Episode 78 / August 16, 2020

Ashmeet Sidana of Engineering Capital on Building Fund for Engineers

hr min

Episode 78 / August 16, 2020

Ashmeet Sidana of Engineering Capital on Building Fund for Engineers

hr min

About the Episode



Ashmeet started his career at HP in 1989. He founded Sidana Systems in 1995 (later sold to Doclinx in 1999). He started his stint as a VC at Foundation Capital in 2004. Eventually, he founded Engineering Capital in 2015, which focuses on investing in Tech startups, based on Technical insights.

He is one of the few VCs to have been to the base of Mount Everest. In this podcast, he also shares his experience of climbing mountains, one step at a time.

Engineering Capital is based in the US and majorly in the San Fransico Bay area, some of its notable portfolio companies are Robust Intelligence, Concentrix, and vFunction among others.

In this podcast, Ashmeet shares his thesis of investing in Tech Startups and the approach he follows while evaluating them.

Notes –

01:24 – His journey from growing up in Rural India to becoming a VC dedicated to Engineers

02:43 – Purpose of starting a fund focussed on engineers

04:04 – Difference between Market insight, Technical insight & Consumer insight

06:43 – Investing in SignalFx based on its use case – “Enabling cloud-based monitoring and analytics.”

08:18 – Investing in Robust Intelligence based on its use case – “Solving the issue of User Data contamination.”

10:51 – Investing in vFunction based on its use case – “Allows users to take any legacy applications and break them into micro-services & benefit from the cloud.”

12:35 – Is Technical insight alone a sufficient reason for a VC to back a Tech Startup?

15:49 – Making an early seed-investment in Azure Power (India) as an Angel Investor

20:50 – His perspective and view-point on Postman & potential of Tech Startups in India

24:55 – Learnings about Market size with future entrepreneurs in B-schools

29:36 – “Even though Venture Capital attracts the brightest and smartest minds all over the world, but still most VCs are not successful.”

36:12 – “The magic of making a startup successful is to focus on an incredibly narrow problem, that has a wide application.”

Read the full Transcript here:

Siddhartha 0:00

Today we have with us Ashmeet Sidana. Ashmeet is the Founder and Managing Partner of Engineering Capital. Engineering Capital invests in technology companies typically as the first outside investor at the seed stage. Ashmeet started his career at Hewlett Packard and then worked at Silicon Graphics where he worked as an engineer. Subsequently, he founded Sidana Systems where he served as the chief executive officer until the company was bought by DocLinx. He then worked at VMware when he was in charge of product management for the company product ESX server, and from 2004 to 2013, Ashmeet worked with Foundation Capital as a venture partner. Welcome, Ashmeet to the podcast.


Ashmeet 1:12

Thank you, Siddhartha. It’s a pleasure to be here.


Siddhartha 1:15

Ashmeet, I have described your journeys in bits and pieces of whats, would love to know your Whys of the journey and your move from India to the US.


Ashmeet 1:24

Thank you, Siddhartha. I’ve had a little bit of an unusual journey because I grew up in India, halfway between a village and the city. My father was a farmer. And so in some ways, I saw the true ancient India, where we were still plowing fields with camels and oxen. We were cutting weed by hand, we lived in a mud house. And yet I was lucky enough to come to Delhi to study get a good education. And from that, I ended up coming to America, because I always wanted to be an engineer. I love to play with things. I love to make things right from when I was a child. including making little mud carts and playing with my hands. And then once I discovered computers, of course, I knew I had to come to America because the education here was so fun. And I followed my path of trying to get a good education and was lucky enough to eventually end up at Stanford, where I did my graduate school in computer science. And then after that, I worked and lived in Silicon Valley ever since.


Siddhartha 2:27

Ashmeet, tell us more about Engineering Capital. What’s the thesis when you say you invest in technical insight and share some of the examples of the companies which have grown really fast from your portfolio.


Ashmeet 2:42

I started Engineering Capital in 2015. Because I noticed that even here in Silicon Valley, most of the venture capital is actually focused on market insights or consumer insights. We had drifted away from our original roots, which of course was Silicon Valley. It was a very deeply technical area. We are a venture capital closely associated with silicon had started. At engineering capital, I focus on early-stage investments in companies which have a technical insight. And here’s how I define technical insight. A technical insight means if I tell a good engineer what I’m doing, they will not know how I’m doing it, it will not be obvious to them how to build it. And that means you have an interesting technical insight. Of course, that’s a necessary condition. It’s not a sufficient condition. Because in venture capital, we are trying to build large businesses. And to build a business you have to solve many other problems. But starting with the technical insight gives you an unfair advantage to build a very large business and some of the best Silicon Valley companies have been started with the technical Insight. I’m happy to give examples and explain some of those differences also, would that be helpful?


