Shardul Shah of Index Venture joins Nick to discuss Assessing an entrepreneur’s imagination. What are the metrics and characteristics that demonstrate product market fit for Early-stage investing? (Shardul Shah). In this episode we cover:
Outsourcing security risk and the need to outsource risk.
The Importance of Imaginative Entrepreneurs
How do you think about the trade-offs of a services business?
Metrics and characteristics that demonstrate product market fit.
The evaluation criteria Shardul uses in evaluating companies.
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Transcribed with AI: 0:00 Shardul Shah joins us today from New York. Shardul is a partner at Index, a leading venture fund where he’s made investments in companies including Wiz, Duo, Data Dog, Dropbox, Squarespace Signal Sciences, Expel and Coalition amongst many others. Shardul welcome to the show. 0:17 Thank you very much for having me. 0:18 Yes, sir. 0:19 Walk us through your background in your path to venture 0:21 Sure I started at Index 15 years ago. And just before that I was an intern at Index when I was at college in between, I didn’t find any venture capitalists who came to me at the University of Chicago. So I cold called my way to summit partners on the West Coast and started my career as a healthcare services investor. 0:41 Okay. So you started at Summit? And then it sounds like you made the transition to Index in 2008. 0:46 Yeah, perfect timing for the financial crisis. 0:50 And you also transition focus areas at that time or, you know, talk us through kind of your early years at Index. 0:56 Yeah, early years of Index, we had a separate Growth Fund and a separate venture fund in terms of Team organization. And so I joined at the very beginning of Index as first growth fund to help organize that effort, I joined in Geneva, Switzerland. 1:13 And at the time, we made an observation that very few countries supported multiple investments for Index very European fund, were regarded as among the leading European funds at the time, where there’s a very fragmented ecosystem across Scandinavia, London, of course, France, Germany, and so on. As part of that observation, I created a hypothesis that Israel could support multiple growth investments over a fun cycle, which is typically three or four years. 1:51 And so I started to spend a lot of time in Israel. And it turned out that there are two prevalent industries ad tech, so advertising technology, and security in Israel, they’re kind of the same thing, like on opposite ends of the spectrum. Security is like finding someone that’s doing something and trying to prevent them from doing more of that, right and keeping out the bad guys, advertising is kind of finding someone and getting them to do more of something like selling them shoots. 2:19 So both were similar, but very, very different. Both were prevalent in Israel, and that kicked off, almost accidentally, to be honest, I’m an initial area of expertise for me in an ad tech and security separately, they kind of came naturally to me, but it was somewhat accidental, I developed one of our first communities at Index, we created an engineering community. Again, the observation was across Europe, many different companies were encountering similar problems, like how to manage a distributed team as an example. 2:54 And while I didn’t have any answers, I felt community members could help each other. And so we created an engineering community. And these, these experts helped me identify another area of expertise around cloud cloud infrastructure that I still hold today. So I definitely moved from healthcare services, which is a very regulated industry, very North American focus when I was at Summit partners, to more technical areas. In the very, very early days. I was also a biotech investor. So kind of drug discovery, with the focus on different hematologic malignancies. So I cut my teeth as a public investor, but very quickly moved to different domains closer to technology. 3:38 Yeah, I noticed your concentration that you Chicago was immunology. You know, we’re going to talk about sectors today. But can you give us you know, some of the elements that underpinned your hypothesis on a Geo? 3:49 You said, You guys are going to enter Israel? You know, what was it that you saw there that made it sort of potentially strong market for venture investing? 3:57 Yeah, well, we had been investing in Israel for some period of time. So it wasn’t particularly new. But it represented an opportunity for our growth fund, which was new for us on multiple levels. That being said, I think we underestimated, frankly, the opportunity set in Israel in the early days. 4:14 If you look at the last few years, the number of terrific companies that have emerged with Israeli entrepreneurs, many of them moved to the United States is really stunning. Overall, we’ve always had a view at Index that there’s opportunity everywhere, the question and again, it’s a function of kind of being exposed to a very fragmented ecosystem. The question for us is always where to dedicate our time and energy and to be focused. And so in some sense, we’ve been more intentional about what we don’t do than what we do do. 4:47 So unlike some of our peers, we didn’t build out kind of a business in China. We didn’t build out a business in India. We didn’t take a view and build out a practice area related to crypto Part of that I would say what’s very different is staying connected as Index. So we’re, while we expanded into the US about 10 years ago, I helped create our San Francisco office that Mike and Danny stood up, Mike Volpe, and Danny rhymer, we’ve always been kind of one team one dream, and not for purposes to like market shows like yours, but because we’re better decision makers, and we have more fun when we’re together. 