last was a LinkedIn repost of my post was from Varatharajan of iDrive Capital. It is a good wrap of the advantages a banker brings to the table.
Finally, my endnotes on this topic.
I do get why bankers are relevant to a certain type of early stage founder, and can see that as our ecosystem expands to bring in founders outside the traditional networks, we are likely to see banker-led pitches grow. Essentially, we are seeing a tiering of founders – the elite, second time founders, or experienced seasoned operators who are aware of how the venture game is played and have enough connects into elite VCs, and their less advantaged cousins starting for the first time, and intimidated by the entire venture game. For the latter, bankers may prove useful.
That said I continue to stand by my initial thread. I do believe that as far as possible, founders (elite or otherwise) should do the fundraising themselves. To me fundraising is an integral aspect of running a startup. Fundraising and Business Ops are to me joined at the hip; both are, in a metaphor I frequently use, two sides of a coin. It is difficult to visualise one in the absence of the other.
I say this also because when your customers are not paying for your product fully, and the VC is paying for the gap (and subsidising your burn) then the VC is also a quasi-customer. Both are your customers. Why would you have another intermediary deal with a customer? As I have shared in a past post, fundraising and sales are the two key channels for founder + org learning in a startup. Founders who do not take up fundraising are losing out on one key channel of learning and are ignoring a key customer.
I elaborate on the learnings from VC meetings in that article (excerpt below)
Over my four+ years in venture, I have seen a consistent pattern. The founder who is not good at fundraising or doesn’t develop that muscle, struggles in future rounds even if s/he gets the best banker. I have also seen that the startup that is not good at fundraising usually struggles on the growth front too (naturally). Mind you, the reverse is not always true – just because you are good at fundraising doesn’t mean the business performance is always better. That said in my limited perspective, the better you are at fundraising, the more likely that you are getting useful feedback and have more capital to invest in and grow the business better and faster (exceptions abound).
I will wrap this piece on an ironic note, stating that despite all of my protestations to the contrary, I am presently working on an investment that has a banker:) That is a good indication of the fact that I don’t believe there are any universal truths or paths in our venture business, other than, make sure you don’t miss out on a good founder!
PMF Convo #2 – Interview with Anshuman Bapna, ex Mygola, now Terra
Here are takeaways from interview #2 that I did as part of research for my book on Product Market Fit. This one is with Anshuman Bapna, now founder of ClimateTech startup Terra, and erstwhile Mygola (acquired by MakeMyTrip). I reached out to Anshuman on seeing a tweet by him describing his failed pitch to Joe Gebbia, Airbnb’s founder. Having seen this and his previous tweets, I thought what he had to say would be interesting. And boy, was I right! The conversation with Anshuman was consistently interesting and illuminating, covering such topics as the biggest mistake founders do, the best metric to use at a consumertech startup, as well as his thoughts on product market fit. Here are highlights / TLDR / takeaways from the interview. If you wish to read the transcript, here is the the link to the transcript.
*
1 - Per Anshuman, startups should not try to innovate along both product and business axes at the same time. Pick one and innovate along that. If you try to do both you will run out of cash, unless you have raised oodles of cash. This was a mistake Anshuman made at Mygola, where he created an innovative product but ran into an implacable business model. By the time he realised that the existing business model was not going to help him monetise his innovative product effectively, it was too late. Essentially he built too much of the product before checking in with the market to verify whether the existing business model was right for his product.
2 – A key mistake founders do is solving the most easily solvable risk, not the biggest risk. Anshuman says “So, in my case, the biggest risk was actually the business model, which is how will you make enough money to actually make this all work? But what I really knew was how to build a great product and make it highly, highly scalable…. it was literally like four years into this journey when I finally realized how far I have strung myself along when in that Airbnb conversation, Joe Gebbia basically said "Dude, we don't even care about scalability. You're too scaled for us."
Anshuman continues “…entrepreneurs that I meet, I say, “Look, I know you're a great product guy, you're a great business guy, you're a great this guy, whatever your background is, can you run your business for six months on just an Excel sheet and a phone call? I don't care what the product is. I don't care what you're doing. But can you just do that, and force yourself to not build anything because building is easy, and gives you a false sense of progress?””
3 – PMF is many S-Curves stacked on top of each other. A great metaphor from Anshuman to describe how PMF necessitates adoption across a large market, not just in niches.
Anshuman: “About 50 to 60% of all people coming to our programs come from referrals, and the kind of keyword or words that they use to describe the experience at Terra is outstanding. Now, the challenge with that, is that why that is still not product market fit is because all that we have proven is that for a very small micro segment of the market, we are golden. But PMF, the M part is obviously as important. And what we have to prove now is that this market is large enough. So in that, and another way to look at is these the classic S Curves, right? PMF is not one S curve, it's S curves stacked on top of each other.”
