Shardul Shah: How Index Makes Decisions & Why Benchmarks & Averages in VC are BS | E1202

Shardul Shah 0:00 (instrumental music plays) The lessons to learn are don't be cute on price, don't underestimate fantastic founders, and don't overthink it. TAM is a trap. Like, go back and look at the S-1s of some of the biggest public companies today. Their market caps are bigger than what they thought the TAM would be. The best founders find and expand market opportunities. We are in the business of finding fund returners. The power law dominates our business. Not being in a 10, 20, 50, $100 billion company is actually painful.

Harry Stebbings 0:30 Ready to go?

Shardul Shah 0:32 (instrumental music plays) Thanks for having me back. Tell me, in all of the time you've spent interviewing so many people, what's the number one lesson you've learned?

Harry Stebbings 0:52 There's no right way to do a venture. (laughs) After 2,700 shows, I've learned that the, one of the biggest mistakes people make is they try and copy someone's style that's not a- that's not authentically theirs, and think that's the right one. And actually, it's about finding where you are uniquely great in the three pillars of venture, sourcing, selecting, and servicing, and really leaning into one over others, actually. Um, that's been my biggest lesson.

Shardul Shah 1:21 Yeah. It took me a long time to figure that out. Like, growing up, I grew up outside of Chicago, and so my childhood hero was, um, Michael Jordan. And all of the advertisements are, "Be like Mike." (laughs) And that, like, be yourself is actually the message, uh, in life and as a, as an investor.

Harry Stebbings 1:41 Do you think that's possible, though, in venture firms? Like, if you are a young person trying to scale the greasy ladder of a venture firm, as much as one might hate to say it-

Shardul Shah 1:50 (laughs)

Harry Stebbings 1:50 ... with internal politics like many have, you have to adjust yourself to the firm to be promoted. It's a game of strategic promotion.

Shardul Shah 1:59 No way. I think, you know, I learned this from, um, Josh Mata, uh, who's the founder of Coalition, sent me, uh, the annual reports from StoneBridge, which is a, a, um, a hedge fund. And, uh, everywhere, kind of a Warren Buffett style kind of annual report comes out. And in, in one of the reports, founder alluded to a culture of belonging. The spirit of belonging is for people to be themselves and not to assimilate. Like, if your goal is to be the best version of yourself, and your firm's goal is to be the best firm on the planet, there's no room for assimilation and, and, uh, confirmation, right? Conforming to other norms. So I think it's absolutely wrong, I think, if you try to assimilate to, you know, be someone who you're not. You're, you're setting yourself up for failure.

Harry Stebbings 2:48 So you do not think that actually individuals and people who wanna scale in a venture firm should kinda play the game on the field, know where they can get angles to get promoted, and focus on that? As I said, like, you have to, you have to fix problems in firms.

Shardul Shah 3:05 The, the game on the field, if you're a venture investor, is to invest in a fund returner. If you return the fund, don't worry about it.

Harry Stebbings 3:14 Sure. But it takes s- eight to 10 years for them to know. Often there's a messy middle. You were in Figma. For years, Figma did not look like a winner. It is not always apparent. And actually, often in the early years, you have managing partners with great deal flow or partners with great flow who need assistance. It's about being a plate remover. And so doing the diligence, doing the grunt work, in some cases is the strategic move to get promoted.

Shardul Shah 3:41 I don't know. Like, what can I tell you? Like, I've been with Index for, like, 20 years. So, I don't have actually a lot of experience with other venture cultures. At Index, y- you know, there's this deep, um, acknowledgement of the importance of mentorship and apprenticeship, right? That's how you evolve in your career. And I've been super y- you know, lucky to have seven mentors, uh, in, in my career. Not once was I coached or not once did I play a game around doing X to climb up a corporate ladder. Like, every time I was promoted, I was surprised. Maybe you're right. Like, if you're in a, um, institution, you know, of 200, 300 people, uh, perhaps there's, like, machinery that you need to navigate. Uh, but in my home at, at Index, uh, it, it's about finding fund returners.

Harry Stebbings 4:38 Danny's been a big shaper on me. How did Danny shape you?

Shardul Shah 4:41 How did Danny shape you?

Harry Stebbings 4:43 Oh, so many ways, but how I think about, uh, building great partnerships, how I think about incentivizing partnerships, how I think about LP management. Um, those would be the biggest. Also, I would really say with Danny, actually for me, focus. Like, there is a lot of things that I could do. He always reiterates to me about the importance of keeping the main thing, the main thing.

Shardul Shah 5:05 I, I think if I had to distill it to the essence, uh, it's intentionality, uh, which maybe gets to some of the concept behind focus. Um, I've become much more intentional with my time. Um, I've become much more intentional with my communication.

Harry Stebbings 5:20 Where did you spend time that you now, with more focus, don't?

Shardul Shah 5:24 When I started my career, um, every meeting, default was an hour. Um, Danny reminded me that I probably know the answer in 15 minutes. And so now, the default first meeting I have is 30 minutes. So that's huge time savings across the number of, uh, meetings I have.

Harry Stebbings 5:43 What's your initial filtering on a, "Do I meet them or do I give to another team member?" I know it sounds blunt and harsh. But like, you have a certain number of hours in the day. You

Harry Stebbings 5:52 have to have leverage with more team members, more junior team members. What's the filtering process between, "I will meet them," versus, "You know what? Interesting, but I don't have time for it."