Siddhartha 3:56

Sure. So can you please first, explain with an example you know, what’s the difference between a technical insight, a market insight and a consumer insight?


Ashmeet 4:04

Yes. So it’s important to understand this difference. And perhaps I can start with some examples that everyone will be familiar with. Let’s look at Google. Google was started when Larry and Sergey were students at Stanford, working on a very interesting problem, which is building a large index, allowing you to search web links, effectively an infinite index, and how to prioritize those sequence of links. And they came up with a very interesting algorithm called PageRank, which, of course, became the basis of one of the most successful search engines in the world. Today, a trillion-dollar company. They started based on that technical insight. Let’s look at Facebook, which started Not long after Google, and was based on a very interesting consumer insight. What Mark Zuckerberg figured out is that people want to be connected. They like to be liked. The like button is very important to us. He built an enormous platform to allow people to connect with each other on the basis of which of course, he built a wonderful advertising business and made a very successful company out of it. So different paths to success. I’m not saying one is right or one is wrong. It’s just a different way in which you start a company, you can start a company with a technical insight like Google, with a consumer insight like Facebook, or with a market insight. In other words, there is an opportunity to create a new market to open a space, which is unserved by people. Amazon was started on a market inside Jeff Bezos figured out that the internet was going to be incredibly important in commerce, it was going to create a new market, and he arguably has built one of the largest marketplaces in the world on market insight. So you can start companies with any one of these. They are different journeys. The trade-offs are different, and they all work in venture capital. I happen to work in one area only, which is the Technical insight area.


Siddhartha 6:01

And that is because you yourself as well have an unfair advantage in this.


Ashmeet 6:05

That’s certainly one element of it is that I am myself an engineer, I started in worked in software. And software, of course has this wonderful property, which gives you Infinite Leverage. Software has zero marginal costs, it gives you Infinite Leverage if you can write a good piece of software. And so it’s a wonderful ingredient to start with. And yes, that is one of the reasons. The other reason is it’s also my passion. I enjoy it. And as they say that if you work on what you enjoy, then you never have to work again. And so I have that luxury now,


Siddhartha 6:36

And Ashmeet, Let’s now talk about some of the technical insights behind your successful companies in your portfolio. Signal FX which was acquired by Splunk for $1 billion, Robot Intelligence vFunction and Concentrics.


Ashmeet 6:52

Thank you, Siddhartha. All of these are companies where I was lucky enough to be the first investor. SignalFX start With the insight that as we were moving to cloud architectures, cloud native, cloud architectures, software development was becoming continuous development, micro services were being built, it was no longer possible to manage and monitor your infrastructure using the classical management techniques. Classically, computers were managed using dashboards using thresholds, where you would say, Well, if the load factor on this machine goes above 80%, then I’m overloaded. Let’s go add a new machine or send an alert, etc. Signal FX started with the insight that in the continuous delivery, continuous Information age of the new cloud architectures, you would need a new way of monitoring these systems, which would themselves be continuous. And so rather than being based on a fixed threshold, you had to think of the world as a set of streaming information, and how do you manage that and that is the problem. That’s Signal FX solved. And then of course Phillip and Karthik, who were the founders of SignalFX built a wonderful business on the back of that, that said that Splunk was happy to acquire for over a billion dollars.


Siddhartha 8:13

And what about the other company’s robust intelligence vFunction, concentrics? What were the insights?


Ashmeet 8:19

Yes, one of the things I love about this work is that every day I get to meet people who have a new insight who solve a creative new problem. And one of the problems that is existing in the world today is that a phrase often popularized with data is the new oil because data is now such an important commodity that people use. I like to say data is also the new asbestos. In other words, data is toxic, and data will kill your company, if you’re not careful how you manage the data in your organization, and robust intelligence was started with a very clever insight on how to prevent Data becoming as best as in the artificial intelligence space. So the founder, Yaron Singer, came out of Harvard, you know, PhD from Berkeley and Harvard, very technical founder. And he understands the problem of data contamination. In other words, when you run an artificial intelligence system, typically people run an AI, they use some data to train it, then they create a model. And now this model is running in the real world. It’s doing whatever problem you have solved with this model. For example, here in the US, you know, we will often use artificial intelligence to deposit checks in the bank, nobody goes to a bank anymore, you just deposit the check using your smartphone by taking a photograph of the check. Very simple AI application uses image recognition, and frankly, that’s how most checks get deposited. Now. However, it turns out, that by just changing a few pixels on the image of the check, you can completely change how the AI system will recognize that check, you can change the amount you can change the account number completely invisible to the human eye. Obviously, this would be disastrous to a bank if somebody wants to do that. That’s what I mean by data contamination. So in an AI system, you always have to worry about what is the new data that is being fed into this AI on which I will now operate. and Robust Intelligence has solved this problem. I’m very happy to say that I was the first investor, Sequoia Capital recently led their series A and Yaron Singer is off building a very interesting company in that space. But what’s fun about this, Siddhartha, is that every day people come up with new innovations with new ideas. And I’m certainly happy to talk about some of my other portfolio companies. I think you mentioned Vfunction, concentric. Do you want me to talk about them.


