Siddhartha Ahluwalia 1:18
Hi folks, this is Siddhartha Ahluwalia, your host at Neon Show and Managing Partner at Neon Fund. We invest in the best of enterprise AI companies between the US-India corridor. For example, Atomicwork, SpotDraft, CloudSEK.

Today I have with me Ashmeet Sidana, Founder of Engineering Capital. Ashmeet, you are one of the first guests on the podcast five years ago. Neon Show started in 2018 and I believe, you know, I got a chance to host you in 2019.

You know, just before the pandemic was starting. So thank you for being then there for us and thank you for coming again.

Ashmeet Sidana 1:51
Thank you for inviting me. Time flies. I’m honored to be back.

Siddhartha Ahluwalia 1:56
Yeah, I think the only thing that has changed is you look much fitter, much younger now. So you have to tell us a secret.

Ashmeet Sidana 2:01
Thank you. Eat less, workout more. That’s the magic.

Siddhartha Ahluwalia 2:06
And don’t stress, probably, or you stress?

Ashmeet Sidana 2:09
I do stress, you know, I mean, they call investing climbing the wall of worry. I don’t know if you’ve heard that phrase, but investing can come with stresses and we have to get used to it.

Siddhartha Ahluwalia 2:21
Yeah. So just want to give a flashback to audience. What has changed and how you think about technology and startups since last time we spoke?

Ashmeet Sidana 2:29
You know, the biggest change, of course, has been the realization that AI is going to have such a huge impact on the market. When we met last time, I had already invested in companies like Concentric, Evinced, Robust Intelligence, all of which are AI native companies. But at that point, they were just regular companies.

Nobody thought of it as an AI company. After ChatGPT, people became aware of the capabilities of AI and that is having a tremendous impact on the market. Now, those companies are still growing.

Robust Intelligence got sold, it became Cisco Intelligence. Evinced and Concentric are now mid-stage growth companies. So, you know, the businesses continue to build, but I think the public realization of the impact of AI is going to be huge. It’s a generational technology.

Siddhartha Ahluwalia 3:15
And what has changed in terms of how you build your portfolio since the last time we spoke?

Ashmeet Sidana 3:21
My portfolio construction is identical. Nothing has changed since when I started Engineering Capital. In fact, as we were chatting earlier, you know, I closed Fund 5 late last year and I use the exact same slides that I used in Fund 1 just in terms of describing what I do at Engineering Capital.

So, this is a very long-term business and your strategy has to be able to live through market cycles, technology cycles, and I believe the Engineering Capital model is an enduring model.

Siddhartha Ahluwalia 3:51
Can you tell us more about the Engineering Capital model?

Ashmeet Sidana 3:54
Sure.

At Engineering Capital, I like to lead pre-seed or seed rounds in software companies that are taking high technical risk and are capital efficient. So, lots of words over there. Each one of them kind of eliminates a lot of companies, you know, from consideration.

Capital efficient, because I’m doing small rounds. Technical risk, because that gives you disproportionate leverage in terms of what you are doing as a software startup. Seed stage, because that’s what I enjoy doing, right?

I mean, you can invest at many different stages, but the work changes. You know, the job of a Series B investor is very different from a person like me who literally sits with two people, usually engineers, brainstorming, talking about ideas, and in some cases, even incorporating the company when they start. And that’s what I love doing.

So, that’s what I do at Engineering Capital.

Siddhartha Ahluwalia 4:46
And across all the funds today, how many portfolio companies does Engineering Capital have?

Ashmeet Sidana 4:50
Oh, I don’t know the answer to that question. So, I’ll fudge it by saying that it depends on how you define portfolio company, because I have some companies that are so large, that even though technically they are in my portfolio, you know, they have tens or hundreds of millions of ARR, in one case, billion dollars of ARR.

Siddhartha Ahluwalia 5:09
Which one is billion dollar ARR?

Ashmeet Sidana 5:10
Rubrik has, you know.

Siddhartha Ahluwalia 5:12
And you still hold Rubrik?

Ashmeet Sidana 5:13
Yeah.

Siddhartha Ahluwalia 5:13
Wow, so you haven’t sold it.

Ashmeet Sidana 5:15
I have held Rubrik for a while. So, you know, Menlo Security publicly, they crossed 100 million ARR. I have other companies, which have, you know, which are very large.

So, I don’t practically consider, I mean, they’re obviously legally part of the portfolio. But practically speaking, you know, I don’t spend any time on them. I don’t go to board meetings, I occasionally get an update from the CEO.

And that’s all it is. And at the other end of the spectrum, I have some zombie companies, you know, companies which are failing or dying, or they are in the process of exiting in some, you know, not so good way. And so, practically speaking, they don’t matter.

In the middle of the portfolio, where I spend the bulk of my work, which I think is your question. You know, that’s where I have about a dozen plus companies, where I spend most of my time.

Siddhartha Ahluwalia 6:01
Got it. And so, you are saying at far end, there are companies which have become too large.

And as a strategy, you don’t do follow on, right? You do the first check, which is like almost gives you ownership in mid teams.

Ashmeet Sidana 6:16
Yeah, I like to take high ownership upfront. And then I will make small follow on checks occasionally, but that is not part of the strategy. So, I am not an opportunity fund, I’m not a multi-stage fund.

I’m not an asset allocator or an asset gatherer, you know, sitting on sand hills trying to maximize the dollars under management. My goal is to maximize carry. And by definition, you maximize carry or you maximize multiple by making your largest investment first.