5:25 And I think that’s really different. Most other firms have franchises, they share a brand share some resources, but they tend not to make decisions together on a global basis. And so when it comes to approaching geographies, a big consideration for us is how do we approach it as one team, you know, versus hiring new members, giving them kind of a shingle in our brand and allowing them to go execute? 5:49 Shardul, tell us more about that decision making process? You know, how does it work at Index? 5:54 Well, it’s it’s few and far between, we open a new office like once every 10 years, you know, every year we get together and we talk about it, usually I raise my hand and I’ll say I’ll go, whether that’s Brazil, or Bangalore, or Beijing. And then my partner’s Look at me, and none of them raise their hand to go with me. New York was different. It was the first time a partner was like I’m in and that was more time to noon. And that’s how we started the New York office. 6:20 But every year we talk about, you know, strategy, whether that’s geography or products, we often do make decisions, compelling ones, like our seed fund that we we launched. And again, often, we’re deciding what not to do. Another example, some of our peer funds have been different was in 2021, we didn’t launch a crossover funder to the other 20, we didn’t launch over lunch, a crossover fund, a type of business that many of our peers got into. So we have kind of arcs of conversation within our partnership over long periods of time that set us up to you know, take advantage of opportunities and be prepared to make important decisions with significant investment pretty infrequently. 6:58 And I think, you know, most listeners are familiar with Index at this point. But can you give us kind of an overview of the firm, you know, the size and broad strokes on on the thesis? 7:07 Sure, Index is a global firm, we’re about 100 people, just shy of 100 people, we invest across seed to growth stages, so anywhere from 100k to $100 million. As first checks into businesses, we organize not by stage, but by domain expertise. That’s why I have emphasis on cloud infrastructure security exam, as examples. Other partners have expertise in marketplaces, or FinTech or AI ml. And that allows us to both create conviction and confidence in the entrepreneurs in the market opportunities we want to pursue. But it’s central to why the best entrepreneurs who have choice choose to work with us at different phases of their journey. 7:48 Very good. So let’s start on this expertise area, you’ve developed your own, you know, cloud and security are your key focus. And, and there’s been a persistent migration to the cloud. As many of us know estimates I’ve seen for cloud spending in 2022, or as high as 25% of the 919 billion in overall tech infrastructure spin. Can you walk us through your sort of the high level framework you use to kind of size up the market key drivers in the areas of most interest for you? 8:18 Yeah, I think you’re I think you’re spot on. So I think the cloud market represents a trillion dollar IT transformation. So it’s really a platform shift. And we’re in the early innings. To your point, when I when I studied the market bottoms up from 2022 figures, my estimate was there’s about $224 billion spent on cloud infrastructure last year. 8:41 So I think you’re really accurate with your estimate of 24% of 900 billion plus, my view is over the next five to seven years that the cloud spend will about triple so there’ll be about six to $700 billion dollars spent largely across Amazon, assure Google and then you know, a chunk of other providers in different markets. Within that, again, to your point, there’s an area with that’s not particularly new, which is cloud security, that I think will be a really massive opportunity. 9:10 My estimate is there should be three to 5% Attach rate of spend to cloud budgets for cloud security. And that’s consistent with what we’ve seen on prem and probably a little conservative with respect to how much people are spending today. So that represents a 20 to $30 billion addressable dollar opportunity for security vendors over the next five to seven years. 