Shardul Shah 6:02 Every meeting, um, ideally would have two people in it. So that's a super high bar for taking any meeting. Like, I'm asking to prioritize someone else's time, in addition to mine, which means the threshold for a meeting is super high. Now, in terms of handing off a- a meeting to someone else, I only do that if I believe, uh, one of my colleagues will have more chemistry or is more relevant. Like, we were talking about vertical SaaS. Like, y- if you're starting a vertical SaaS company, you ought to talk to Nina or Paris. They're geniuses. I- I don't know anything about vertical SaaS. We go for two people in a meeting.

Harry Stebbings 6:41 Why do you like majors? Now I, you know, you specialize in cyber, and you said that you don't particularly (laughs) specialize or like vertical SaaS.

Harry Stebbings 6:49 Can you just unpack your thinking to me around why it's important to have a major in venture? And does that mean the future of venture is specialization?

Shardul Shah 6:55 Little nuance, um, I, I'm a liberal- liberal arts graduate from University of Chicago. So I believe in concentrations, not majors. Uh, that being said, yeah, I kinda fell into cyber. Um, one of the areas I actually started in at Index was biotech. Um, so I think there's a lot of utility in each of the three competencies that- that you think about, like selection, you know, winning, and- and supporting by having, uh, some amount of focus. Um, es- especially for me, but similarly at- at Index, I- I wouldn't recommend this to the vast majority of investors. Each of us is stage agnostic, right? We're investing at seed, venture, and growth stages. The vast majority of investors on the planet specialize by stage.

Harry Stebbings 7:42 Do you not find it difficult to adjust your mental plasticity with stage? You know, at pre-seed and seed, you have to get very comfortable at making decisions without much data or any data

Harry Stebbings 7:51 at all. And then at series B, you have a lot more data. How do you think about that mental plasticity with stage?

Shardul Shah 7:58 Starting point is actually the same across stages, right? It's- it's all about the founders. Like, there's this canonical question, I think, in our industry. Is it the market or is it the team, right? And I think many great firms would argue that it's market. In my view, it's very clearly the team. Um, and as a consequence, when you're trying to think about, um, even, um, paying high prices at late-stage businesses, you're still fundamentally taking a view that that team will find adjacent market opportunities over time. An- and so the, in some sense, the plasticity required to evaluate a team at stage is not a requirement.

Harry Stebbings 8:37 How has what you love to see in founders changed over time? And so an example for me would be, I place a lot more emphasis now on finding entrepreneurial talent early in one's career. One of the biggest determinants I found of success from interviewing 500 founders is actually that the best always start early. So I spend a lot of time on childhood, and not much time on the business. (laughs)

Shardul Shah 9:01 I'll try to think more about that. Look, I- I mean, if I step back, um, you know, in our industry, there's clearly a power law, right? Uh, Bill Gurley's talked about this at early stages. I think, um, Lafont did a good job at E- East Meets West, kind of, uh, bringing real attention to how seven companies are driving the, you know, returns in public market indexes. Um, so the power law exists, I think, at- at every stage. That's a pattern. When it comes to patterns of selection and patterns within people, the only pattern is there is no pattern. Now, to your question of, like, what has evolved, I think I've become much more conscious of, uh, two components of my decision-making. One is, um, intuition, and the second is, like, an analytical framework. Um, and- and venture's a craft, a- and so you're constantly kind of refining it. In- intuition, I have a harder time kind of putting to words. You know, it's a feeling. I know it when I see it. My partners definitely know it, uh, when they see it in me. But that intuition and conviction ha- has definitely evolved and grown.

Harry Stebbings 10:10 Can you take me to a time when you've had the strongest intuition and it was wrong? And why do you think it was wrong?

Shardul Shah 10:16 At Index, we, um, uh, I was once asked to run, like, a- a tech offsite. And so I kind of threw the old approach out- out- out of the window, and I told all my partners to do the homework, um, and I asked them each to write a post-mortem on a company we could've created a billion of gain or more. And then we distilled kind of the lessons learned. And ultimately, you know, the sins of omission are much greater than the sins of commission, right? The- the sins of omission for us distilled into three lessons. One, um, don't be cute on price. Uh, two, uh, don't overthink it. Uh, and three, uh, don't pass on generational founders. And so...

Harry Stebbings 10:55 Mm-hmm.

Shardul Shah 10:55 Intuition around, like, I'm so smart. Like, one of the challenges with being a- a major or a concentrator in a domain is you get so smart that you actually think you know what you're- uh, what you're doing, uh, (laughs) and then you might instinctually be dismissive of actually a disruptive idea.

Harry Stebbings 11:13 Don't be cute on price. I get it. I completely agree with you. But we're seeing the pains of that now, with so many companies looking at valuations going,

Harry Stebbings 11:22 "I don't know how we're gonna grow into that." Is there a line between high and a step too high, and how do you think about that, and across different stages?

Shardul Shah 11:31 Not when you have conviction, right? So intuition is one part of it. The other part of it, for me, is an analytical framework. In- in founders, I look for, um, folks that have imagination, operational excellence, and high-quality decision-making. And- and I find that, like, combination to be rare in one individual. Some of that may come out in kind of childhood trauma, like, that shapes, uh, who someone is, and ultimately, uh, gets manifested in- in the types of decisions, um, and the style of decisions that they make. But when I- when I think about...... conviction in people at the earliest stages, um, I think you can be really elastic on price. Um, at la- late stage, if you have conviction, price is just a representation of, like, future expecta- ex- expected free cash flow, right? So, y- you're, you're probably not wrong on price. You're wrong on the investment.

