2021 Observations
December 2021
Aashay Sanghvi
I’m experimenting with this format as a way to convey ideas I picked up on this past year investing at Haystack. It serves as a snapshot into my mind at the end of a long year. The following are no in particular order.
1/ Optimizing for outperformance relative to your peer set is the wrong way to view the venture capital business. The “Occam’s Razor” view on venture capital is that there are a select handful of companies that truly break out every few years – rapid scaling to >$50B in value – and all that matters is being a material owner of those companies. Everything else follows.
2/ Many markets tend to skew oligopolistic over monopolistic. For example – Microsoft, SAP, Salesforce, Workday….it’s horizontal business applications all the way down.
3/ There’s constant public discussion about high valuations, but there’s very little concerning control. However, “governance” is the last thing an investor would bring up before they’re shown the door.
4/ Sourcing great investments is necessary but not sufficient for a junior investor to level up. Winning competitive investments, adding value above replacement, a direct relationship with the founder, and ownership all matter. Appropriate sequencing is also important.
5/ The attributes of generational companies are somewhat known (per Peter Fenton):
The difficulty with seed or venture investing is over extrapolation. These characteristics often don’t become legible until well after a company has gone public.
6/ It’s possible to invest in great companies and make average returns.
7/ Hiring momentum beats most things as a leading indicator of success for seed stage companies. This is especially true for deeper technology companies who corner relevant experts with technical acumen or a social following.
8/ Theses are double-edged swords. They can help you fish in the right ponds for new companies and talent but can also talk you into investing in the wrong company. Sometimes, the best opportunities just smack you in the face.
9/ Uncertainty (read: not risk) is a strength that caters to startups over big companies. More should use this to their advantage.
10/ There exists a group of n early stage firms whose investments are almost guaranteed subsequent financings given the liquidity and indexing in the system. This is great for startups (rule #1 is don’t run out of money; rule #2 is don’t forget rule #1), but induces competition in well-trodden categories.
11/ Half the battle of being a venture investor is internalizing trite sayings you were told when you started. The recent one for me: “venture is a sales job.”
12/ The history of venture is ridden with bad data and examples that can backfill any rationale. Some great companies have always looked expensive (Stripe) and others were relatively “cheap” for a while before a major inflection (Shopify).
13/ Incremental business model tweaks can be just as powerful as supposed 10x business model innovations – offering hardware in vertical SaaS for free, giving back interchange to customers in fintech, offering a free tier, etc.
14/ Too many people in the venture and startup ecosystem are focused on the macro (the economy, the Fed, rates, etc.) with a short-term time horizon. Success is likely predicated on lasering in on the micro (individual companies) over the long-term. Liquidity puts pressure on this principle.
15/ Second order effects of rapidly decreasing cost curves matter a lot. For example – Jio in India indirectly contributed to the rise of platforms like Apna.