Siddhartha 10:50

Yeah, definitely.


Ashmeet 10:51

So, vFunction was started by Moti Rafalin . Again, a very interesting entrepreneur, you know experienced, had sold his previous company successfully Watchdox to Blackberry. And he was looking for a new idea to start a company when we started chatting, and we came up with this problem that the cloud has become very popular. Everybody wants to use the cloud, the cloud is where all the new applications are being built. But what about the legacy applications? Every enterprise has hundreds, even thousands of legacy applications running in your data center on premise, written 5,10, even 20 years ago? How do you move them to the cloud? How do you convert them into cloud native applications, use micro services use serverless get all the benefits of running in the cloud. It’s an extremely difficult problem. What Moti has done with his co founder has built a very interesting technology that allows you to automatically take legacy applications monolithic legacy applications, break them into smaller pieces, microservices, and get all the benefits of the cloud without having to do any software development work. So again, kind of problem that people would call rocket science or extremely hard. Through technical insight, we have built this technology and are now in the early stages of building the business over there. And like I said, I love working in this business. Because every day I meet a new idea, I meet a new problem, I meet someone who’s trying to solve an interesting, new technical insight.


Siddhartha 12:27

So how do you reject good technical insights which you think would not be a viable business but a great insight to solve a problem?


Ashmeet 12:37

Yes, Siddhartha. Most technical insights are actually not good venture backed opportunities. So it’s really important to understand that technical insight is a necessary but not a sufficient condition to build an amazing technology company. It’s necessarily in that of course, that’s the area that I focus on and I look for opportunities where people have these technical insights. But it’s not sufficient, because that insight must have many other attributes for you to make it a venture-backed success. At the simplest level, a technical insight may not have a practical use, it may be a great insight, but nobody cares about it. There’s no application, there is no current problem which is being solved. So many insights get rejected for that reason. Another would be that perhaps there is a use for it, but it requires too much capital, it is not conducive to the venture model. venture capital is a very extreme form of investing. We live on the very edge of the risk-reward curve. If you look at sort of the returns that venture capital is aiming for. We are taking very high risk in the hope of very high rewards in companies which are hopefully highly capital efficient, and are able to build you know, disproportionately profitable businesses, if they are successful. Well, all technologies don’t have those attributes. And so even if you have a technical insight, it may not have those attributes. That doesn’t mean it’s not a good business, perhaps it’s also good business. But maybe that’s the kind of business that should be backed by a government. Maybe it’s the type of business that would have to be backed by a foundation because it’s better for the environment. Maybe it’s the kind of business that requires you to create some sort of an industry or a consumer consortium to build problems around it. Those are all good businesses. They just may not happen to be venture backed businesses. So I am looking for that narrow slice, that very edge where it happens to have all of those attributes. A great founder, someone who is disproportionately ambitious, willing to take the risk to go build a company like this. A person who has the technical savvy, but also the business savvy to build a real business around it. A technical insight that is solving a real urgent problem in the market for which customers are willing to take today for which they’re willing to pay today, and is capital efficient. So with a small amount of capital, you can build a very large business, which long term is a high gross margin business? So that’s a lot of things to look for. And it’s the unfortunate reality that almost most of the companies that I meet with, I don’t end up investing in. It’s less than 1% of the companies that I meet that I actually make an investment. That doesn’t necessarily mean they’re not good businesses, it just means they are not a match for what I am trying to achieve.


Siddhartha 15:33

And Ashmeet would love to know you know, your first investment from foundation capital in India and what were the reasons of their successful IPO?