Harry Stebbings 12:25 When did you do a deal at a really high price and actually it turned out to be a great decision, and the supposedly very high price at the time was not actually high given the outcome?

Shardul Shah 12:34 Every investment in Datadog was at a high price. Every in- um, it's not an outcome yet, of course, but every investment in Wiz has been at a very high price. Um, I feel great about each of those decisions.

Harry Stebbings 12:48 Have you ever had a great investment that's been a good deal as well?

Shardul Shah 12:53 You know, Demir on my team once asked me, once asked me this question. He's like, "Sherdil, how did you get comfortable with that price?" And I was like, "Wrong question. I don't seek comfort." You have to be comfortable with being uncomfortable. We're in the business of taking risks. I'm not a value investor, right? I believe in the power law. I, I think very few investments and decisions we make will create disproportionate returns. So, I'm not seeking average returns. I'm not seeking good deals. I'm looking for outliers.

Harry Stebbings 13:23 When you think about risks that you're willing to take versus risks that you're not willing to take, you've got execution risk. You've got market timing risk. You've got market

Harry Stebbings 13:32 sizing risk. How do you think about those different risks and your willingness to take them or not take them?

Shardul Shah 13:38 Are you a Star Wars fan?

Harry Stebbings 13:40 Uh...

Shardul Shah 13:40 There's this, like, there's this scene... Yeah. I see the hesitation. Again, I'm the-

Harry Stebbings 13:45 I've never seen Star Wars.

Shardul Shah 13:46 I'm the nerd here.

Harry Stebbings 13:47 (laughs)

Shardul Shah 13:47 You know, there's this guy, General Ackbar, who's like, uh, this alien, and at one point he screams, "It's a trap!" That's, that is the voice I hear in my head anytime someone talks about TAM sizing. TAM is a trap. Like, go back and look at the S1s of some of the biggest public companies today. Their market caps are bigger than what they thought the TAM would be. The best founders find and expand market opportunities. So, I think, at Index, we've been really good at overthinking TAM and systematically underestimating the magnitude of our best companies. So, no. I never run into, uh, like, market sizing, uh, because we, I, I don't put effort into it. Um, in terms of market dynamics, I get that wrong all the time.

Harry Stebbings 14:30 What do you get wrong in market dynamics? Misunderstanding competition? Misunderstanding timing? What element is there?

Shardul Shah 14:36 Here's an example. I thought that the endpoint security market would be totally commoditized by platforms. I thought, "I use a Chromebook." I thought MacBooks have pretty good security, and as a consequence, the EDR market, like, which the first generation was McAfee Symantec, et cetera, would n- would not, would cease to exist. There's like, at least 65 billion dollars that explains I was wrong on CrowdStrike, Cybereason, SentinelOne, like this entire category.

Harry Stebbings 15:06 So, if you unpack that, what do you take away from that? Like, what's the subsequent lesson for you there? Don't come to such quick conclusions? Like, how do you change your mindset as a result of that realization?

Shardul Shah 15:17 It was not a quick conclusion. Uh... (laughs)

Harry Stebbings 15:20 (laughs)

Shardul Shah 15:21 It was a consequence of overthinking it, like rule number two, and not recognizing George Kurtz for the phenom that he is. Like, those are the lessons from CrowdStrike, like, terrible mistake.

Harry Stebbings 15:36 Did you have the chance to invest?

Shardul Shah 15:37 Anyone had the, the opportunity to invest as a public company and still make a tremendous return.

Harry Stebbings 15:42 When you think about found- like, you mentioned that kind of ones that you miss, are there any that you believed in that you were wrong about? You don't need to name them obviously, 'cause that's very harsh to say, but what did you get wrong

Harry Stebbings 15:51 when you saw something that later turned out to not be true?

Shardul Shah 15:54 There are business models that, um, have, um, real capital needs, and they can encounter two challenges. Either the founders are unable to raise significant amounts of capital or their distribution, um, model gets in the way of allowing there to be sufficient growth to overcome the capital needs. And so I overestimated, like, uncapped market upside, underestimated the capital intensity of a company, voted in favor, uh, with high conviction on the investment. And, you know, I think one of my partners is doing a great job of, of finding a path to, you know, returning capital on that investment, but that's certainly not desired outcome.

Harry Stebbings 16:39 Do you think the best founders are the best fundraisers?

Shardul Shah 16:44 No. When we invested in, um, Olivier and Alexi's Series A at Datadog, so he was not a great fundraiser. Thank God he was not, right? Um, if being a great funder- fundraiser is defined a- as having multiple opportunities, you know, in a short span of time, uh, with whatever else, um, you, you wanna consider. Um, Didi, he evolved into being a tremendous fundraiser, um, over time, but I don't think the best founders begin as the best fundraisers.

Harry Stebbings 17:15 We mentioned this company that I'm looking at doing a, you know, whatever the check size is now, and I'll just leave it there 'cause, you know, the founder will kill me if I mention it, uh, and he'll know.

Harry Stebbings 17:24 Um, but, uh, it will be an incredibly dilutive company along the way. It will need a lot of cash, and that is a consideration. How do you think about capital requirements over time, capital intensity, potential future dilution when investing, or do you not think about that?

Shardul Shah 17:41 I probably don't think about it as much as you. Um, uh, uh, the luxury of having a seed venture and growth fund is we can build ownership over time, uh, with, with more capital if the company is performing. That being said, there are definitely business models, like, in biotech, drug discovery. Those are, those are hugely capital intensive, can have binary risk, um, binary scientific risk on if a drug asset becomes an actual, like, a candidate becomes a- an asset. Um, those are business models that we won't participate in.