9:32 What are the drivers behind the cloud adoption? It’s this perfect combination of quality, speed, scale and cost. What are the drivers of you know, security adoption? It’s by necessity, some of the most important data and identity is an infrastructure reside in the cloud. They become really interesting targets for adversaries. And as a consequence, I think there will be segregation of duties. While the cloud service providers will provide a degree of security and Most organizations will seek third parties to support a more sophisticated security strategy, which will represent a massive commercial opportunity for security vendors, 10:09 And are their sub segments either within Cloud broadly or within security that are of particular interest 10:15 Within Cloud security, the three pillars that I think most about our infrastructure, data and identity, though I do believe that the most significant vendor will consolidate the three, I actually think architecturally that’s possible, it’s also in the best interest of potential customers, it’s also very likely in a recessionary environment where there are benefits and working with fewer vendors. 10:46 So I think vendor consolidation across those three pillars is a really significant opportunity, each of those three are important enough that the number two can be a pretty significant business in each of those three pillars. And so I think there will be a huge number of incumbents and new startups that are formed to go after that opportunity. Outside of cloud, I think there are going to be a couple of areas that are that are really significant. One is what I would describe as kind of outsourcing. 11:18 So if I step back for a moment, the world is is in an interesting shape. individual companies largely have to manage their own risk by themselves for modern stuff like the cloud, as well as old stuff for stuff that they control and stuff they don’t. And they have, like very limited resource in terms of people and process and technology to manage all of that risk. In part, this is because the labor supply of security professionals is limited, it’s very fluid. And people don’t have enough like money, and time and resource to invest across people process and technology to manage their own risk. That’s actually kind of more problematic, the smaller the company is, right, they have even fewer people, even fewer resources to manage their own risk. 12:07 On the flip side, adversaries like nation states, criminals, individual hackers play by totally different rules, they share information, they can use only, like the most modern technology, they can play statistics and create automated attacks. And just look for kind of the the nails that are sticking up and apply the hammer and the economics are improving because of ransomware. Like you can create transactions or the political game. So adversaries economically, are growing and playing by totally different rules. And this creates a real problem, right? That I think is endemic to the industry, which is why security is such a resilient and persistent commercial market opportunity. So one structural solution, I believe, is to outsource risk, right. And I think there are basically two ways to outsource risk. 12:56 One is through outsource security services. And this is a established large industry that, again, is being transformed by a set of companies, one of which were invested in that’s expel, it’s a that’s a business based in DC that’s performing super well. And there’s a number of other, you know, solid companies in that space. Second, is insurance, which I think is a emerging category that’s poised for significant growth over time. And again, I served on the board of a company in that area called coalition. There’s a number of other incumbents and startups that are that are relevant that I could speak to. But I think outsourcing is a structural requirement for our industry to effectively mitigate risk when they have insufficient resources to do it themselves. And that’s much more of an acute problem, the smaller the business becomes. And it’s true internationally as well. 13:47 Shardul, we haven’t seen enterprise grade offerings reach the SME market yet. Do you expect that unique options for this market will emerge, whether they sell through MSPs and MSSPs or otherwise? 14:00 I disagree. I think there are products that have service, the SME market. I’ll give you a couple examples, antivirus solutions, right, which have been around for a couple of decades. And there’s a long list of companies, they have real competence in sales and marketing because it’s often very difficult to educate and convince an SME that that’s in their best interest. So it’s not easy, but there definitely been solutions that have been offered to SMEs 14:27 To your point MSSPs, these outsourced service providers represent a huge category of exchange of value with SMEs duo security sneak, which we’re not invested in and represent companies that have a more approachable product offering that is self serve, right that is kind of two clicks to purchase, download and use which represent a different methodology to approach SMEs. So it’s definitely a segment of the market that I believe is underserved, but it’s not one that hasn’t had solutions in the past? 15:01 Shardul, you’ve previously discussed the importance of earnings predictability. But in early stage investing, things are evolving at a rapid pace. How can you get a sense for predictability in a rapidly evolving environment of early stage tech startups? 15:16 So there’s often a question of like, how do you think about valuation? Right? And I think at the center of that question is long term predictable earnings growth as a public investor. And I think this is especially true today, where people are talking about growth versus profitability, I’m sure you’ve heard that trade off. In other conversations, I think what people are getting at is the predictability of long term earnings growth. 