Ashmeet 15:45

Yes, so before starting Engineering capital, I had led the seed investment in a company called Azure Power. I met the founder Indrapreet when he was working at Oracle where he was a software entrepreneur and subsequently went to loyalty Lab, very smart man, very thoughtful, diligent, methodical, ambitious, you know, he had all the attributes that you look for in a good executive. And he came to me one day and said, You know, I’m trying to start this company. And he had moved back to India at that point, and said that I’m trying to start this company, but I’m not able to raise money. And can you help me? I said, You know, I mean, I’ll take a look, what are you trying to do? Let me see if I can help. And he presented his business plan to me, which of course, was the business plan Azure Power. And I looked at it. And it made complete sense to me. It was very thoughtful. He had a real insight. He had a real idea he came across as someone who I think, could build that business, but he was unable to raise capital, because at that time, we were in the midst of the quote, unquote, clean tech bust. For a while in Silicon Valley here there had been this huge phase, when a lot of people that invested in clean tech, but had not been you know, was famously a bust. A lot of money was lost investing in that space. And because he was starting a solar company, it was associated in that space. And so he was unable to raise money. But here was the difference in what Indrapreet was proposing. All of his economics were based on profitability without subsidies in a market, which I knew well, where there was a shortage of electricity. So in India, you know, when I was growing up, we of course had a in net shortage of electricity, there was no capacity to build power and supply the amount of power that was needed. And so it was clear to me that the demand existed. We were competing not with the electricity grid, but with diesel generators. Every time I would visit India, every big building had these huge diesel generators outside, which they would run. And I was like, that’s the real competition. So from a price perspective, it was clear to me that what Indrapreet was proposing sense. And then of course, some of the risks that we took were that the price of solar panels will fall, we had estimated that they will, they will fall at a certain rate. It turned out that China was much more aggressive and they fell even more. And so we of course benefited from that price decline that occurred in the price of solar panels. And Indrapreet executed flawlessly. He built a great team. He built a great business. I like I said, I was the first investor, I led a seed round. And we started the company with enough capital to build a one megawatt of power plant. And I said, Look, let’s go build one megawatt, if you can show that you can do that and you can build a business, I think you’ll be able to raise more money. Today that company runs thousands of megawatts of solar, and that’s how companies start with a small amount of capital. He was able to prove that and built a company that is today public on the New York Stock Exchange.


Siddhartha 19:00

Wow, what a story. And then why it didn’t inspire you to invest more in India back then.


Ashmeet 19:06

That’s more of a personal decision in terms of, you know, I mean, I happen to live here, I’ve made my home over here now. And so, you know, investing is a very local business, you really have to be local, you have to spend time in the market, you have to spend time with the entrepreneurs, if you want to be a good investor. So for me, that was at one level, it was personal, because my life was here now, at a second level, it was a strategic decision for the firms in terms of what foundation capital as a firm was doing at that time. And so there was a firm level decision on whether we would invest more or less we did make other investments. So, Azure was not the only investment that the firm made. That’s the only investment that I made. And I led and served on the board off in India at that time. And so you know, you have to choose as an investor, a firm and an individual has to choose where they focus I happen to focus over here in Silicon Valley. And frankly, Silicon Valley is also the heart of where a lot of technical innovation takes place. And so I find this to be fertile ground, even though we have a lot of engineers in India, of course. And I do occasionally hear of good ideas over there. But then I typically refer them to local investors, who would be able to help them and work with them over there.


Siddhartha 20:21

So India has seen recently a huge success in terms of Postman, I believe you might have heard it, it was built by a technical insight by the founders that was difficult to collaborate on APIs. And he built a platform where developers could collaborate on API’s, and it was much easy to work on them and the company to raise $3.5 billion. So I think India will be, you know, second or the third home ground for the next set of companies built on technical insights.


Ashmeet 20:55

I completely agree. I think Postman is an incredibly interesting company. Both in terms of the technology, but also the business that they have built, and the fact that they have millions of developers who are able to use this, Postman has pioneered a go to market model, which is very efficient. And I think it’s going to be a great company. And that could be the seed from which many flowers blossom, in the sense that when great companies like Postman are built, eventually people who grow up in those companies leave and start new companies. So if you look at Silicon Valley itself, right, if you look at the history of Silicon Valley, the reason we have Silicon Valley here is because Shockley Semiconductor was started over here Shockley, of course, one of the famous three engineers who invented the first transistor, why did Shockley come and live in Palo Alto and start Shockley semiconductor in Mountain View, California. Most people are not aware of the fact. But the reason he came to Palo Alto, is because his mother was a widow. He had left Bell Labs, and he wanted to start a new company. And he could live with his mother cheaply and start a company over here. And so he moved over here to Silicon Valley, which was basically farming land. Most of Santa Clara County or Silicon Valley was, you know, orchards. And he was able to start a company very cheaply over here, from Shockley semiconductor, of course, famously came Fairchild. The traitorous eight who left shortly to start Fairchild and from Fairchild came in Dell, of course, Gordon Moore, etc. And that’s really the history of Silicon Valley in terms of how it came over here. Now, that’s not the only reason why Silicon Valley is here. There are many other things that contributed to the ecosystem being built over here and you have to credit you know, things like the US government, DARPA, you have to credit the farsightedness of the regulatory regime and the economic system that works. And of course, Stanford was instrumental Dean Turman, some of the work that Dean Turman did in getting Hewlett and Packard started over here. So there were many elements which contribute. I mean, I’m not trying to put all of it on one single factor, but I am recognizing that there was a confluence of elements, which has created an ecosystem, which is a virtuous cycle, where you see a lot of technology developed. In some ways, I described this as the World Championship for technology startups over here in Silicon Valley. If you want to build the world’s biggest, best, most amazing technology, you could do it anywhere. And Postman is a great example of a company being built in in India right now. But you do get some advantages, doing it here in Silicon Valley. And now with the success of Postman in India, I predict that as Postman succeeds, it goes public people will learn that playbook, more people will leave and if those other factors can exist around it, then you will see a blossoming of true technology insight based companies in India also.