And so, that is very much the strategy of Engineering Capital. The first check is always the largest.

Siddhartha Ahluwalia 6:48
Okay. And by this definition, you have kept your fund sizes relatively small in spite of having stellar track record.

Ashmeet Sidana 6:58
Yes, I’ve been very lucky. So, I’ve been oversubscribed since fund one. And so, every time I had to make a decision, an active decision on how big should I make my fund.

And I just backed into it by doing the basic bottoms up calculation. How many companies do I want to do? What’s the approximate first check that’s going to write in and how much do I want for reserves for that?

Again, I’m a solo GP. I am directly aligned with my LPs. All I’m trying to do is maximize their returns or my carry.

It’s the same math. The same thing works for both of them.

Siddhartha Ahluwalia 7:28
And which year did you came in Rubrik?

Ashmeet Sidana 7:31
Rubrik, I invested just before I started engineering capital. I had a company called Datos. Datos was acquired by Rubrik.

They merged and that’s what became what is now today, obviously, a large public company. So, that’s how that came about.

Siddhartha Ahluwalia 7:43
I assume today on the fund, it’s fund one company?

Ashmeet Sidana 7:47
Fund one, yes.

Siddhartha Ahluwalia 7:48
It would have been sitting at multiple of fund one, if I’m right.

Ashmeet Sidana 7:52
I don’t talk about the numbers or the returns on the funds.

Siddhartha Ahluwalia 7:55
Sure. But assuming Rubrik gives so much credibility today as a portfolio company, because a 65-70 million dollar fund producing a public company is huge.

Ashmeet Sidana 8:09
I think the way you should think about it is, it’s good for marketing purposes. But frankly, that’s yesterday’s story. What we are doing today, which is going to matter 10 years from today, it’s going to matter 10 years from today.

That’s a 20-year gap between when Rubrik, Datos was done, and when the work that we do today is going to matter. It’s a completely different world in 20 years. And so, I like to really separate those things and really think about where the world will be 5, 10, 20 years from now.

And candidly, Rubrik may or may not even exist at that point. I actually believe it will exist. I think it is one of those long-lasting, independent, successful businesses.

But there’s no guarantees in life.

Siddhartha Ahluwalia 8:59
And as the fund has matured over the years, what are the some things that have remained same, like size has remained same? And you said the investment thesis have remained same. And what are the some things that have changed over the years?

Ashmeet Sidana 9:12
Yeah, so a couple of things have changed. One is obviously the technologies. The market is behaving very differently in terms of where the technical advances are.

AI is the most obvious example, data, cybersecurity, all these areas have been affected by it. Second, the venture landscape, the market as in the way VCs are operating has changed. And so, I have to adjust my strategy based on that.

Capital efficiency used to be defined differently. There weren’t these incredibly capital-intensive companies. By incredibly capital-intensive, I mean companies taking a billion dollars, 5 billion, 10 billion dollars in terms of investment.

And so, all that has also changed. So, I have to navigate that landscape. And I’m a service provider.

I’m a venture investor who is navigating a landscape that is organically changing in front of it.

Siddhartha Ahluwalia 10:05
Yeah. And so, you mentioned that the VC landscape has changed. In what terms it has changed in the last 10 years?

Ashmeet Sidana 10:11
Well, I think the most, I wouldn’t say 10 years, maybe a little bit more than 10 years. But the most obvious example is if you look at the evolution of a firm like Sequoia Capital, obviously a fabulous firm. When I entered venture capital, Sequoia Capital was a classic sandal firm, $300-400 million fund, one fund, early stage, meeting series A’s, that was the business.

Look at it today, managing 10s of billions of dollars, evergreen fund, multi-stage, multi-geography, every variable is different in that firm. I don’t know the exact number, but I’m going to guess it’s in at least the many 10s, if not, maybe 100 plus people who are on the investing side. I mean, that’s an inconceivable number from when I started in venture capital.

So, things change. But it’s equally important to remember, benchmark, which also had those same characteristics has not changed. And so venture, you can practice in many different ways.

Venture capital is one of those wonderful asset classes, where there are literally 100 different ways in which you can make money. You have to understand what your strategy is and what you’re winning, what is the way in which you are going to win.

Siddhartha Ahluwalia 11:21
So, at Neon, what we are seeing and what we are practicing today, we have fundamentally seen a difference where we would earlier require the CEO to be go-to-market leader for the company. Now, we believe that specifically in the AI landscape, if the pain is so huge, there are two technical founders, for example, in one of our portfolio companies called Sagepilot. Within four months, they have 3x their ARR.

It’s a company where founders are based in India, US HQ company. And it takes four months to, usually for Indian founders to build a company in the US incorporated, get the bank account running. We wired them the money like a couple of weeks ago.

And without needing our money, we had the first institutional check in the company, no money raised before. The revenue went from, it’s almost touching a million today. The company is profitable, the founders have their own office through their profits, build a 10 member team.

I think both are engineering founders. So, the thing I’m trying to say, if people are following such a deep pain point, GTM is not the issue which used to be in the older era.

Ashmeet Sidana 12:36
I agree with you to some extent, but I’ll disagree in the following way. There are 100 different ways of building companies in Silicon Valley. And you have to understand how that particular company is going to execute and build their businesses.

So, for example, the enterprise GTM, which is what I think you’re talking about, the more traditional way of hand-to-hand combat sales, that has always existed as a business. But equally, there were consumer companies that were built. Equally, there were business development, go to market, indirect sales companies that were built.