15:40 It’s how you compare a bond or a T bill, with a software company, the beauty of SaaS businesses is they have embedded in the structure of their contracts, a huge amount of predictability. And the longer the duration of that business, the more predictable the behavior of cohorts can be. And then you get these magic things that I’m sure other investors have talked to you about, like NDR, the net dollar retention, which again, add a degree of predictability to how a business’s long term earnings potential might be. 16:11 So at the earliest stages, I actually don’t think it’s about the predictability of earnings on day zero. It’s about the nature of the business model to support long term predictable earnings. One of the mistakes that I’ve made like personally, and I will probably make, again, is under estimating the size of a market opportunity. And I think the difficulty is actually forming a view on how imaginative entrepreneurs and businesses can be, right? The canonical example is Amazon, a bookseller that created the greatest software company on the planet, which is AWS, who could have predicted 16:51 Yes, 16:51 Without that estimate, there’s no way to imagine what the predictable earnings potential of Amazon could be, right? So often, you know, people like me who are deterministic thinkers fall into traps at the earliest stages of believing in themselves that they actually know. And they can actually predict when it’s not possible, like the counter is well studied and describe like black swan events that are unpredictable, that change outcomes, like everybody knows that. So everybody thinks about the lack of predictability and risk calculus, the opposite is just as true people are not powerful in predicting opportunity and opportunity size. So for me, it’s more of a if I were trying to approach kind of earnings predictability at early stages, it’d be a question around the structure of the business model. But I think that’s secondary to, you know, how imaginative can an entrepreneur actually be? 17:42 So how does one assess opportunity size in underwrite and investment to an outcome? If you know, TAM is largely unpredictable? 17:51 Yeah, if I if I actually knew the answer to that question. I’d be wearing a different pair of gloves. You know, I think the what I look for is how entrepreneurs make decisions and how they learn from mistakes and failure. Right. One of the earliest indicators is the willingness to talk about problems and quickly get to what are different solutions to step into next. So kind of that desire to not be right. But the desire to learn is, I think, a reasonable correlate to someone’s ability to imagine more tam more adjacent areas over time. 18:33 Second, I think there there are, and there’s different archetypes, there’s no one kind of cookie cutter model. If I were to try to generalize the ends of the spectrum, on one hand, entrepreneurs may be really opinionated about what the world needs. The example is, if people like Henry Ford, right, people would have wanted a horse and carriage. They wouldn’t have imagined a car if I’ve asked about transportation. So sometimes I think entrepreneurs have an opinion that’s unknown to set of customers. On the other end of the spectrum, I think you can build phenomenal businesses and adjacencies to those businesses, by being really dedicated to listening to exactly what the pains are of your customers and bringing a solution to bear. So there’s different and there’s everything in between. 19:18 So there’s different pathways to creating a business creating second and third chapters of a business. And it’s a very difficult craft to form a, you know, the judgment of will an entrepreneur be able to crack the first chapter before he or she has the privilege to go into chapters two and three. You know, I just 19:38 interviewed Rick Zullo from Equal Ventures this morning and he had mentioned Data Dog and he said that they did their Series II around a $300 million dollar valuation and look what happened. So you know, was it some of these characteristics and some of this mindset that you saw on Oliviea when you invested in the company, 19:55 When we were chosen by Oliviea and Alexei to invest the company was eight people $10,000 of revenue in the series A, I think the company’s worth about $20 million. We knew very little. We completely together with Ali and Alexei and Ahmet, we completely underestimated the tidal wave that was represented by cloud infrastructure, what we knew was the cloud would would require a different architecture for monitoring. What we knew was Ali and Alexei were set out to solve a problem that they had experience. 20:33 They were like friends who pointed fingers at each other to solve problems instead of being on the same team. And what they needed was vocabulary. And so with a Data Dog, they’re kind of with a very opinionated view on architecture, bringing forth vocabulary, it was so conceptual and esoteric that they required Ahmed, who’s now the president of Data Dog to actually shape that into commercial potential with a monitoring solution. 