Siddhartha 23:58

Wow, what a wonderful story and, you know, it gives us a lot of hope and inspiration.


Ashmeet 24:06

I’m very bullish on India as an economy. You know, obviously, I’m biased I grew up in India, but I have experienced the vibrant entrepreneurship that exists in India, I mean, on every street in India, you know, you have local vendors, we are in many ways a free economy, of course, you know, we have many other constraints in terms of capital in terms of infrastructure, in terms of the regulatory regimes, etc, that we have inherited. But India has many advantages over there. So, I definitely feel that we will see great technical companies built in India also. And if I was starting up today, it would be a reasonable choice to start a venture practice focused on technical insights in India. It just happens to be the case that that’s not what I do, butmaybe somebody else will.


Siddhartha 24:52

And Ashmeet, you also teach about scale and markets, a class from a VC perspective.


Ashmeet 25:00

Yes, I have a class called Market Size from a venture capital perspective, which is really better described as market size for markets that don’t exist yet. One of my frustrations is that often entrepreneurs don’t think about the market that they’re going after well, and so I developed this class as a way of giving back as a way of talking to people. And I’ve taught this class at Stanford, at USC, at Wharton, in different universities, different locations, you know, at conferences, etc. where I talk about how should an entrepreneur or a venture capitalist think about a new market, in other words, a market that doesn’t exist yet. How should you try to estimate that market size? And, you know, it’s gotten a good reception. So I think it’s really important that people think and understand that carefully. Because many companies fail not because entrepreneurs don’t work hard, or they don’t have a good insight, or that they don’t get financed. But because they have not estimated the market correctly, they haven’t thought about what is the true market size that they are going after. Because here’s the sad truth. A company can only be as big as its market. It can never exceed the size of its market. And so it’s really important to get that market size, right. And I’m always happy to share that lesson. Maybe I’ll do it as a webinar someday, and offer it online.


Siddhartha 26:30

Sure, would love to have any links to a PPT or a doc as a part of the podcast transcript. And you mentioned in one of your interviews, that VCs also tend to get it wrong. They do the market top down what what is wrong with that?


Ashmeet 26:45

I think a top down market size is an incredibly dangerous way to think about a market from a venture perspective with the assumption based on the assumption that you are trying to disrupt a market that you have a job when a new idea where you have taken some form of an insight could be a consumer risk could be a market, it could be a technical risk, and you’re trying to disrupt that market, because top down market sizes are based on extrapolations of surveys, extrapolations of trends, you are continuing lines, and looking to see what size of that market would be. When you try to estimate it. A venture backed company, by definition is trying to create a new market or at a minimum, disrupt a market that exists. And so it’s really critical that you think about the market from a bottoms up perspective, what are the unit economics? What does it take to attract, acquire and sell that first customer and then the second and then the third? Because however larger company may be that you build there will always be that first customer. Maybe you will build a billion dollar company or a $10 billion company one day, but there is always that first customer that you have to sign up. How much capital do you need to get there? How do you grow from there? All of those factors are really important. And that’s why the discipline of looking at a market bottoms up is an essential discipline that I recommend to every entrepreneur and every VC.


Siddhartha 28:15

And can you shed some more light on What do you mean by when you mean the bottoms up?