And certainly, there were chip companies that were built or OEM style, design wind style companies that were built. So, these different businesses have always existed. The important thing is to understand how your business works and how you are going to take it to market.

So, for example, I have a company in my portfolio, Harjot is the founder of a company called CodeRabbit. It’s a fund three company. He was the CEO of a fund one company called Netsil that was acquired by Nutanix, where we were doing classic traditional enterprise sales.

CodeRabbit is a completely different go to market. And obviously, they’ve accelerated dramatically. They publicly announced a financing at $550 million.

I’m not going to say more than that, but that one is publicly announced. And it’s a software development space as a developer led motion. It’s a completely different go to market motion.

And Harjot is an amazing entrepreneur and he knows how to build and follow the market. And so, he’s taking the company to market in a different way. The important thing is not to say whether this works or that doesn’t work.

The important thing to say is whether for this company, this particular approach is the approach or not.

Siddhartha Ahluwalia 14:17
Yeah, so what I was saying is in enterprise GTM motions, right? Now, technical founders have the winning edge. Earlier, it would require a go to market founder.

Why do you think is happening? I just want to brainstorm with you.

Ashmeet Sidana 14:31
Well, I think it’s so again, with the caveat that these things change and this will change again very quickly. What’s happened with AI right now is two things. One, AI itself is very powerful.

It’s very powerful. Technology is having huge impact. And so, the technology itself is leading a lot of innovation is happening in AI.

And so, technology wins in that case, in the early stages of any new technology. The second thing that has happened with AI is that for the first time, we have the entire technical stack being innovated on at the same time. This has never happened before.

So, in the PC era, all the innovation was the PC. In the mini era, all the innovation was the mini. In the internet era, it was all about networking and internet or online innovation.

But there was no innovation on chips that occurred at that time. Yeah, I mean, chips were developing, they were advancing, but just on a regular basis. With AI, we are seeing innovation at all layers of the stack.

So, PPU, GPU, CPU, everybody’s kind of thinking about new ways of doing things. Systems level, what’s the interconnect? How do we build these systems?

Are we going to use InfiniBand? Are we going to use internet? How will networking build?

I have a company, Hedgehog, in the networking space, doing some very interesting work over there. Then, of course, at the systems level, we had Kubernetes in the cloud, but Kubernetes is not how you deploy your AI inference and your AI training workloads. So, there’s a lot of innovation over there at that space.

Then at the application or the deployment stage, there’s the infrastructure at that stage, the cloud stage, in terms of how people are working at it. And then, of course, on top of that sits the final use case, the final data. And we are seeing innovation at all layers of that stack.

And so there, the technical advantage wins, because nobody knows what is the right way, what stack is going to actually be true a few years from now. And that’s what makes it so exciting.

Siddhartha Ahluwalia 16:24
So, overall, when you’re investing, what are the things that you are looking for in a founder? Obviously, as you mentioned, Engineering Capital means an engineering-led founder.

Ashmeet Sidana 16:34
Sure. I mean, Engineering Capital, the name comes from the fact that I invest in engineers who are going to solve interesting technical engineering problems, not science problems. So, I don’t do deep tech in the sense of science, but it can be technically very challenging.

And then, of course, my job is to engineer capital. So, hence, Engineering Capital. So, it’s a little bit of a pun on that.

What do I look for in a founder? What every VC looks for in a founder, right? You’re looking for someone who has some disproportionate ambition and desire to take risks, to build something amazing.

They have a vision for that, which is different, iconoclast, independent thinking, willing to do that, yet has commercial instincts, knows how to build a business, can be a leader, in other words, can attract people to follow them, because a CEO has to attract leaders to follow them, and then can bring all of this together with some technology or some market. So, you’re looking for all those characteristics. They usually come from education, experience, and that, you know, unsaid je ne sais quoi, you know, sort of ambition that a founder has, that regular people don’t have.

Siddhartha Ahluwalia 17:49
And for you, when you’re putting the first institutional check in a company, you mentioned already that, you know, you’re looking roughly 15% ownership, that’s a good number, if I would say between 11 to 15. What is the check size that you go up to max in a company?

Ashmeet Sidana 18:07
I don’t have a rigid number for anything. I believe in venture capital, you shouldn’t make rules. In fact, our job is to break the rules.

So yes, would I like 15% ownership? Sure. Would I like 16 more than 15?

Of course, 17 better than 16? Of course, I’m just as greedy as the next venture capitalist. So that’s a little bit of a zero-sum way of looking at the world.

I think the way you should think about venture capital is positive sum. The way you should think about it is, what can this become? What is that worth?

What is the right set of inputs, including money, check size that will allow you to reach that goal? Given that the market is so big right now, and some companies are very capital intensive, they’re just not part of my model. They’re just outside the scope of what I focus on.

And that’s totally fine. I don’t have to do everything. I just have to do some number of winning companies to build a successful business.

Siddhartha Ahluwalia 19:00
So how do you look at it as a fund across all your funds? Make a single vintage of a fund a winner. What is required for that fund to become a winner?

Ashmeet Sidana 19:09
I have a very classic venture capital model, order of 20 companies. I am the lead investor in all my companies. So I have significant ownership in all of these companies.

And the way I think about it is that some fraction of those would be lost at the seed. In other words, they will not progress to an A. Some of them will progress to an A, then A to a B, B to a C, and then C to maybe some form of a large exit or perhaps even a D or an IPO or something like that.