4 – Anshuman gives an interesting framework for GTM, and identifying your hero channel. First identify existing watering holes where people seeking solutions to the pain they are feeling (and which you are targeting as well) congregate, and tap into that. Then identify the happy customers at the watering hole and see if there are more like them, but to be tapped via a different channel or approach.
5 – A leading metric he uses to gauge product health is how fast the follow on action is or second session is. Anshuman: “To me, any product that might be high consideration or not, has to exhibit very fast follow-on behaviour, for it to become a habit in the user’s mind and habit even on a weekly scale; I am not talking about lifelong habit. Which means that your second session has to happen quickly enough. And you can tweak that up and down depending on what product you're selling. But the second session has to happen quickly enough. And that is another example of a not super precise, but a leading indicator of whether you're doing well or not.”
6 - I thought this idea of image search was really cool! This is part of a section on how he learns!
Readings
Recent podcast transcripts I found interesting. In two of the cases, I organised the transcripts, as the podcasts don’t come up with transcripts. Here they are.
Harry Ritter, Alma on In Depth podcast w host Brett Berson of First Round Capital
Link to podcast. Link to transcript (organised by Sajith Pai).
Alma is “a mental-health startup that helps therapists manage their practices and contract with insurers.” They raised a $130m Series D in Aug’22.
The episode didn’t have as much dope on PMF (product-market fit) as I expected, and as the podcast title promised(!) but it is a good quick read / worth a quick listen for how a company recovered from losing 70% of its revenue over a weekend (in March’20 preceding COVID) and reinvented itself, to the importance of having all of your key team interact and listen to customers deeply, and how to do customer discovery better.
Highlights from the episode:
Harry: “The way that I built those (interview) guides was built on some of the interviewing skills that I had had from medical school. When you're trying to diagnose someone, you're supposed to start with your narrow questions and your open-ended questions. Your open-ended questions are really important because they let you capture information that you might have not even thought to ask. Your narrow questions are important because you get a little bit more of a structured data set out of that that you can then use to think about what comes next. So there was a combination.”
Harry: “Goes back to one of my biggest learnings as a CEO, which is it's not just enough for your product and design teams to be in front of your customers. Every single person who works at the company needs to have a connection to the customer. Because in a moment like that, if I'm coming to them and saying, look, here's what we know they need, it's not just me saying it. They can feel it coming from the customers that they've worked with.”
Harry: “If I went back to those first hiring conversations, I was thinking in my head, what's the scorecard here for humility or gratitude? In retrospect, absolutely. And something you and I have talked about in the past, as you think about culture in an organisation and going from early stage to later stage, those people-driven attributes become I think values-driven attributes. And if I think about how we developed our values as a company, it's probably looking back at those early team members and asking the question, what values do you represent? And those sort of become the values that obviously resonate with the organisation.”
Mark Leslie, Silicon Valley Go-to-Market Legend, on Starting Greatness w host Mike Maples Jr of Floodgate
Link to podcasts - Part 1, Part 2. Link to transcripts - Part 1, Part 2 (transcript organised by Sajith Pai).
Mark Leslie co-founded Veritas Systems in the ‘90s, which reached 6,000 employees and $1.5B in revenues in a decade. Presently, a lecturer in management at the Stanford Graduate School of Business, Leslie is regarded as a leading expert in startup go-to-market strategy. In this two-part series with Mike Maples Jr of Floodgate, Leslie discusses his well-known Sales Learning Curve, the lesser-known Leslie’s Compass( a framework for understanding if your org is sales-first or marketing first), and a range of topics including the role of the CEO, doing a sales weaponry review etc.
Brief notes on these concepts below. (I have extracted the key learnings / snippets pertaining to these concepts, from the transcripts, into this summary / TLDR sheet. Go there if the below notes whet your appetite for more.
Sales Learning Curve: Similar to the Manufacturing Learning Curve, Enterprise GTM too has a Sales Learning Curve. Startups get far too excited when they see initial sales offtake and ramp up their sales org far too quickly. It takes time for the startup sales org, and the wider org, to learn to support sales efforts better. There are broadly three phases in the Sales Learning Curve, says Mark Leslie. These are Initiation, Transition and Execution. The initiation phase needs a specific kind of salesperson – the renaissance salesperson. The last stage needs a different kind (similar to infantry in the military, he says). Details on the three phases of the Sales Learning Curve and the type of salespeople suitable for each phase along that in this summary / TLDR sheet.
Leslie’s Compass is a good GTM framework consisting of 7 questions to ask, in order to determine if your GTM motion should be sales-led or marketing-led, i.e., whether it should be pull v push. Details of the framework including the 7 questions.