20:58 We had no idea that we would launch now 20. You know, we fast forward 10 plus years, we’ve launched 20 Plus products, it’s unbelievable portfolio of solutions that are coherent and cohesive, such that they’re, you know, delivered as one experience to customers that comes from their focus on on customer centricity. So we knew there was like authenticity, we knew that they weren’t purists from a technology standpoint, like doing things that were possible. Instead, they made trade offs, for example, how frequently to collect information in order to serve a customer’s need their real business trade offs from a gross margin standpoint, but also related to what was necessary for customers. 21:44 So they made all of these decisions that collectively led to building a really beautiful business that was very competitive right at the time, but no, like, we had no idea it would become a 20; 30; 40… Like one of the best software companies on the planet. Like, yes, we double down and triple down and invested out of every fund into every round, but I would have bought every single share, plan, if I knew what the outcome would be. But I mean, that’s, that’s the, that’s the fun of our craft, right? It’s having the privilege to work with entrepreneurs, as talented as Olivia, and Alexi, who, you know, rise to the occasion, you know, and to this day are totally locked in building their business, you know, 22:26 Shardul it’s often the the founders that are making hard decisions on trade offs. And of course, as an investor, we all want super high margin software, only businesses that just are up into the right, continuously, but that’s not the reality, you know, how do you think about businesses that have maybe a services component, or maybe, you know, some lower margin loss leaders or, you know, dynamics to the business that include these trade offs, and require one to think long term and maybe sacrifice some near term high margin in order to get a much larger slice of the pie? You know, in the future? 23:05 The unsatisfactory answer will be it depends. So let’s talk about a couple of different examples. As a public company, you will encounter different shareholders who have shorter term expectations that can create either limitations on what you do, or it can actually create terrific habits, and how you do things with less. And so the more scrutiny there is, let’s say from investors, the more you’re focused on those trade offs, sometimes short term minded investors actually represent scrutiny, even if they’re not asking the same set of questions, as a private company have more degrees of freedom, right. And so I do think the board and corporate governance can play an important role in helping think through some of these trade offs. 23:56 The reason I say it depends is to your point, you have to consider market dynamics, competition and how to use limited resources. So for example, I made a mistake years ago, and not putting great effort into hoping George Kurtz would accept me as an investor at CrowdStrike. And at the time, the company, if you really squint at it from great distance, it probably look like a services company with relatively low gross margins. And you could easily make the case you’d be totally wrong. But one could easily make the case that this will never be a high margin business in the long run because it represents a services company that was just totally wrong. And if you look at CrowdStrike today, it’s one again, it’s a beautiful business. 24:45 So point in time, the nature of a business may require a fixed investment, which represents a different margin structure. And one has to have belief that it will achieve scale and efficiency in order to enjoy margin improvement that is an example of like, where services can be deceiving early on, in terms of what the real long term potential of gross margins can be. Same is true with expel, right. And I could go through that in more detail. Even at companies like data dog, we now consider different components of services to improve the customer engagement with our business. So it’s less about kind of revenue, or profit maximization. It’s about doing the right thing for customers. So it really depends on if you’re public, if you’re private, what the nature of your businesses, what you need to do short term, you know, what you need to long term. 25:34 Every company is different. But I’m curious to hear what metrics and or characteristics, you’re looking for that that demonstrate to you that a company has product market fit? 25:46 I think there’s two things. One is qualitative. The second is quantitative, qualitatively, I will concentrate on the opinions of really discerning customers. So with Wiz, I asserted that there was product market fit when the company had $1 million of revenue, and a number of individuals disagreed with me. But I had absolute conviction, because of the nature of the customer feedback I heard from, let’s say, people with discerning taste, who wouldn’t do me any favors, but are friends of mines, right? The flip side is for a company that has really robust customer engagement data, even if they don’t have monetization, it can be a clear indication of product market fit. 26:31 Again, we learned this lesson from making mistakes, like we didn’t invest in LinkedIn, we didn’t invest in Twitter. And it’s because we