So that’s kind of what you are looking for. In engineering capital right now, I have companies, as I mentioned, at the mid-stage, at the growth stage, large businesses, 1,000 employees, 500 employees, types of companies. And so hopefully one of them, two of them will go all the way and make the fund a good thing.

But believe it or not, even 10 years into engineering capital, obviously less number of years into fund two and fund three and fund four and now into fund five is still too early to tell. You don’t know what’s going to happen in a fund for quite a while. That’s also the nature of venture capital.

Siddhartha Ahluwalia 20:13
Yeah. So let’s say in your fund one today, there would have at least been a couple of companies that have broken out. So at what stage of the period you start exiting companies?

Ashmeet Sidana 20:27
I have typically not exited companies in secondaries. I have kept that option open. I mean, I keep the option open and I may consider secondaries in some cases.

But so I just, I’m a long-term investor. I’m aligned with the CEO. I want to work with the CEO.

And I have companies like Asimily in fund one, companies like Onymos, Nexla, vFunction, which are, I’m going to go long on those companies because they have great CEOs, great technologies. They’ve got reasonable revenues and reasonable growth rates and good businesses. And so they’re going to grow.

Siddhartha Ahluwalia 21:01
And today these companies would be at roughly what scale?

Ashmeet Sidana 21:05
That varies. I don’t share the revenue numbers on the companies, but it varies from company to company.

Siddhartha Ahluwalia 21:11
But I assume each of these companies would be above series B.

Ashmeet Sidana 21:15
Yeah, they’ve all raised follow on rounds and they’re much further along. In fact, I don’t think I’m on the board. I typically leave the boards of my companies at the series A.

There’s a couple of exceptions. I stayed on the board of Evinced. It’s a fund two company because, you know, it’s a large board and the company is doing very well and the CEO wanted me to stay, but typically I leave the board of the series A.

Siddhartha Ahluwalia 21:36
So even after 10 years in engineering capital and 20, more than 20 years as a venture capitalist, do you still have to play aggressive to win the best companies?

Ashmeet Sidana 21:48
Oh, absolutely. I mean, this is a highly competitive business. I mean, you and I recently did a company, it’s not announced yet, so I won’t share the name over here, but you know about this.

He had multiple term sheets. He had a choice. And so he had to choose, in other words, you know, the best investments, they choose you, you don’t choose them.

That’s almost always the dynamic. So it’s just a very competitive business and it will always be competitive. So yes, you absolutely have to fight for them and win them and you have to give the entrepreneur who has multiple choices a reason to choose your term sheet over someone else’s.

Siddhartha Ahluwalia 22:27
For example, in this case, what was the reason for the entrepreneur to choose you?

Ashmeet Sidana 22:34
I think in this particular case, the entrepreneur understood that I was aligned with that entrepreneur better than any other firm, at least for the first one to two years. By the way, the other term sheet was a good firm, reputable firm and they’ve built great companies. They’ve been around for a long time.

So they’re going to do good investments, but they are a slightly later stage firm. So their real core expertise comes in a little bit later. My expertise is a little bit earlier.

I knew the founder for, I think, two or three years, maybe even more from before, when he used to work at Google and he was an employee. And so I had built a relationship, I had built trust with the founder and the founder knew my model. He understood what I was doing and what value I would create for him in that first year or two.

And he was savvy enough to choose me and I was fortunate that he chose me. And frankly, it would have been a good decision for him if he had made any other choice also. These choices are, they’re easy to make at that level when you have so many investors sort of giving you an option.

So I was lucky that he chose me.

Siddhartha Ahluwalia 23:41
So what visible edge over a period of time you have made at engineering for entrepreneurs once they have competing term sheets?

Ashmeet Sidana 23:51
Ultimately, this is a reputation business. Your reputation travels far ahead of you. I can’t tell you how many times I’ve had a founder come to me and say that they don’t want to work with that particular investor because they’ve heard something bad about it.

I now have the luxury that I have five CEOs who are second time founders in my portfolio having previously sold a company for hundreds of millions or billions of dollars. And they’re very wealthy. They’ve done well.

And they could walk into any venture firm and get a term sheet. So I’ll give you specific examples. Phil Lu was the founder of SignalFX.

SignalFX was acquired for 1 billion by Splunk. He then started Trustero. He gave me the honor of being the first investor in Trustero after me.

I was the first investor in SignalFX. SignalFX was funded by Andreessen, CRB, General Catalyst. So great firms.

These are firms that everybody respects. Harjot, I mentioned earlier, Fund 3, Code Rabbit. Fund 1, Netsil.

I believe Mayfield had done his series A at Netsil. He gave me the honor of being the first investor again. So these are people who’ve chosen me the second time.

Rohit at Auditoria. I mean, I can go on and on naming these CEOs. When they choose you a second time, that is when you really know that you did it right.

That you really added value and the entire life cycle was completed when they have a choice. And so that’s an obvious reason why people choose me. But I have also worked very hard to be, number one, aligned with the founder.

And number two, be genuine value add with very little overhead. I think some VCs make the mistake where they don’t realize how much overhead they are creating on some little entrepreneur who’s just a five-person team and they’re just getting started. And to you, it may seem like a trivial thing to say, hey, just work with my admin, set up a board meeting.

And the guy’s running around trying to make it happen. I don’t keep an admin. I schedule my own calendar.

My entrepreneurs hear from me directly, immediately when they reach out to me. These are little things, but they go a long way in terms of building a relationship.

Siddhartha Ahluwalia 26:03
Which means, you take the first call on every prospective entrepreneur.