Ashmeet 28:20

The idea of approaching a market bottoms up is very simple. Focus on an individual sale, an individual customer. So perhaps you’re building cell phones, and there are billions of cell phones in the world and cell phones are being sold in all different countries, all different shapes and sizes and features. That’s great. That’s a massive market by definition. And let’s say you want to build a cell phone. Well, if you build cell phones, there will become a day on which you sell your first cell phone, then your second then your third. These are monotonically increasing functions. By definition, the acquisition of customers occurs starting from one and building up from there. So what I recommend to the entrepreneur is always try to imagine that first individual customer, what are the characteristics of that customer? What does that customer benefit from your product with? How will you reach that customer? How will you sell that customer? How will you service that customer? And will you make a profit on an individual basis on that customer? Not at the company level? Of course, nobody can make a profit selling their very first customer. I mean, that would I guess it’s theoretically possible. But that’s not how the real world usually works. Obviously, you have to get to some scale before you start making profits. But are you building a product that will have a high gross margin going forward? All of these questions the cost of acquisition, the gross margins that you run at, the service needs of the customer, etc, are critical to determining whether you have a viable long term business, whether your market is truly a venture return style of business. Remember, I’m not interested in making 10 percent return or 20% return on my money. If you want to do that you can go to the bank, you can buy an index fund. There are many other ways to invest money at that rate. Venture returns are measured in multiples, can you make 10 times your money? Can you make 100 times your money? Can you even make 1000 times your money? So, if you’re trying to build that type of a company and get those types of returns, then those characteristics high gross margins, capital efficiency, low service costs, etc become very important. And those are made crystal clear if you look at the market bottoms up.


Siddhartha 30:37

and you are not here worried about when you are doing a bottoms up analysis of the market. How many such first customer profiles exist?


Ashmeet 30:45

Eventually you need to worry about it. Of course, that’s a question you have to answer. And yes, but I think people in general tend to error by focusing too much on the large market, on the large numbers and not on the individual. The point of my class is to focus the mind and really force you to think about that individual. That’s the point that I’m trying to bring across in that class.


Siddhartha 31:10

And you also mention a very interesting point about venture capitalists looking for 1000x return, help me understand, VCs attract the smartest of the mind, you know, across the globe in India, and it started with the valley, but still only a very few percentage of the VCs are successful or get the returns they dream about.


Ashmeet 31:36

You know, venture is a very difficult business. It has a very high failure rate. It is hard to predict the future. There are so many things that can kill a company when you are aiming for that extreme type of a return. And so if it was easy, then the returns would not be high then everybody would be doing it. So it is definitely not an easy business. But when it is successful, the returns are so high that it pays for those mistakes. And that is what attracts people into this business. Yes, smart people come here because it’s makes a lot of money. Smart people come here because it’s glamorous. It’s attractive. There’s many reasons why people go into venture capital. But the sad truth of venture capital is that most VCs are not successful. The reality is, most VCs actually lose money, even funds will often lose money, even firms will often lose money. So that’s just the reality of the venture capital business, which is a reflection of the underlying risk that exists in this. Remember when we are investing, especially when I am investing, I am talking about one or two people with a PowerPoint idea. That’s all it is. There is no customer there is no product, there’s no company, there’s no revenues, there’s nothing to look at which you would call tangible, measurable elements on which you can do diligence. And yet that’s how the best investments are made. One of the very early venture capital investments in fact, the very first venture capital firm in the world, was a firm called ARD American research and development started by a very interesting entrepreneur called George Doriot. By the way, he himself was a very interesting man, a French immigrant, taught at Harvard as a professor, general in the US Army and founder of the very first venture capital firm in the world. ARD American research and development made an investment in DEC (Digital Equipment Corporation), which became the second largest computer company in the world. And he did return 1000 times on his money on that investment. So this asset class was invented, because this sort of return was possible and capable, but the failure rate is extremely high. The analogy that I would make if you think about venture capital is like winning a gold medal at the Olympics, let’s say you want to run 100 meters, and you’re really good and you come first in your school, and then you come first in your city, and then you come first in your state, and then you come first in your country, you may still not win the gold medal, because then you have to come first in the entire world to go get a gold medal in the Olympics. So that’s the way you have to think about venture capital. How many people run 100 meters, practice, run, play everyday, everyday everyday for that one chance to get that one gold medal. once every four years, only one person is going to get that. That is the odds that you face when you work in venture capital.


Siddhartha 34:41

Bu you position itself VC business as a zero sum business, whereas wealth creation is not a zero sum game.