Harry Stebbings 18:10 So, I spoke to 12 people who've either invested, like invest with you today or, like, have invested with you in the past, and nine of them said I had to talk to you about conviction building. And so you are a-

Shardul Shah 18:21 Just nine?

Harry Stebbings 18:22 Yeah, just nine. So-

Shardul Shah 18:23 What are the other three talking about?

Harry Stebbings 18:25 ... they said you're incredibly difficult to work with generally. Uh, always struggle to put the microphone in the frame. Just challenging all over. Uh, (laughs) but I thought it was really interesting. They said, "You have to ask about the conviction building process." And I did wanna discuss that on the theme of, hey, you have multiple different funds, and so you can sort of concentrate capital over time. You can. (exhales sharply) Gotta have some, some big conviction to continuously double down, and double down, and double down. How do you approach that conviction-building process across stage?

Shardul Shah 18:56 So I'm not thinking about averaging down my cost basis. I'm not thinking about incrementally increasing my ownership. I'm building a net new investment case on, can I create, you know, a fund returner? Um, and with that, like, I do all the work again. So, if I, if I think about, um, companies that I've been involved with, I've rotated shadow partners to help me with an objective view on reassessing the management team. I've redone customer calls. I've redone competitive analysis. I've rebuilt, uh, financial models. Like, I do all of the work again, and often in, like, short or- order, because I've doubled down, you know, m- multiple times within a year.

Harry Stebbings 19:39 Does the upside requirements change with each stage? And what I mean by that is, you know, when you are a, a seed or series there, it's like, "Hey, I need this to be a fund return." When you get to growth, does it change to be like, "Mm, we'd like to see a 3 to 5X pathway"? How do you think about that, like, upside requirements as it changes across stage?

Shardul Shah 19:56 When we started our first growth fund, um, our, our hypothesis was probably 3 to 5X over three to five years, right? Um, I'd just come out of, of, uh, a private equity firm, um, as had some of my colleagues. And so we had like a, we had that mentality. And when we looked at the performance of the fund, it turned out there was a power law. There were companies that were 5, 10X plus. Um, there were very few companies that were actually 3 to 5X over three to five years. And so we kind of accepted the fact that we're not value investors. We're invest- venture investors at growth stages. We're driven by high conviction. And as a consequence, when we're building our investment cases at growth, we never... It's like, it's super dangerous, I think, to say that there's a safe 2X. There's no such thing. And you alluded to this with, um, the memory of all of the activity from 2021. There's no such thing as a safe 2X. And so what we're looking for is definitely 5X, um, plus upside, even at growth investments at late stages, at high prices.

Harry Stebbings 21:02 I had Sam on the show from Greylock, and he said, actually, that when you look at series B and C pricing today, combined with the revenue multiple compression that we're seeing with the public markets pricing, actually series B and C will just be a terrible performing asset class for this vintage. Do you agree with that, or do you have a different perspective?

Shardul Shah 21:21 I don't know why we're talking about averages. (laughs) Like, we're, we're... None of us are in the business of mean reversion. If we're making a series B investment, it's by exception. Like, Elastic, series B investment, terrific return. Confluent, series B investment, terrific return. Um, and, and the list goes on.

Harry Stebbings 21:39 But if you were seeing series B average entry prices go up by 30, 40, 50, 60% for the best, and then you're seeing, uh, compression in terms of public market pricing, like even for the best, it is a worse asset class to be in, correct?

Shardul Shah 21:56 No, it's not. I mean, we're, we're mixing two time horizons, right? Like, when you invest is not when you exit, so the multiples, um, may evolve and change. It turns out the best companies get premium multiples, uh, and again, are above the average multiples that you might be alluding to with, you know, multiples coming down. Second, the, the best companies that are category defining are gonna be far more significant, and so you can afford to pay up. Like, if you look at the averages, I hear you, but there's, to m- eh, from my perspective, there's no reason to look at the averages.

Harry Stebbings 22:28 What's the hardest thing for you when you think about doubling down on winners? Like, when you look at, say, like, a Wiz or a Datadog, can you just talk to me about like, e- e- let's break one

Harry Stebbings 22:37 down. Let's do Wiz. What gave you the conviction with Wiz to continuously put in more and more money?

Shardul Shah 22:42 Um, what's the, what's the hardest thing? Um, um, it's, it's kind of identifying if you're delusional-

Harry Stebbings 22:51 Yeah.

Shardul Shah 22:51 ... or you have conviction. Uh, and sometimes it can feel like a, a thin line when you have such deep conviction.

Harry Stebbings 23:01 In what ways can you be delusional?

Shardul Shah 23:03 You can be lazy, right? If you skip the details, if you don't do the work, if you stop asking questions and are surprised by new information, those are examples of being, uh, th- those are symptoms of being delusional. Um, I think when you have a culture, like at, at, at Endux, uh, we invite agreeable disagreements, right? And it can actually steal your conviction. When... Uh, I have so much respect for Dani, who we talked about, for Jan, for Martin, for Adriana, Nina, Carlos, Vlad. When they disagree, like, you take it really seriously. You sleep on it. And when your conviction is unchanged, it's crystal clear, you know, that you need to go deeper. That said, like, with Wiz, when we were doubling down, we took multiple approaches to it. Like top-down, look, the cloud market is on a path to a trillion-dollar transformation. There's probably $300 billion of spend on cloud service providers. That'll get accelerated by AI compute data demands, right? But we're, so we're talking about a trillion, potentially a trillion-dollar-plus market opportunity. In comp- comparable categories, there's 5 to 10% attached to security spend. So, the cloud security market-... um, could be really significant. If you think about most software, like functional software areas, the market leader commands north of 20%, 25% market share. So you do the math on, you know, how big could the winner be, and um, uh, y- you know, you can apply, uh, various discounts on penetration rates and time and so on and so forth, but you get to really significant numbers. Number two, you look at public comps. CrowdStrike, $50 billion plus business. Uh, Palo Alto Networks I think now is like $100 billion plus business. Bottom's up. The, the, the, you know the business in, in, in four years the company has, um, grown faster than any company of all time, um, with unbelievable productivity in different segments, in different geographies. From a team perspective, they've gone from strength to strength adding, uh, most recently Dolly as their COO who's an absolute beast. And so from every dimension, this, this story is, um, profound, but I don't think it's obvious.