Ashmeet Sidana 26:08
I take the first call. And that is a hard way to run your business. I wake up every morning to a whole inbox just full of opportunities.

And I triage them every morning myself. And I personally respond. And I say, and if they are interested, then I will meet with them very quickly.

Siddhartha Ahluwalia 26:27
And how many opportunities do you see in a year?

Ashmeet Sidana 26:31
I haven’t counted, but I take a few hundred meetings because I try to meet one or two new companies every day. So, every year I take a few hundred meetings.

So, obviously, more than a thousand.

Siddhartha Ahluwalia 26:45
And these are in-person meetings?

Ashmeet Sidana 26:46
In-person meetings.
I like to take one or two in-person meetings.

Siddhartha Ahluwalia 26:50
One or two in-person meetings you have almost daily?

Ashmeet Sidana 26:52
Every day I like to do one or two new meetings.

Siddhartha Ahluwalia 26:55
You’ll do meetings on Saturday, Sundays also?

Ashmeet Sidana 26:57
I hate to say it, but yes.

I mean, I’m a bit of a workaholic. I mean, you have to be in this business because it’s such a fast-paced business. And I just love it.

So, I just can’t resist sometimes. And I go for a walk every Saturday morning. I try to think about it.

But sometimes you just can’t resist. And you come back and then you just meet with another entrepreneur.

Siddhartha Ahluwalia 27:18
I think you live in Palo Alto if I’m right.

Ashmeet Sidana 27:20
That’s right. I live here.

Siddhartha Ahluwalia 27:21
Yeah. So, globally, this would be the highest density of one of the most talented entrepreneurs.

Ashmeet Sidana 27:29
Yeah. I mean, broadly speaking, Silicon Valley is a unique place, right? I mean, the area between, I like to say that my life is lived on 101 between Palo Alto and San Francisco, because that’s where the density of talent, companies, opportunities, also exits, also M&A, also the conferences and the meetings and the learnings about what is going on with those companies happens over there.

So, it’s not just about meeting entrepreneurs. You have to stay current. I can call up people at Google or Meta or Cisco or Salesforce and have a conversation with them.

And that’s critical when you’re doing diligence or when you’re trying to get a company sold or perhaps signing a partnership with a company. You know, Events is one of my companies. The CEO, Naveen, I was the first investor.

Naveen came to me one day and said, I want to talk to Microsoft. And he was still at the seed stage. And I said, you know, it’s too early.

I mean, you’re small and you’re going to get swamped. Microsoft is this giant beast. And he was like, nope, I’m ready.

Here are my three slides. I know exactly what the strategy is and who I want to talk to. And I want to use my silver bullet.

I give every entrepreneur a silver bullet. And so I said, OK, I’ll call Microsoft. So, I called my contacts.

Within four weeks, we had a one-on-one with Naveen and Satya Nadella. Microsoft became an investor in the company. We have a go-to-market partnership with that company.

And it’s a huge business today. So, these things happen, but they don’t happen by accident. They happen.

There’s luck. There’s luck involved. But they happen when you spend time and, you know, repeatedly do that work.

And that work happens more often than not in Silicon Valley.

Siddhartha Ahluwalia 27:51
Got it. And let’s say, across your portfolio, what percentage today is at least one of the founders of the Indian diaspora?

Ashmeet Sidana 29:16
Again, I don’t know the numbers. I don’t track things like this. I would say 50%.

Very large proportion of the Indian diaspora. Many of them are Indians who may have immigrated or their parents may have immigrated here. So, they may have, you know, they may not be Indian in a legal sense or Indian with any kind of practical experience in India.

But, you know, they’re the children of immigrants. They came here. They live here.

And yes, you do see a large proportion of…

Siddhartha Ahluwalia 29:45
50% is huge. And I believe it’s not by intent. It’s by accident.

Ashmeet Sidana 29:52
It’s purely by accident. I mean, I am a solo GP. I’m trying to find the best possible opportunity that I can.

And certainly, I have CEOs of all other, you know, nationalities and backgrounds. I mean, Diane Yu is the founder of Tidal Wave, you know, is obviously not Indian, but was one of those second-time founders. She was the founder of Freewheel, where I was also an investor and a board member before.

And again, she gave me the honor of being the first investor in Tidal Wave. And she has built a phenomenal business over there. So, obviously, I have all types of families.

Siddhartha Ahluwalia 30:27
So, what, at least at Neon, we are seeing today, specifically in AI, I mentioned a point about technical founders, which are winning in AI. The other observation is, like, the founders are much younger today, who are winning. They are 25 years old, background in data science or researchers.

Ashmeet Sidana 30:48
That is very true. So, as the capital requirements for companies came down, as the business of starting a company became more commoditized, more open, more regularized for people, the average age of the founder came down because the barriers to entry came down in terms of starting a company. So, yeah, over my career, I have seen the age come down over here.

I mean, most people are shocked when I tell them that, you know the founder of TSMC was, over 50 years old when he started TSMC.

And you’re like, what? He was in his 50s?

I was like, yeah, you know, that’s not crazy. Because you need that much experience before you start a fab company. I mean, obviously, he started a fab and started, you know, invented the fabless business.

And so, yeah, the age has come down for sure, no question about it. But there’s no right age or wrong age. I mean, the founder of McDonald’s was in his 50s, the founder of TSMC was in his 50s.

So you can be a founder at any age, there’s no question about it.

