Interview, Fireside Chat
Shardul Shah: How Index Makes Decisions & Why Benchmarks & Averages in VC are BS | E1202
- Investors and founders are expected to expand beyond initial Total Addressable Market (TAM) calculations, with a strategy focused on identifying power law returns where missing $10 to $100 billion companies would be painful.
- The firm anticipates that fund performance will be driven by the ability to increase ownership through capital allocation at seed, venture, and growth stages for companies that perform, while avoiding capital-intensive business models with binary scientific risk like certain biotech drug discovery sectors.
- Return expectations are planned to shift away from "safe 2x" targets at growth stages toward aiming for 5x plus upside even at late stages and high prices, based on the belief that top companies command premium multiples despite public market compression.
- Conviction building for follow-on investments will rely on redone customer calls, competitive analysis, and rebuilt financial models rather than averaging down cost basis, utilizing both top-down market sizing and bottom-up team assessment.
- Specific industry trends over the next decade are predicted to see fund sizes polarize into "Chanel" models with constrained specific Ideal Customer Profiles and "Walmart" models with massive cash pools, alongside defense becoming a larger category and healthcare evolving due to catalysts buying hospitals.
- A redoubled healthcare practice is planned to capitalize on the fact that 25% of Series As in New York are related to healthcare, while AI is expected to create tailwinds for existing markets and new opportunities.
- Operational changes include reducing default meeting durations from one hour to 30 minutes, prioritizing meetings with two participants, and using walking meetings for conflict resolution under the premise that movement aligns direction.
- Investment decision-making will maintain a culture of "agreeable disagreements" where partners sleep on disputes to ensure conviction, and the firm plans to use group decisions with built-in guardrails for public market sales rather than individual judgment.
- Proceeds from large public market positions are expected to be distributed immediately to adhere to a "buy and hold" philosophy for winners, even amidst price fluctuations.
- Internal dynamics involve a continued role for the speaker's spouse as a "shadow IC" for common sense and non-verbal cues, with the speaker anticipating they will be middle-aged by the time of the next such interview in seven or eight years.
- A risk associated with the investment approach is the potential for systematically underestimating the magnitude of top companies due to overthinking TAM calculations.