I loved this quote by Mark Leslie in the section on the role of CEO. “First of all, I have a deeply held conviction that what makes a company successful is great strategy, not great execution. So execution without strategy, the trains run on time, they don't go anyplace, they go in a circle. Great strategy allows you to transform your company…And my personal criticism of people who are great operating executives, quote unquote, great execution people is that they basically say, how do I make this wheel continue to turn at the same speed or greater, rather than saying, maybe I need a different wheel.”
Lenny Smith, Graphite, on Lenny’s Podcast w host Lenny Rachitsky
Link to podcast and transcript.
Every startup CEO, using content as a channel to acquire customers, should hear this podcast / read the transcript. Ultimate dummies' guide / ELI5 on SEO from Lenny Smith, one of the top craftsmen of this field. It is packed with a lot of details that you don’t normally easily get to know like this one on 1000 visits / day coming via non-search before you start SEO. This was a kind of mic drop moment for me.
Books I read and enjoyed in 2022
I will finish reading 29 books this year (presently on the 29th). Around a third of these are fiction books, a count I am proud of. None of these are Booker-worthy stuff - in fact the most prestigious of these fiction reads may well be a John Le Carre (his last, Silverview). But I am delighted nonetheless, as that was something I wanted to improve upon. In the last four years preceding I had only read seven works of fiction!
Here are my fave reads of the year, in no order.
(1) The Power Law by Sebastian Mallaby. This was one of the best reads of the year. It is an exceptional piece of writing – a fair and extremely balanced look at the venture industry and its evolution. In Venture, given how much we live in the future, not many pay attention to the past, e.g., if I go around asking my younger colleagues about Arthur Rock, I will draw a blank:) Imagine a public market investor not knowing about Peter Lynch or Benjamin Graham! The book is useful in that regard. It gives you a glimpse into the past of venture, and how it arose and evolved.
The author, who is incidentally married to The Economist’s editor, spent four yrs researching and writing the book, and all of that detailed research shows.
All of us in the venture profession should read this. Learnings for all of us building venture funds from India or anywhere. Particularly interesting are the chapters on how Accel & Sequoia were built, and how KPCB lost its way.
(2) eBoys by Randall Stross. This is a twenty-two year old book, published around the time of the dot com boom, and covers two years in the life of Benchmark Capital, including their eBay investment and the IPO. They invested $6.7m in eBay mid-‘97 picking up a 22% stake. In under two years, eBay was trading at $21b, 1000x up! eBoys is a fascinating look at how a VC firm sources and picks investments. In parallel, it also chronicle’s eBay’s extraordinary rise. On the whole, an excellent read.
(3) Four Thousand Weeks by Oliver Burkeman. I felt as if the book was written for me:) TLDR; life is short, absurdly short (the title of the book is our life span essentially). You can't do everything in this brief life. So choose, and what you choose becomes richer and more meaningful because you have rejected many alternatives, and enjoy it. Productivity is not so much trying to do x work in y hours, for it will always spill over, but more about what you should work on.
(4) Desperately Seeking Shah Rukh by Shrayana Bhattacharya. Interesting format; segues between her personal and other (interviewee) women's interior explorations, reflected through the lens of Indian cinema, especially Bollywood superstar Shah Rukh Khan's fandom. Through the book, she covers issues that Indian women face, and how they try to overcome them or fail.
(5) The Goal by Eli Goldratt. One of the best reads of the year and one that really impacted my thinking; the big learning from this was that you can look at any startup / biz model as a manufacturing operation, and identify constraints or bottlenecks. So a WhiteHat Jr manufactures teaching slots, and a key constraint is teacher hours, and so on. Interestingly, the book is structured as a (business) novel, and not a regular non-fiction work, that details several manufacturing concepts; clever!
(6) The Cold Start by Andrew Chen. Lots of useful concepts for marketplace startups - hard side, tipping point etc., but especially the concept of the Atomic Network as the smallest network to validate product mechanics & customer utility. Chen suggests the Atomic Network as a way for 0->1 marketplace startups to validate network effects, & then rinse and repeat. I also think it is a useful concept to redefine your present marketplace. In a startup I support, we used this concept to resize their unit of operation.
Bye, and Happy New Year!
That is all for now folks. Feedback in the comments or at sp@sajithpai.com (Please don’t send pitches here; use sp@blume.vc for pitches please).
I hope to make this newsletter a wee bit more regular in 2023. Wish me luck.
Hoping you all have a great wonderful new year, filled with the stuff you enjoy doing. See you in 2023!
Got it. Thanks.
Thanks Sajith. I have read Big Billion Startup and The Mooonshot Game (found a lil closer to power law but may be expectations are too high post reading the power law:) )
Any podcast/blog you suggest which covers Indian business history/VCs history? Thanks