Siddhartha Ahluwalia 31:45
But with AI, things are changing so much so fast. Is it like, do you also believe the younger founders have an advantage because the world has moved completely upside down on how things get built, how things get distributed?

Ashmeet Sidana 31:59
In general, younger founders have an advantage, just in terms of energy, but also in terms of being near to the technology. If you graduated, you know, five years ago, you got the latest education. I did an AI course when I did my undergrad, but that was 20 years ago.

So that AI course is vastly out of date from the AI, which is being taught today. So I’ve had to educate myself to bring myself up to date in terms of what is going on over there in the market. So they have an advantage because they are closer to the technology, they are closer to the market.

They are more, you know, risk seeking. And so, yeah, they have some advantages over older founders. Older founders have more domain experience.

They are much more grounded in what they are doing. They have a broader perspective. They have a better understanding of the problems and of the customers.

And so they have their own sets of advantages. So you have to evaluate every opportunity by its own unique set and say, for this case, is this the right founder? Is this the right stage?

Is this the right technology? Is this the right financing? And if all those things come together, then you make an investment.

Siddhartha Ahluwalia 33:01
And, you know, some of these technical insights, you know, Engineering Capital invests in technical insights, unique tech. So sometimes they might not turn into a big company. So where do you think, you know, the marriage of technical insight happens with the business that it creates a large company and where it, in your experience, hasn’t landed anywhere?

Ashmeet Sidana 33:22
Yeah, unfortunately, I would say more often than not, they don’t become massive businesses because that’s just the ratio of failure versus success in the venture business. Sometimes they can become massive businesses, and that is what drives the venture business. But most of the time is spent with companies that are still looking for product market fit.

They’re looking for a large market. They are trying to create a business that they are doing. Where companies don’t succeed is when the founder, the CEO, the main product person doesn’t have enough of a commercial instinct, doesn’t spend enough time understanding a customer, doesn’t spend enough time being creative and creating a unique packaged product that solves a problem that a customer is willing to buy.

And that’s a very hard problem. So I don’t hold it against them. It’s a very tough challenge.

It’s like winning a gold medal in the Olympics, right? A hundred people show up, only one person gets a gold medal in the Olympics. So you have to fight hard, but that’s how the business works.

Siddhartha Ahluwalia 34:23
So one observation about the founders that when I have observed, they ruthlessly prioritize.

Ashmeet Sidana 34:33
Yes. Yes.

Siddhartha Ahluwalia 34:36
From very round, like the very pre-season, they are very good at saying no to things.

Ashmeet Sidana 34:40
So prioritization is an executive function. All executives are good at prioritizing. Founders have to be exceptionally good at prioritizing because they are doing many different jobs at the same time.

When you’re an executive in a large company, you tend to have a very narrow job. Even if you’re very senior, you still have some functional expertise, a department, a group, a problem you’re trying to solve. Founders are doing everything.

They are the CFO. They are the salesperson. They are the technology person.

Guess what? They’re also the IT guy, you know, who’s running around trying to get the laptop working and to get the OS installed. So founders have a very, very tough job.

I’ve run a company. I was a founder. I was a CEO.

Siddhartha Ahluwalia 35:20
Sedana Systems

Ashmeet Sidana 35:21
Exactly. And so it’s a very tough job.

You have to be a jack of all trades. And yes, you have to prioritize ruthlessly.

Siddhartha Ahluwalia 35:30
Yeah. So I’ve seen founders that are very good at saying no. Let’s say, for example, I might introduce them to 10 candidate hires for their GTM function.

They say, hey, we are not looking for an experienced person because they come with a bias.

Ashmeet Sidana 35:42
Yes. Sometimes they are making decisions which may seem arbitrary to you or may seem like, you know, not efficient. But from their prioritization, it is efficient.

And so you have to trust the founder. I mean, you make an investment when you trust the judgment of the founder to make those types of decisions in real time.

Siddhartha Ahluwalia 36:01
So in your experience, when are the some patterns that you have gone wrong on previously? Like you invested in a business, but you later discovered these are some of the common patterns why some of the businesses are failing. Or these are the assumptions that you had.

Ashmeet Sidana 36:19
Yeah. So one of the very common failure modes of founders, especially technical founders, is what I call playing house. What I mean by playing house is that in any company, and this is related to that prioritization point, in any company, there’s a large amount of work which needs to be done, which is good work.

For example, you know, it’s good to organize your customer contacts, your engineers, it’s good to have a good evaluation system for your employees. It’s good to be organized in terms of all your legal paperwork. Guess what?

None of those things are going to help you get product market fit. And none of those things are actually going to move the numbers that actually matter, which is that initial traction. And so sometimes founders get into this trap, where they start doing what I call playing house.

In other words, they’re building this beautiful house, everything looks nice, it’s neatly organized, everything is in the right place, everything is neatly polished. But they haven’t solved the real problem, which is product market fit. I’d much rather have a founder who was messy, who gets some things wrong, who forgets certain things, whose calendar is not well organized, but who is ruthlessly prioritizing figuring out product market fit.

Once you figure out product market fit, it’s a different journey. And my time is spent almost entirely before that product market fit journey happens.

Siddhartha Ahluwalia 37:41
How do you define product market fit? Because everybody has their own definitions.

Ashmeet Sidana 37:45
So product market fit, I’ll define by first observing the product market fit is a continuum. It’s not a on and off thing.

It’s not like a one and a zero. It’s like you are on the journey of product market fit. So you’re along that journey.

In a great product, you know what is the right price, you know what is the right packaging, you know what is the right path to what problem that you’re solving to the customer. So what path are you going to take? Is it a direct sale?