Harry Stebbings 25:32 Did you get pushback with each round or not?

Shardul Shah 25:35 Yes.

Harry Stebbings 25:36 You did?

Shardul Shah 25:37 Of course.

Harry Stebbings 25:37 O- o- on what? Price? Progression of company?

Shardul Shah 25:40 On every dimension like we beat up investment themes, right? So people, product, technology, competition, traction, uh, market, like y- you know, every dimension we'd debate.

Harry Stebbings 25:54 How do you think about finding the truth together? I know it's kind of a weird tangent, but I think about this a lot now as we build our team and have the same discussions. I want to have

Harry Stebbings 26:03 vigorous debate and have passionate discussion about these elements, but I also don't ever want to put someone off with the forcefulness of a discussion, or with just the kind of vigor of discourse. How do you think about kind of finding the truth together most effectively?

Shardul Shah 26:21 You may have, uh, the advantage, if I understand correctly, your team's local, right? They're, they're near you.

Harry Stebbings 26:27 Yeah, more than possible.

Shardul Shah 26:27 Right, so, um, the advantage of that is like conflict resolution is much easier, you can go for a walk.

Harry Stebbings 26:33 Mm-hmm.

Shardul Shah 26:33 Um, I really recommend walking meetings by the way. I learned this from Steve Ward at the time he was the Chief Security Officer of TIAA-CREF and then he became CSO of Home Depot. Um, uh, Steve, in a prior life, was Secret Service and protecting, uh, 42 Bill Clinton. So there's lots of great Bill and Hillary stories. That said, one time, uh, Bill was in a meeting with the, at the time, the first female Secretary of State, Madeleine Albright, and they were at a, like loggerheads, they were at a disagreement. And Bill said, "Hey, Madeleine, let's go for a walk." And she said, "I'm old, my knees hurt, I don't want to do this." And Bill was like, "If we're walking, at least we're headed in the same direction." So I think when you have a disagreement or challenging conversation, walking, like movement plus heading, heading in the same direction can actually be really stimulating. So it's actually a really good tool. That said, the fundamentals are, I think, trust, mutual respect, and mutual admiration. There's no shortcut. Like trust takes, um, time to build and it's easily fractured, so I think it's fair to be really sensitive to that if you value the, the culture of your organization to get to high quality decisions which is what I think you imply in, in seeking truth. But it takes a lot of effort to, uh, to nurture. It's especially hard in a venture firm in light of the power law, right? Again, very few companies are going to create returns which means there's likely to be concentration among, uh, um, uh, different investors, which suggests that you can have a skew of ego or insecurity, which can really fracture trust, respect, and admiration. So there's no shortcut, you really have to be conscientious about cultivating it.

Harry Stebbings 28:19 What are the biggest things that gets lost and gets gained when doing decision-making virtually as well? You know, you have an amazing team in London and in Europe, um, but then you also make decisions in the US, and I know that you have like joint meetings together obviously for investment committees, what are the things that get better doing that, and what gets worse?

Shardul Shah 28:38 Better, um, perspective. I'll give you an example. Vlad, uh, who just joined us, um, has an uncanny ability to read body language over Zoom. Like he'll literally zoom in and look at people's, like facial movements to take a read on how they're reacting to questions and, and why. It's beautiful. I love having Vlad on Zoom, and it doesn't matter what part of the world I'm in. What are the disadvantages? Um, they're real ones, right? Like we are, in New York, which is where I'm sitting, is, uh, at the center of, you know, ten time zones, right? There's a ten-hour time zone which makes San Francisco and London logistically a little challenging to get together. So sometimes we have meetings that are really early in the mor- early in the morning for San Francisco, and if you're not AM shifted, if you're not an, a, a morning person, you may not be at your best from a cognitive function standpoint, right?

Harry Stebbings 29:34 Mm-hmm.

Shardul Shah 29:34 So I moved to New York which is much more aligned with when I make high-quality decisions. So I think trade-offs are, are, um, logistical.

Harry Stebbings 29:41 Can I ask you, going back to the kind of conviction-building element-

Shardul Shah 29:44 Sure.

Harry Stebbings 29:45 ... I spoke to Danny in his show, and he said that Nasty Gal was probably one of the biggest, um, learning moments for him in terms of writing follow-on checks and how it shaped his thinking. If, if you go to one that maybe didn't work and how it changed your thinking, what, what comes to mind and how did you change as an investor on the back of it?