thought, at that time, this around 2010, we thought at the time, revenue was the proxy for product market fit, we thought you had to be like 10 to $20 million in revenue to actually have product market fit. Totally wrong, like engagement was off the charts. And so when we saw the engagement data of Slack, when we saw the engagement data of Discord, we were absolutely convinced that these could emerge is really important franchises in the world. So to your point, like every company is different, but the two indicators like yes, if a company has like $50 million of ARR, it’s probably easy to assert that it has product market fit. The more interesting I think characterizations of PMF for us have been a function of robust qualitative data, or really rich product usage data. 27:25 As we think about Wiz, Shardul, clearly they built a product that customers wanted, and they reached Product Market Fit relatively quickly. Was there also innovation on the go to market side? And you know, how did that play out? And what did you see there that was unique? 27:40 Wiz has a terrific board, sometimes there’s more character than opinion in the room. But with some really, you know, there’s a lot of experience around the room. And a number of folks gave kind of conventional wisdom. And I mean, that in a positive really positive sense. I think this is true for 99% of companies, the wisdom was hired to salespeople to explore if it’s just found your sales or salespeople can sell it. And if salespeople can sell it, then like hire a VP of sales, because then he or she can build a team. And if the team can sell it, then you know, build out a channel like that’s the traditional approach. Founders should sell like 20 customers, then hire two salespeople then hire a sales leader, scale the sales teams and scale channel 99% of time when there’s a company with product market fit and software. That’s the advice you’d give. 28:27 Wiz took a different path and took a different decision. And soft, recruited Colin Jones, who’s the CRO of the business when the company was about $1 million of of ARR. And that was really kind of a head scratcher for many folks at the time. And even to this day, you know, when I encounter investors, they’re like, You hired a CRO at a million of ARR. Like, that sounds nuts. Like, why would you do that? I wouldn’t describe that as innovative, but it was definitely unconventional. Why did we do that? I think we played a small role as Index in this in so much as Colin worked at one of our companies for seven years. And he’s one of those people who’s like seven years seven promotions, he has an equal amount of EQ and IQ. He has an integrity towards sales excellence and a humility to build a real function. Those that’s very unusual, he’s very analytical, which I thought that combination of characteristics could be a terrific fit for a soft and his style of leadership in the business needs. 28:27 Now, it wasn’t without total surprise, because when Colin came in, he had his mentor and his mentors mentor telling him this company doesn’t have product market fit. They don’t have 10 million of recurring revenue. And so we had to spend a lot of time with Colin on exactly your question, which is like, Well, how do you actually assert product market fit? But when he came into to Wiz, the first person he hired was a sales operations individual again, usually you’d hire a sales rep. Instead Ed Collin started building out the infrastructure, right the systems, the processes that were required such that when we wanted to scale, we would be prepared. And it turned out, we needed to scale much sooner than anybody expected, which is why the company was able to really take off. 30:21 Now, within this, let’s not forget, like the market demand for cloud security is massive, right? There is enormous amount of demand in the market, when you combine huge market demand with a product that meets that demand, because it’s an excellent product that scales for enterprises, which is really difficult to pull off, when you have like market demand that meets a beautiful product. With a prepared mind as a go to market organization, all of a sudden, you can witness what’s never been seen before, right the trajectory of the company, but I think if there were not like infinite market demand, and you didn’t have a beautiful product, Khan wouldn’t have been as successful as he hoods. So it really required this kind of intersection of the three to be as aggressive as we were in building up the go to market engine. 31:09 This is really good insight, because often folks will come on the show, and we get a lot of generalized advice about what one should do in a certain scenario. And often scenarios are unique. And they require, you know, their own solutions. And there’s people banging the drum for product led growth, and there’s people banging the drum for top down enterprise sales. And, you know, recently I’ve seen many models have success somewhere in the middle sort of product assisted growth, you’ve got a combination product lead and in enterprise and so I guess, you know, just want to honor your point that these things are not one size fits all. 31:45 Yeah, and you know, I like I hate the term product led growth, like I think PLG is like so misunderstood. I think people because I mean, like Data Dog is one of the best examples of a company that has “PLG”. And people want plg, because they believe it drives to capital efficient growth, there’s a number of features that that play into potential capital efficiency. That being said, I’ve actually debated with the co founders of whiz, you known AMI and Roy, they kind of are on rotation with who hears that next about a seltzer product. And my view is not to encourage them to build a self serve product for the sake of PLG in the capital efficiency that we may or may not enjoy as a function of like that go to market nature, right? 