Is it a channel sale? Is it a partner sale? What is the price the customer is willing to pay?

And you can repeat those things. If you can start repeating those P’s, then you are well on your journey to product market fit. The other thing which is really important to understand about product market fit is that a product market fit is a dynamic equilibrium.

It is not a static equilibrium. In other words, it changes. It can change overnight.

And one of the best examples of that is Facebook and product market fit of Facebook. So Facebook itself ha , he had cracked growth, and it was just growing incredibly fast.

And then one day, someone published a blog post in the UK about Cambridge Analytica. And in one second, the product market fit of Facebook changed to the point that even today, it has never achieved that same level of product market fit. Now, Facebook is still a product, it generates enormous revenues for the company, and it will always continue to be a product.

But product market fit changed because people’s perception, acceptance, requirements for privacy changed once the Cambridge Analytica scandal came out. And so product market fit changes in a company. So it’s a continuing journey that a company has to undertake.

I’m using the word at the seed stage very crudely to say that, hey, if you can do it five times, if you can do it 10 times, you’ve got some form of product market fit at that point.

Siddhartha Ahluwalia 39:44
Some of our founders, you know, that have described product market fitted, that growth is the only thing that they need to solve for that product market fit. Because the rest of the things have come together.

Ashmeet Sidana 39:56
That’s a good definition, I think for a first order of approximation, that works. And I would accept that definition in a company, again, with the caveat with the previous example, I gave you that it changes very fast. And so you kind of have to stay on top of it.

But yes, that’s a good working definition for an initial founder.

Siddhartha Ahluwalia 40:15
And I have observed the Silicon Valley is just obsessed about product market fit, either you are on the side of product market fit or this side. And at least in our portfolio company of 60 plus companies, six companies have failed and shut down or returned less than 1x. In all of those companies, the common reason was, they were great founders, but not able to achieve product market fit.

Ashmeet Sidana 40:35
Yeah, so product market fit is in some ways the founding journey. I mean, that is the job of a Silicon Valley technology oriented founder in terms of what we do and how we build. Are we obsessed with it?

I think we’re not obsessed enough with it. I think there are still people who think that you can follow a template, or you can follow a system and you can do it. No, product market fit is a creative endeavor.

It is a discovery, it is an active path that you have to follow and find for yourself to build a company.

Siddhartha Ahluwalia 41:07
So how do you, when you’re talking to, let’s say, hundreds of founders in a year, you might invest in eight of them?

Ashmeet Sidana 41:14
Less than eight, I don’t think I’ve ever done eight investments in a year.

Siddhartha Ahluwalia 41:17
How many do you do typically?

Ashmeet Sidana 41:18
Maybe five, six.

Siddhartha Ahluwalia 41:19
That’s it. Five or six?

Ashmeet Sidana 41:21
Roughly one a quarter, sometimes two a quarter.

So five or six is probably.

Siddhartha Ahluwalia 41:25
So, probably you’re meeting, let’s say 50 entrepreneurs in a quarter, one on one, to select that one?

Ashmeet Sidana 41:31
Yeah, more than 50, I would say.

Siddhartha Ahluwalia 41:33
Probably like 100 in a quarter?

Ashmeet Sidana 41:35
Yeah, probably. I mean, you know, if you think about it, there’s 90 days in a quarter, maybe there’s, you know, 70 working days in a quarter.

So two a day is 140, so maybe 100.

Siddhartha Ahluwalia 41:46
Okay, so 100.

Ashmeet Sidana 41:48
Order of magnitude is 100.

I mean, it’s not 10. 1, 10, 100, it’s not 1000, it’s not 10.

Siddhartha Ahluwalia 41:53
So probably how do you get an inkling that this founder, how that he or she is thinking is closer to product market fit in terms of customer pain, discovery, the right solution for it, and the remaining, you know, that you don’t choose to invest in?

Ashmeet Sidana 42:10
Specifically, in the question of product market fit, in addition to meeting these founders and trying to stay current on technologies, I’m also trying to stay current on the market. You know, when I do diligence on a company, of course, I’m doing diligence on that product, but I’m also diligencing the market. You know, what is going on in the market?

Where are the trends? What are the problems that people are facing? And I’m trying to educate myself on the technology trends, and therefore foresee where there may be opportunities in the market.

And so that’s really the educated or the prepared mind that I have on a particular sub segment of the market. That’s why I don’t do many other companies. I don’t do robotics.

I don’t do space. You know, I don’t do consumer because I don’t spend any time on those markets. If you ask me, what are consumer trends?

I have no idea. You know, that’s something I have no knowledge of.

Siddhartha Ahluwalia 42:58
Which are the categories that you invest in?

Ashmeet Sidana 43:00
These days, I’m primarily focused on AI, cybersecurity, data, and then I have a small practice in an area that I’m calling the death of the x86. So because the x86 architecture is now effectively dead, that’s going to create some opportunities. And I have two companies that are working in that space.

Siddhartha Ahluwalia 43:19
And how important do you find storytelling ability in a founder for their ability to hit product market fit and scale a company?

Ashmeet Sidana 43:29
Yeah, I would say it is one of the incredibly valuable and highly leveraged capabilities that a founder has. It is not necessary, and it is not sufficient. But it is one of the most valuable skills that a founder can have.

Because founders ultimately have to tell the story of their company. It is possible to build companies without being a great storyteller. If you have an indirect path to market, if you have other ways in which your company will get built, but it is a tremendous asset.