Shardul Shah 30:05 I really think that the sins of, uh, omission are much more significant than the sins of commission. The lessons to learn are don't be cute on price, don't underestimate fantastic founders, and don't overthink it. Um, those are far more valuable than, um, thinking through...... how could we have, you know, uh, improved on a selection of a company? There's- there's so much long tail risk in a company that I feel like the exercise around pattern recognition, um, benchmarking, um, a- as- as just, like, two examples, risk mitigation is the third. Our exercises in psychological safety, like we are in the business of finding fund returners. The power law dominates our business. And so not being in a 10, 20, 50, $100 billion company is actually painful.

Harry Stebbings 31:01 Can I s- do you agree with signaling being a challenge for founders when working with multi-stage funds? Obviously, we've talked about kind of concentrating capital and winners

Harry Stebbings 31:10 over time. Do you agree that signaling is something that founders have to be careful around messaging on?

Shardul Shah 31:15 No. I think what happens is, in the seed market, um, most seed investors are using signaling as part of an objection to work with a multi-stage fund. Most multi-stage funds say that signaling doesn't matter, and the seed fund doesn't provide any value, so- so you should work with us. Um, our strategy is a little bit different. Generally, um, when I, when I meet a- a founder at a seed stage, I'll tell him or her I'll underwrite the entire round, so there's no financing risk. But we should split it into three sleeves. One sleeve is for Index, one sleeve is for- sleeve is for a seed fund, and the third sleeve is for angels/operators. Because it takes a village. Like I don't have all of the answers to support a company at- at the get-go. They can really benefit fr- from multiple perspectives. I have the opportunity, if I deliver value, and if the, uh, company performs, to increase my ownership over time. And so, I give that optionality to founders, which I think is actually super different, but, um, I think is far more critical in development of a company than, you know, thinking about signaling.

Harry Stebbings 32:30 So I love that, and I- I completely agree with that perspective, but how do you think about making ownerships work then with those three different sleeves? If you think about Index, like what do you need? Like when you're thinking about your initial sleeve, what is that in terms of what you need?

Shardul Shah 32:42 I think the hardest sleeve to accommodate is actually the seed fund.

Harry Stebbings 32:45 Yeah.

Shardul Shah 32:45 Right? Because y- you know, different folks have different philosophies. Um, I've come across a number of folks that I really respect who are pretty rigid on the "I need to have this ownership because I'm gonna get diluted," and, uh, et cetera. So we tend to have a lot more flexibility than- than seed funds. Angels/operators is probably the most, um, flexible, right? Like I- I definitely don't encourage founders to have, uh, like a party round. Uh, it ends up being an exercise of- of herding cats. So tend to be very selective around a few functional leaders, for example, kind of like what you do with your, um, um, y- your fund strategy, uh, in order to support a company in- in different phases of its development.

Harry Stebbings 33:25 Do you have any big piece of advice to founders on how to construct the best angel and operator segment of that sleeve? In terms of, like, lots of people, small

Harry Stebbings 33:34 checks, fewer people, bigger checks, filling specific roles, any lessons on mistakes that often is made when filling out that angel/operator allocation?

Shardul Shah 33:44 Yeah. I think about different kind of flavors, like there might be a chunk for rainy day, like someone who you don't expect or anticipate to call frequently, but when you really need something, they'll be there for you. Um, second, distribution, product, engineering, like take expertise that you really need. Um, don't take money from customers, right? It- it's fraught with a conflict of interest. Um, and then, uh, more to your original question, limit the, uh, number of people. I tend not to give advice on the size of the check.

Harry Stebbings 34:18 Totally agree. I- I say don't have minimums 'cause some people can be amazingly helpful with 5K. And so, don't rule them out because of that. Kenneth, when you look across the different

Harry Stebbings 34:27 spectrum of venture, you know we mentioned sourcing, we mentioned selecting, um, there's securing, and there's servicing. When you look across those four, where are you best and where are you worst, do you think?

Shardul Shah 34:39 I think the hardest competency to develop is winning. Sourcing competency is nuanced, uh, because we're- we're rifle shooters. Like I'm not actually aiming to see every single opportunity on the planet. If I were, I would construct Index in a completely different way, right? I'd have an army, um, or maybe a huge data science team. That's not the goal, right? So, um, I think about these competencies perhaps in a different way, uh, than- than others. But if I could wave a magic wand, um, I'd be great at all three.

Harry Stebbings 35:21 So where are you best and where are you worst, Shodal?

Shardul Shah 35:23 Probably the best at winning. Um, where I spend the most time thinking about, uh, is, how can I become better at supporting entrepreneurs?

Harry Stebbings 35:32 Do you think that the best founders need a VC? You know, we've had many... we have Bryan Singleden from Founders Fund on, and- and Delian, um, and they both said, literally, "The best founders do not need VCs," period.

Shardul Shah 35:45 Well, I'm glad they said that. (laughs) Good luck.

Harry Stebbings 35:50 (laughs)

Shardul Shah 35:50 You know, look, I- I think there's, of course, some merit to it, like if you think about Mailchimp, beautiful business, bootstrap, never raised a single, uh, dollar. Phenomenal founder, great outcome. Right? Um, on the other hand, um, in very few strategic moments, um, I think having a, uh, valuable board, um, is terrific. That board member may be an investor or could be an independent, right? Uh, but I- I definitely believe boards are invaluable to businesses that want to dominate categories.

Harry Stebbings 36:26 What have you learned about what it takes to be the best board member? Again, like, I use the show as a pure learning mechanism for me. I want to be the best board member.

Harry Stebbings 36:35 I acknowledge it's early in my career. What do you know now about what it takes that you'd share with me?