32:37 The rationale around self serve and being product led is I think, far too many people underestimate the importance of product ergonomics and how the look and feel and opinions you expose and how a product is experience can lead to significant differentiation. And there are all sorts of knock on effects like how you consider telemetry and billing and how prescriptive the product is in encouraging a set of stakeholders to participate. So being product lead is, I think, more important in forcing an organization to be very, very intentional with how the product is experience, as opposed to like just thinking about, Oh, that’s a capital efficient way to create, you know, linear growth or a quarter that’s predictable for earnings growth. 33:26 Shardul, I want to transition a bit and talk about, you know, the startups that you’re investing in and working with? And I wanted to start with sourcing? Are there any unique methods that you’ve used to source deals? And are you more proactive or reactive? 33:41 I don’t know if like any sourcing is actually differentiated and unique. You know, at a high level, there’s inbound, and there’s outbound with respect to inbound, the best channel, I think, for every venture firm is a referral from someone they trust. It’s mutually beneficial, right? Because entrepreneurs who get referred to an investor will know far more about that investor and what it’s like to work with him or her positive and negative, right, and what the trade offs are, a referral from someone we trust allows us to characterize that individual much more deeply, versus kind of a completely opportunistic cold email into my inbox. Now, I started my career by cold calling summit partners. So I have great respect for cold calls, and I invite them all, but it’s just much more effective when there’s a warm referral in terms of outbound effort from us to your point that is, that’s proactive, right? 34:32 And the two main dimensions are somatic. Right? So we’re thinking about outsourcing, we look for the best teams that are focused on outsourcing within security. And that leads to companies like expel the second dimension is people right, where there are relationships that we’ve forged for many years. My most recent investment, which isn’t announced yet, we just signed the term sheet a couple of weeks ago over the holidays. It’s an entrepreneur I’ve known for 10 years. I personally invested in his last company actually passed on his last two companies like three times. So I feel very privileged that he is allowing me to eat my hat and with me. But we’ve known for 10 years, we’ve been thinking about this theme for 10 years, right? So it’s his choice, right? It’s actually his decision on whom he wants to work with. 35:21 Joshua Mata at Coalition, the Cyber Insurance company I alluded to before, we didn’t invest in CloudFlare, multiple times. We didn’t invest in the first round of Coalition. I think it’s because Joshua’s wife Gweneth, likes my wife, Poonam, that we were considered to even invest. But, you know, we led a really significant round, I joined the board, it’s a function of relationship, right? We had a prepared mind on the business model and the view. But those are the two pathways to being proactive on people or on themes. 35:52 Shardul, can you talk about some of the evaluation criteria that you’ve used in indoor acquired, you know, over the many years after having worked with many companies and seen some that work out? And some work out? Quite well? 36:05 Yeah. You know, as a kind of a liberal arts kid, having studied at University of Chicago, I’ve learned the art of critical thinking, but actually have no skill. And so for me, evaluation is very different from how some of my colleagues who have really rich lived experience can evaluate opportunities. So how I evaluate is not meant to be a model for anybody else. I’m a career investor with very, very few skills. My approach is to find experts understand their biases, and then form a perspective based on you know, my filtration of their biases. Where that gets wrong is it’s really hard to learn about someone’s biases, it’s really hard for someone to expose what they really think to you. And as a consequence, forming a perspective based on those artifacts can be challenging. 