Shardul Shah
speaker
103 appearances
1 recordings
1 series
first heard Sep 2024
last heard Sep 2024
Shardul Shah’s voice in public audio — every appearance, attributed to the second.
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Appearances
At Index, I was once asked to run like a tech offsite. And so I kind of threw the old approach out of the window. And I told all my partners to do the homework. And I asked them each to write a postmortem on a company we could have created a billion of gain or more. And then we distilled kind of the lessons learned. And ultimately, the sins of omission are much greater than the sins of commission.
The sins of omission for us distilled into three lessons. One, don't be cute on price. Two, don't overthink it. And three, Uh, don't pass on generational founders. And so intuition around, like, I'm so smart. Like one of the challenges with being a major concentrator in a domain is you get so smart that you actually think, you know, what you're, uh, what you're doing. Yeah.
And then you might instinctually be dismissive of actually a disruptive idea.
So intuition is one part of it. The other part of it for me is an analytical framework. In founders, I look for folks that have imagination, operational excellence and high quality decision making. 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 who someone is and ultimately
it's manifest in the types of decisions and the style of decisions that they make. But when I think about conviction in people at the earliest stages, I think you can be really elastic on price. Late stage, if you have conviction, price is just a representation of future expected free cash flow, right? So You're probably not wrong on price. You're wrong on the investment.
Every investment in Datadog was at a high price. It's not an outcome yet. of course, but every investment in Wiz has been at a very high price. I feel great about each of those decisions.
Which is like, often people say, listen, the best are priced high. Yeah, you know, Demir on my team once asked me this question. He's like, Shardul, 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 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.
There's this scene. I see the hesitation. I'm the nerd here. There's this guy, General Akbar, who's alien. And at one point, he screams, it's a trap. That is the voice I hear in my head any time someone talks about TAM sizing. TAM is a trap. 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 market sizing because I don't put effort into it. In terms of market dynamics, I get that wrong all the time.
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 cease to exist.
At least $65 billion that explains I was wrong on CrowdStrike, Cyber Reason, Sentinel One, like this entire category.
It was not a quick conclusion. Uh, It was the consequence of overthinking it, like rule number two, and not recognizing George Kurtz for the phenom that he is. Those are the lessons from CrowdStrike. Terrible mistake. Did you have the chance to invest? I mean, even if anyone had the opportunity to invest as a public company and still make a tremendous return.
You know, there are business models that have real capital needs, right? they can encounter two challenges. Either the founders are unable to raise significant amounts of capital or their distribution 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 with high conviction on the investment, And yeah, I think one of my partners is doing a great job of finding a path to returning capital on that investment, but that's certainly not a desired outcome.
No. Unpack that for me. When we invested in Olivier and Alexei's Series A at Datadog, he was not a great fundraiser. Thank God he was not, right? If being a great fundraiser is defined as having multiple opportunities in a short span of time, He evolved into being a tremendous fundraiser over time, but I don't think the best founders begin as the best fundraisers.
I probably don't think about it as much as you. The luxury of having a seed venture and growth fund is we can build ownership over time with more capital if the company is performing. That being said, they're definitely business models like in biotech drug discovery. Those are hugely capital intensive, can have binary risk, binary scientific risk on if a
an actual, like a candidate becomes an asset. Those are business models that we won't participate in.
I'm not thinking about incrementally increasing my ownership. I'm building a net new investment case on can I create a fund returner? And with that, I do all the work again. So if I think about 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 financial models. I do all the work. Again, because I've doubled down multiple times within a year.
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