Ashmeet 34:50

You know, this is something which has been started over time because it’s a long term business. It’s hard to get really, really good statistics about it. But general belief is that the average venture capital firm has either zero or perhaps even negative returns net of fees. So as an asset class, venture capital, on average, is not a profitable business. That doesn’t mean that they aren’t profitable, firms are profitable partners are profitable investments. Of course, all of those exists. That’s why people go there and take that risk. But if you take the entire sum of the whole, I think it’s a pretty brutal business. That’s just the reality of venture capital. You know, that’s like saying that if you look at all the people who run 100 meters, on average, you’re going to you’re not going to get the gold medal. Yeah, 99.9% of the people you back are not going to get the gold medal. It’s only that one person who’s going to get the gold medal. Now, it’s not quite so bad. The odds are not that bad in venture capital. And of course, my job is to improve those odds. My job is to, you know, to do the hard work to see estimate apply judgment apply skill etc, to improve those odds, but they are still tough odds. And on average, most investments don’t work out. They don’t have venture style returns.


Siddhartha 36:10

Fantastic insight, Ashmeet one of the things you share is, you know, the mistakes that new teams make, or new entrepreneur makes is gluttony. Most thing that they go after a big market, and will they solve a big problem, and they will be successful. But you say, the magic of doing a startup is to focus on an incredibly narrow problem that has a broad application, would love to know your depth of insight on this?


Ashmeet 36:38

Yes, this is advice that I often give to new entrepreneurs, who will sometimes approach a problem and remember we’re talking about people who are inordinately ambitious, who want to go for that gold medal who are willing to work extremely hard, sacrifice so much to try and achieve that. And so they want to go after something big and the natural instinct is to take a big problem and try to solve that. Unfortunately, that is not always the best approach for an entrepreneur or for a startup, a better approach is to identify a very small problem, a very narrow problem that has a broad application. And then you can build a very big company. That is the ideal way for an entrepreneur to do a startup. And so what I recommend to people is even at the risk of market size, even at the risk of not eventually getting to a large enough scale, solve a small, narrow problem extremely well, because a startup will have very limited resources. By definition, you’re a startup, by definition, you have limited resources, you have limited capacity to do things. So you can only solve a small problem. So take a very narrow problem and solve it extremely well, so well, that nobody else comes even close. And then you are likely to be able to build a big business, if that’s small problem has a broad application, then Wow, then you’ve got magic, you really can build an amazing thing. Let me give you an example, which is not a startup example. But I think is instructive in this case. Let’s look at the iPhone. When the iPhone came on the market, there were already existing smartphones, there was obviously the Blackberry, which was the dominant provider at that time of the solution, but there were many other forms of cell phones. People had tried many types of smartphones before, including Microsoft, Blackberry itself, and including Apple itself in previous incantations, and then of course, there was go etc. What it Steve Jobs do that was so magical that made the iPhone so successful, it’s instructive to go and watch the launch video of the original iPhone. Steve Jobs repeats over and over again in that launch video. Here is something which can do three things can make phones calls, it can access the internet. And it plays music can make phone calls, you can access the Internet, and you can play music. And really those are the only three problems he was trying to solve. So what he had done successfully is narrowed down the problem to an incredibly narrow case of what he was trying to solve, solved it extremely well and of course built, you know, the world’s largest company on the backs of that. Steve Jobs was a master Product Manager. He understood that the hardest thing for a product manager to do is to delete features, not add features. It is easy to add features, the hard thing is to remove the features and solve only a very narrow problem. To give you another quote from Steve Jobs for those of you who, you know, are familiar with the growth of the PC industry. I give full credit to Steve Jobs for basically inventing the home computer creating the desktop computer. And another one of his great insights was that he shouldn’t have called the Mac, the PC, Steve Jobs insight was he should have called it a desktop publishing machine, because that’s really the problem that that solved, that really became the killer app for that initial version of that computer. And that case that he went after Steve was the master of taking a problem and continuing to narrow, narrow, narrow, and then narrow it again, and then narrow it again and then build a killer product. And that is why what I advise entrepreneurs is that Be careful. The risk factor for you is not starvation, it is gluttony, you are aiming for too many features, aim for less and you are more likely to be successful.


Siddhartha 40:44

So, Ashmeet. That’s a very unique insight and you have taken examples which I can relate very well. So tell me, you know, entrepreneurs, how do they become better problem solvers with time? Is it a skill that can be learned? And if yes, how?


Ashmeet 41:02

Entrepreneurship is very much a skill and like any skill, practice makes perfect it can be learned. And how do you learn, you learn by making errors you learn by doing it again and again and again. And it’s okay to make errors. The good news is that in the world that we live in today, errors are largely forgivable. These errors are not necessarily fatal. Which is why of course you have to be a risk seeker. You’re willing to make errors, but you can succeed. No question about it. I think 99% of entrepreneurship is hard work. 1% is inspiration. I’m stealing a line obviously over here. And so if any person who is ambitious, who is competent, who is willing to listen, they will be they can succeed at entrepreneurship. It is very much a skill that can be learned.


