#33- Foolishness, experiences & wisdom as a VC
Why am I evaluating a company for the second time this year, after passing the first time
A few months ago, I had written why I would not invest in 4W servicing startups? The blog was a way to engage with potential 4 wheeler servicing startups that would pitch to us. I found it to be an excellent conversation opener - if a founder can point out flaws in my reasoning, we take it up. If a founder does not reply, I take it as an agreement with my views.
I had evaluated a 4W servicing startup earlier this year, and after some due diligence behind the scenes, I did not find the industry to be attractive. The research formed the basis for my article.
Which company am I evaluating right now?
The company in point is a 4 wheeler servicing startup predominantly based in India.
Why am I evaluating the company again? And what was I hoping to hear?
At Malpani Ventures, we get anywhere between 10-15 incoming deals every week. Being a lean team, and a Micro-VC of sorts, we have to pass on many deals that do not fit our mandate. Do I love engaging with founders and getting to know their businesses more closely? Yes! At the same time, do I also have to ensure spending enough time to be able to issue term sheets to startups that fit our thesis, close the rounds, spend time reading and writing, regularly interact with portfolio companies on their business, growth, special situations, any specific requests, and also spend time with my family? YES! I have actually created a strike zone for myself, beyond which I ruthlessly prioritize.
Case in point, this 4-wheeler servicing startup had reached out to us earlier in the year (pre covid, yep that’s my timeline) wherein we had an in-depth chat on their journey, business model, future plans, and their funding round. However, upon consideration, I had found the conversation steering a bit towards them raising a Series A round. “Our competitors have done it, we can too”. Oh, how naive of them- being a fresh VC associate this was the first thought that came to my mind. And somehow this thought stuck, amidst the entire conversation we had. Another red flag for me was that I thought they did not have any projection or utilization plan for their fund raise.
As a fresh VC, being given the opportunity to run a portfolio - I was not going to spend my time with someone who was not prepared. Having said that, I now believe both my premonitions were wrong, and at that point in time, I was not sensible enough to seek clarifications. Boy was I cocky!
“Foolishness is more than being stupid,
that deadly combination of arrogance and ignorance.”
I embodied every single word in the above quote by Paul David Tripp.
About six months later, I understood that the founders had been in touch with our principal investor throughout (Sheesh Sid! what a facepalm for you!), and he used to forward the communication to me. All the while, I used to forward him my blog for my reasons not to pursue it any further.
Another month passed and I was nudged to reconsider the company and to keep an open mind.
“What’s the worse that will happen? If they’re as bad as you think, you’ll waste an hour doodling and your beliefs will be validated.
If they turn out to be the opposite, you will have learned something new, and also to not to judge a book by its cover!”
Before I decided to open the file, I decided to do some groundwork myself. I reached out to a batchmate of mine from college whose family office has a strategic presence in this space, as well as an investment in similar companies. He was gracious enough to put me in touch with the Director of Investments, and I will always cherish that conversation.
Knowing I was not completely right in passing, I grudgingly (oops!) accepted Dr Malpani’s offer and went on to open the data room that the founders had shared with us. I was pleasantly surprised to find that they had grown handsomely despite spending less on customer acquisition, and were also fairly profitable. I was actually informed later, that a leading lubricant company had comped their marketing spends as a part of their outreach partnership effort, and in the absence of the comps, the company would have been EBITDA negative. Nickels and dimes.
I was also very happy that the founders did something that I did not have the courage to- follow up diligently. After all, we as investors expect founders to do all the heavy lifting without having the courage to do so ourselves. Ah! If only investors were made to work for their privileges!
Long story short, I was actually hoping to be right (about the naivety of the founders, their blind faith in the market & industry which would not have been backed by numbers, and a cocky attitude since I had passed them over without a sufficient reason - yes I did mess up). But maybe I wasn’t. We’ll find out over the coming weeks.
Did the business reflect adequately in their deck?
Actually yes. The deck was simple and crisp. It had most numbers that I love to see (which I have to ask otherwise), and also had a 2x2, a competition comparison slide, and a summary. The deck also had a slide titled “Multi-Billion Dollar Opportunity For Us” with data on the top companies in China, the amount raised, their valuations, and key investors. Now, this is something I usually do not like, because this is akin to counting your chickens before they hatch! But in this case, since the comparison was China, I liked it, especially because China has consistently been about a decade ahead of India.
How will I explain it to my investment team at the family office?
Yes, while I conduct diligence and interact with founders, the decision-making is collectively based on the views, opinions, and conviction of the entire team - right from our CIO to the bright interns we have the opportunity to work with. Since Malpani Ventures is under the ambit of Dr Malpani’s family office Solidarity, we do things the Solidarity way. And that is by following strict processes and being democratic in decision-making. Every deal that I like, and evaluate - goes to the team. I share my detailed note (nothing fancy, a long email), along with reference material like pitch deck, financials, projections, and any other relevant information. Post that, the team reviews it and shares their questions before our team meeting where I am supposed to pitch, provide reasonable answers to their questions, and if needed, seek further clarification from the founders.
Over a period of time, I have understood what it takes to be a good analyst. A good analyst anticipates potential problems and questions and tries to get clarifications early on. In the same way, I know the kind of questions that my team will ask, and I have to be ready to get the answers - this is something I like to base my diligence on. “Seeking wisdom through questions!” is what we like to call this process.
Do I really see my investment team investing in this company?
I don’t know, maybe not. And herein lies the challenge, and the opportunity. Anticipating their disapproval, I will try to dig deep and find answers to every problem they will find for me. In doing so, I will not only know more about 4W servicing startups than the next analyst but also be able to understand my conviction levels about this company.
Maybe experiences since the last time will help us make an informed decision.
One good thing that happened for the company has been COVID. This period helped them better understand their strategy, focus on what’s working & what’s not, and helped them form leaner operations.
“It (covid) was a blessing in disguise. While we did not end up raising the last time we spoke, we have learned a lot since.”
Me too, my friend!
Next steps
I will be having another conversation with the founders this week. And a testament to my building conviction on them, and the sector - I also shared with them my idea of a brief 12-month plan on their business model with assumptions on key metrics, growth, fixed cost build-up, cash burn plan, as per our conversation. Might come back with an update on this post soon!
I will end this post with a gem from Sacha Guitry:
“Our wisdom comes from our experience,
and our experience comes from our foolishness.”
I was foolish, now moving towards experience. Wisdom is a long way ahead.
I am a writer masquerading as a full-time VC. I like to share my honest learnings as transparently as I can. Today’s world of venture capital is extremely opaque, for founders and analysts alike. This blog is a quest for reducing that opacity. If you like what you read, please consider subscribing!