Shardul Shah 36:41 Do less. (laughs) You know, when I started as a board member, I was really excited about being a board member. Um, (laughs) it's like, it, there's this black box room, like, "What happens? I wanna be part of it." It, it, there's, like, probably ego, and power, and influence, like, all of these, uh, uh, ideas that pop into your mind. Uh, and then you wanna help, and then you try to help everywhere, right? There are very, very few things that matter. One approach I take which I think can be a useful tool is h- to hold up a mirror, right? So, uh, recently we were in a board meeting. Entrepreneur is talking about, uh, in a closed session, an executive, um, that he, that he works with. And, um, the board starts going around the table on like what to do when kick the can down the road. Uh, and I'm like, "Hey, I wanna hold up a mirror. I heard you say toxic, irreparable, inevitable. You know your decision, it should be made tomorrow." And we made the decision tomorrow. And I didn't actually contribute perspective. All I did was play back to the entrepreneur what he'd already said. Um, and I think that can be really valuable in asserting high quality decisions, which is a key component of, um, building an important business. Having the courage to say no, uh, to big opportunities, um, requires, uh, deep relationships with, um, maybe not every board member but a, a few board members. And that's, that's a place where, again, um, if you're positioned as, like, the first call, um, if you're getting calls from your founders on weekends, that's a really important role, um, in, uh, and from a fiduciary standpoint, um, meaningful, right, to all shareholders, uh, to, to play. Um, helping with decisions on, uh, hiring executives, not just firing, but hiring executives, where you may have seen kind of a range of sales leaders or, or in your case, like, the best growth or the best of the best in product, you may be able to create a really nuanced perspective on the performance of an, of an individual, um, and therefore inform your entrepreneur with perspective that can enable them to make, um, key decisions. So I th- I think there are very few things that matter.

Harry Stebbings 39:02 Are you impressed with the quality of investor board member that you're on boards with?

Shardul Shah 39:06 Yeah. I mean, I am really fortunate to be working with some of the best in our industry, so I'm absolutely impressed.

Harry Stebbings 39:13 Who is the best, from your perspective, outside of Index?

Shardul Shah 39:17 Outside of Index, it's really case dependent. Like Gili Renan, fantastic board member. Doug Leone, great board member in a, in a very, very different way. Mike Speiser, tremendous board member.

Harry Stebbings 39:29 How is Doug good in a different way?

Shardul Shah 39:31 Doug is incredibly intuitive. Um, he can inspire confidence in, in a decision, um, which is really, really different. Grady's also, like, uh, I respect Grady. I respect Vishra. Like, uh, I respect Murat Beacher. Uh, there, there are, uh, I respect Som. I've seen Aksham in action. He's great.

Harry Stebbings 39:53 Where do you find VCs can be damaging in terms of boards?

Shardul Shah 39:57 I think there are, like, if I, if I identified, uh, key moments,

Shardul Shah 40:02 um, sometimes VCs put their interests ahead of entrepreneurs, which can be disruptive.

Harry Stebbings 40:11 And their interests are what?

Shardul Shah 40:14 Uh, varied, right? It could be, um, finding a path to liquidity for themselves. And so in, in that path, they may not be clear-eyed on a capital allocation strategy. Like, one of the key things a board should do is help inform the level and direction of, of capital investment. And if you're seeking near-term liquidity, you might be more, much more conservative in how much capital is being allocated. Like, that's an example of misalignment. Um, M&A, like, it might serve you to encourage a company to have a robust M&A strategy to buy, you know, fallen, uh, seed stage companies, which may be completely antithetical to the appropriate strategy for a, for a business, which I have seen and, like, threw a torpedo at. Like, it, it, you can be... Yeah, investors can be, um, disruptive.

Harry Stebbings 41:09 (laughs) They can. I, I think it's Vinod Khosla who says that 90% of investors are net negative, um, (laughs) which is, uh, potentially slightly damning.

Harry Stebbings 41:18 Can I ask, you mentioned there about kind of, uh, liquidity s- uh, situations. How do you think about when's the right time to sell? I think one of my biggest regrets from the last few years is not taking cash off the table when I could have done. When you think about lessons that you have, how do you think about when's the right time to sell?

Shardul Shah 41:34 I probably am more in the Charlie Munger school of, like, s- the sk- the, the goal is to buy and hold, uh, and let other people help inform, like, when to sell. Um, so, and, and that's true for kinda the winners that make up the power law contributors, which is the business that we're in to find fund returners. For, like, a, a non-fund returner, what are tools that you can use? If you come across an entrepreneur who you believe is on the spectrum of unethical to incompetent, you should sell immediately.

Harry Stebbings 42:08 Is there a situation which comes to mind when I think about not selling or selling and it being the wrong decision and it impacting how you think? Like, have you ever sold and you're like, "You know what? We sold way too early and actually I didn't see the next card, I didn't see the next chapter"?

Shardul Shah 42:24 We were a large investor in a, in a company. We invested early stage. Company got acquired for about a billion dollars by a public company. Um, and within a week of receiving our proceeds, um, I asked our team to distribute the whole position. Couple weeks later, price, you know, rocketed up.... um, I got a few phone calls. Uh, a couple months later, stock tanked, and I got zero phone calls. So, you're, you're rarely congratulated for making the right call. You do get phone calls, uh, if temporarily it looks like you've made the, the wrong call. But you don't lose any sleep over it when you know you've made the right decision.

Harry Stebbings 43:08 Do you think you have asymmetric information, and so when companies go public, you have a better handling of their stock than people who do not have that same information? Or do you just want to distribute to LPs and it is theirs from that point on?