Siddhartha 41:50

But I also asked about problem solving since you know, you narrowed it down to Steve Jobs’ skill at problem solving. And what you’re also looking for, you know, focus on a very narrow problem. So how do entrepreneurs or people in general, get better at problem solving?


Ashmeet 42:06

Oh, that’s a really interesting question. I haven’t thought about it carefully. I mean, I am an engineer. So I am by inclination, a problem solver. Engineers are problem solvers. That’s what we do. That’s what we are trained to do. And we are attracted to that, I would assume that there are people who are attracted to problem solving and people who are not. And, you know, as human beings, we would if you then focus on what that problem is, you learn everything that you can about it, you look at different alternatives, then you can pretty much start solving that problem, you can start deriving what the outcomes will be over there. That’s sort of a very abstract view of it. Here’s a more tangible way of what I would recommend if somebody wanted to start a company or somebody was looking for problems to solve. The one thing that you need to do is go talk to customers. If you imagine yourself in the world and this is a place where I will contradict what Steve Jobs often said, Steve Jobs often said that the customer does not know what he wants he or she wants. I don’t believe that. I believe that if you spend time with customers, and you really understand and really listen to what they are saying, you can identify the problem. And you can solve that problem in a better way in a more interesting way. And so that is the one thing that I think no entrepreneur can do enough of, which is spend time talking to customers.


Siddhartha 43:31

Fantastic. And that’s quite a contradictory advice to what Steve gave. And at the same time, you respect him a lot.


Ashmeet 43:39

Absolutely, and again, that’s what makes you know, this venture and entrepreneurship, so fun, there is no one right answer. With all due respect, I do believe that Steve, you know, listened to his customers very carefully. He understood his customers extremely well. He was a master where he was able to even go to the next level and imagine things that the customers could not imagine and understand. But step one is just to get to understand what the customer wants, and what is in the customer’s mind, and really be able to articulate that in the form of a product. And if you can get to even that level, you can build a many, many billion dollar company just at that level. Of course, if you can go to the next level, and if you want to build a trillion dollar company, then that’s a whole another level that we can talk about. But let’s face it, I mean, most entrepreneurs would be very happy if they built a $10 billion company. And so you can certainly get to that size just by doing enough time with customers.


Siddhartha 44:37

Entrepreneurs listening to the podcast would think wish it was that simple to build a decacorn by just listening to the customers, but


Ashmeet 44:44

It’s absolutely not simple. And remember, I learned this from my mentor Catherine Gould. She always said, entrepreneurship, venture capital is simple, but not easy. And people confuse simple and easy. Those words don’t mean the same thing. The opposite of simple is complicated. The opposite of easy is hard. In other words, entrepreneurship is simple, but not easy. In other words, it is not complicated, but it is hard. So don’t think it’s a complicated business, spending time with customers, listening to what they are doing in venture capital, investing in large markets and good entrepreneurs buying low selling high. These are not complicated ideas, but they’re very hard to pull off. It takes hard work, it takes diligence it takes, you know, studying, etc, to go make that happen. And so, again, I’m not saying it’s easy, but it is simple.


Siddhartha 45:39

Fantastic. And as a conclusion to a podcast, you know, I would like to share that you have climbed Mount Everest, and when was that?


Ashmeet 45:49

Yes, so I love living outside. I love you know, I definitely enjoy doing that. I have not been to the summit of Mount Everest, but in 99 after selling my first company SSI, like I said, I took a couple of years off and part of that time involved spending time in Nepal. And that’s a life changing experience. And if you have an opportunity to do something like that, I recommend it to every single person. I can tell you when I went there, I came back as a different person, having spent time in the mountains, certainly something I recommend to everyone.


Siddhartha 46:23

And do you have any any learnings that you apply in your daily job as a VC to your experience living there?


Ashmeet 46:31

I think one of the things I learned is that climbing a mountain is always done one step at a time. So while a mountain may look daunting, the reality is it’s only one step that you can take at any given time and any single step is not daunting. So whatever happens, whatever problem is facing you, whether you’re starting a company whether you want to go do something else achieve any goal, just go take the first Step and then take another one, and then take another one. And pretty soon it becomes like, yeah, you know, I can do this, I can go make this happen, and you can even climb a mountain.


Siddhartha 47:11

Thank you so much for sharing your wisdom, your insights and your experience. It’s been wonderful to have a conversation with you on the 100xEntrepreneur podcast.


Ashmeet 47:19

Thank you. It’s been a pleasure.


Transcribed by


Vector Graphic Vector Graphic

Know when new episodes are released. Subscribe to our newsletter!

Please enter a valid email id