36:54 But that’s that’s like the core of how I can come to some semblance of a unique point of view on an area that’s esoteric, you know, like security, without having any real expertise from a valuation perspective. We talked a little bit about kind of financial analysis and how I overemphasize usage and qualitative information versus the actual utility of like a certain scale, like, I think there is almost zero difference between half a million of ARR and 2 million of ARR. I think many investors believe there’s something magical that happens at 1 million of ARR. That allows you to form a view on a series a investment, I think it’s just random. There’s like 20 customers, or there’s 25 Customers like what’s the difference? Right? So it’s all about qualitative, like the rich, robust opinions, or quantitatively, you’re seeing something that you’ve never seen before? 37:51 Are there qualitative factors in a founder that jump out at you early in a pitch? 37:56 Yeah, again, pre pitch, I tried to do a lot of work on understanding whom I’m speaking to, which is why I really value referrals. That being said, I’m really careful about not trying to believe that there’s a formula for an archetype of a founder, I really don’t think that’s true. And so I try to be really open minded and observe whom is saying what and why. And qualitatively, that can be expressed in very different ways. Right? Some of my the founders I work with are extreme introverts, others are extreme, extroverts, their style is very different and discerning style from substances, like half of the art, right? When I’m evaluating businesses, I’m actually I go into every single meeting looking for a green flag to say yes, knowing 99% of the time, you know, the answer is no, without the illusion that I’m actually the decision maker, the entrepreneur is the decision maker. So always seeking Yes. Which allows me to always, you know, be optimistic about any founder can have a qualitative ingredient that can be super powerful. 39:05 Interesting. Shardul. Will you talk before sort of about decisions at the firm level with opening new offices and launching new strategies? Is there a approach that you all use when it comes to investment decisions? You know, is it a group decision? Is it an individual, you know, making an impassioned pitch? How do decisions get made on investments at Index? 39:28 We tend to look inside, make better decisions and have fun when we’re together. However, we recognize that in our business, we have to be agile. And so typically, we have a process and we break process when necessary. So examples of this are typical process. It can be very short, we have domain expertise, we’ll have a referral and as a consequence, we have a prepared mind to be very decisive very quickly. The first time I met Asaf when I was served on the board of his previous company. Asaf is the Founder of Quiz, I met him on Thursday, we had a sign term sheet on Monday, like it was a very short process doesn’t say that we weren’t diligent, we talked to 10 customers, we analyze the business, we understood the market opportunity, we were prepared to make a decision, right? 40:15 So I think when we when all of those things kind of clicked together, we can be really lightning fast, a typical process for a seed investment, we’ll have fewer decision makers in an investment committee than a growth stage investment, that’s, you know, maybe $100 million investment. So we have different quorums that could be on Mondays or Thursdays are Wednesdays are the weekend whenever it’s necessary, right, but we’ll expand the size of the decision making group kind of proportionate to the dollars we invest. So that’s a reasonable proxy for how much time we may need in prosecuting a deal. But then we break process, right couple of us had dinner with Jason from Discord. We were like, holy shit, this usage is off the charts. We got to go. We broke all our processes Slack. You know, Danny, Mike and I were with Stewart Butterfield, it was absolutely incredible. We’ve never seen this before. And to break all our processes. I don’t think we’ve had a situation where it’s just like one person making an impassioned pitch. It doesn’t play to like who we are. But in some sense rules are meant to be broken. 41:20 Shardul I’m curious what prompted the move to New York City? 41:23 Yeah, I’m New York’s not new for Index. We’ve had over 20 investments here for many, many decades. The opportunity we see is expats from both Europe as well as different parts of the United States moving to New York. So we believe there will be a population of new entrepreneurship in New York. And second, we will be alumni from a number of the success stories over the last decade, both of which are opportunities, we think we’re really prepared to be the primary investor behind internally, it’s very convenient that New York is equidistant from London and San Francisco. It allows us as New York to be a bridge across our offices. And again, it’s so important to us to be one team to you know, have one dream, and it’s actually not external at all. It’s purely for internal purposes. We think we’re going to work closer together by having these three offices. 42:18 And then finally, here’s Shardul what’s the best way for listeners to connect with you? 42:21 A referral through you is probably the best. if you if you’ve met folks, for me. I’m sending referral cold emails just fine. 42:30 Well, he is Shardul Shah, the firm is Index Ventures. Shardul, thanks so much for the insight and the advice today. Really appreciate it! 42:37 My pleasure. Thanks a lot. See ya. Thank you, sir. Take care. Transcribed by https://otter.ai