Shardul Shah 43:24 That's a, that's a super tough one. We try not to be smarter than Mr. Market and, like, the invisible hand. Um, that's real. There are people who are professionals at public market trading. That said, I do believe, um, as a, um, as a venture investor, you can have differentiation in, in terms of duration of hold. Um, I do think you can have advantage in terms of understanding the business in more detail, um, and, and therefore you have more texture and nuance and context. But again, you've got to always be aware of that line between delusional and conviction. Um, so often people kind of have rose-tinted glasses because it's so rare to see a company go from, you know, point of investment to public company, that you believe it's going to continue and sustain. And so we create some guardrails, uh, within Index. It's not an individual's decision. We have a, a group of people that help, um, again, with agreeable disagreement, uh, to get to the best possible decision.

Harry Stebbings 44:26 Can I just ask you, in terms of, like, the future of venture, I think about this actually a lot when I look forward over the next 10 years. I think it's, like, dominated by, like, Chanel and Walmart.

Harry Stebbings 44:35 And so Chanel is, you know, benchmark and USV constrained fund sizes, very specific ICP. And then you have Walmart, which is walls of cash. It's Andreessen, it's Insight, it's Sequoia, it's Index. Like, big, big pools of cash. How do you think about the next 10 years and the, kind of, winners and losers in that respect?

Shardul Shah 44:59 You won't be surprised we talk about Rolex, uh, Swatch, uh, and the (laughs) the Apple Watch. A- and so I, I think a little bit less about who are winners or loo- losers. Um, generally, I believe, like, in a competitive industry, not changing seems... It's not the strategy I would take. Like, if the world around you is changing, adapting seems to make sense. But given it's, it's such a, an... Uh, the industry is so driven by the power law, like, I think people can withstand, uh, cycles longer than we probably give them credit for.

Harry Stebbings 45:40 Do you think we're entering into a new era of investing in terms of the assets that we invest in? You know, we obviously see defense becoming ever larger as an investable category. We see general catalysts buying hospitals and healthcare really changing as an investable category. We see a lot more physical infrastructure plays. Do you think we're seeing a very changing landscape in terms of where we find alpha as venture investors?

Shardul Shah 46:05 Yeah, I think we noticed that when we opened up New York, right? 25% of Series As in New York are, are related to healthcare. That's a really different mix than San Francisco. And so we've redoubled, uh, an existing healthcare practice to make many more, uh, new healthcare investments. And, and so definitely, like, AI is a draft that's playing into tailwinds for existing markets, as well as enabling us to invest in, in new ones.

Harry Stebbings 46:31 Shaodil, I'd love to do a quick-fire with you. So I say a short statement and you give me your immediate thoughts. Does that sound okay?

Shardul Shah 46:37 Yeah, let's try it.

Harry Stebbings 46:38 What's the biggest advice for someone

Harry Stebbings 46:40 who wants to get better at public speaking? I hear that it's something you've been focusing on.

Shardul Shah 46:43 Three elements that I would think about. One, like, have fun. Two, be yourself. And third, probably watch yourself.

Harry Stebbings 46:49 What do you mean watch yourself?

Shardul Shah 46:50 Like, record and then play back. Notice your own ticks, how you phrase things. Did you land the point that you wanted?

Harry Stebbings 46:58 What's the biggest lesson from opening up the New York office?

Shardul Shah 47:01 I love Martin. Like, Marty is Captain America. So principled, sets such a high bar. And, uh, although we've worked together for a decade, it's been an incredible (laughs) experience.

Harry Stebbings 47:16 Why so? You were saying this beforehand. Like, what did you see in Martin from this experience with him that you maybe didn't see before being with him virtually?

Shardul Shah 47:25 You know, every week there is minutiae of decisions that we can make. And there's complete trust between us in terms of who makes what decision. That's completely different f- And when you're working side by side with somebody in a new office, like, where is the office going to be? What's the seating chart going to be? What's the color palette? What's the art choices? It... And you go on and on. Um, and it's, we're completely indifferent to who makes what choices.

Harry Stebbings 47:56 What's your worst trait that's also helped make you successful?

Shardul Shah 47:59 My fair share of analytical horsepower, and that can lend itself to overthinking.

Harry Stebbings 48:06 What's the biggest piece of BS that you hear most often in venture, Shaodil?

Shardul Shah 48:09 It really irritates me when I hear, uh, investors say it's an exceptional founder, uh, a A+ founder, without any, like, specif- specificity or substantiation.

Harry Stebbings 48:22 (laughs) Yeah, I agree with you. Uh, biggest mistake you see first time founders make?

Shardul Shah 48:28 Not firing fast enough.

Harry Stebbings 48:30 Hmm. Biggest sin of the zero interest rate environment?

Shardul Shah 48:33 It depends on, uh, for whom. For founders, like, the best founders probably didn't grow aggressively enough. For investors, investors probably didn't maximize liquidity opportunities.

Harry Stebbings 48:46 What question, final one, what question are you never asked that you should be asked more?

Shardul Shah 48:50 Is your wife the shadow I see at Index?

Harry Stebbings 48:54 (laughs) Is your wife the shadow I see at Index?

Shardul Shah 48:58 I run every decision by her, and she's got an incredible amount of common sense and reads my body language, so knows what I'm thinking in my answer before I do.

Harry Stebbings 49:09 (laughs) Shaodil, listen, I, I think it's been like seven or eight years since we did the last one. So I'm gonna, like, officially be middle-aged when we do the next one. Um, this has been such a pleasure, and thank you for putting up with my prying.

Shardul Shah 49:20 Ah, you're the best. Thank you, Harry.