And most successful companies do have a founder like that. I mean, Steve Jobs was famous for his reality distortion field when he was telling a story about the future. But great founders are definitely able to do that.

Look at how Jensen talks about the future of AI or how Elon Musk talks about the future of electric cars or space. They have reality distortion fields that they are trying to implement.

Siddhartha Ahluwalia 44:23
So when you are evaluating founders, is storytelling one of the abilities that you are also evaluating them on?

Ashmeet Sidana 44:28
Absolutely. I’m evaluating them on all criteria. Do they have the education?

Do they have the experience? Do they have the sales skills, the storytelling skills, the relationship skills, the recruiting skills? Reality is no founder is perfect.

No founder has all of these skills. And so what I’m really evaluating for is the meta skill, which is, are they going to learn this? Are they going to spend the time and effort to try to learn it?

And how good will they be at learning it? And do they have those abilities? So that is also part of my job as a venture capitalist.

I share this anecdote with people that my current title at Engineering Capital is Chief Engineer.

Siddhartha Ahluwalia 45:04
Yeah, that’s enough. Next question.

Ashmeet Sidana 45:06
Oh, okay. So I’ll share that.

That’s a fun title because it’s kind of boring to be a general partner or managing director, which is the titles that most people use. And so when I started Engineering Capital, I decided to call myself Chief Engineer because it’s kind of fun. It goes with the name and it matches my job, which is to engineer the capital.

But when I made a list of all the titles that I could have, obviously I put managing director, general partner in there, but those were boring. I threw them out. I made a list of names of what titles could I have.

The runner’s up title that I had was professional student. I wanted to call myself a professional student because my job is to learn. And I think the job of every CEO is to learn.

And to some extent, they have to be professional students. That’s just the nature of the game. Companies grow at the speed at which their CEOs can learn, not the knowledge that they already have, but the knowledge that they are going to gain over that journey. And so that is one of the things I am evaluating.

Siddhartha Ahluwalia 46:08
And how many companies that you are investing in or have invested in overall in history of Engineering Capital have been solo founders versus co-founders?

Ashmeet Sidana 46:21
The vast majority have co-founders. Solo founders is rare, but I have done solo founders. Unlike some firms, I don’t completely exclude that.

So I probably have four or five companies in my history that have been solo founders.

Siddhartha Ahluwalia 46:37
How do you take that exception of backing a solo founder?

Ashmeet Sidana 46:40
So I think solo founders are much riskier.

I think solo founders in general are riskier. So the risk reward has to be, it’s a different ratio. And I want to understand why they are a solo founder.

And I want to understand whether they are the type of personality and person who will succeed at being a solo founder. It’s a hard job. Being a founder CEO is a very hard job.

And so having a co-founder makes it easier. And so why do they want to undertake this journey as a solo founder? It’s very important for me to understand that.

And in general, my advice to founders is you’re going to build a team. You have to build a team to succeed. Why not have part of them be a founding team?

But again, I’ll make exceptions. This is not a business of following rigid rules. This is a business of finding exceptional opportunities and then trusting, believing and risking with that.

Siddhartha Ahluwalia 47:33
And in some of the large outcomes that engineering capital has, what have been the things that contributed to apart from all the right ingredients at time of input that made them large outcomes?

Ashmeet Sidana 47:47
In addition to all the right ingredients at the time of input is a tremendous amount of hard work. There is some amount of luck. There is some amount of foresight, which went into what was being built.

Siddhartha Ahluwalia 48:00
Can you give an example of foresight?

Ashmeet Sidana 48:03
So I’ll take an example of Robust Intelligence. This is a company that was started by Yaron Singer and Kojin when they were at Harvard.

Yaron has a PhD from Berkeley, very deeply technical. He was already a professor at Harvard when he wanted to start the company. And when I met him, this is before the AI craze.

So I believe it was 2019 that I made the investment. And it was very clear at that point that machine learning was going to be very important. And safety and alignment issues in machine learning were critical issues.

In fact, the original name of the company was SafeML. It was incorporated as SafeML Inc. So that’s what I wrote the check to.

We later renamed the company to Robust Intelligence. And what Yaron saw, and because I was so deep into AI well before starting from 2017 onwards when I signed up with the University of Toronto, I was convinced that ML was going to be huge and safety in ML was going to be huge. And so I think that was foresight.

And I think Yaron had the foresight to understand that problem. We didn’t have product market fit. We thought we’d be selling to banks, and then we thought we’d be selling to consumer, and then we thought we’d be selling to big tech.

And so we were kind of chasing all of these things in the beginning. But in the end, we built a business. And then Cisco eventually acquired, we made or had a partnership with Cisco.

Cisco became an investor in the company. And then eventually Cisco acquired the company. And today, all of what is called Cisco Intelligence is run by Yaron.

So Yaron runs the group. That is basically Robust Intelligence.

Siddhartha Ahluwalia 49:43
So one way in Bay Area has got expensive is the kind of first rounds the founders are raising, the kind of valuation sometimes they are raising. So how do you keep up with that? Because having a fund where you have received tremendous inbounds, but you chose to restrict it to a certain size.

Ashmeet Sidana 50:03
Yeah, so I’ve kept it small because I believe in the two-pizza team. I believe great invention, great creativity comes with very small teams, the two-pizza team. And whether it’s OpenAI, whether it’s Google, whether it’s VMware, they were built by two-pizza team.

Eventually, it took tremendous amounts of capital growth, all of those businesses were built. But that initial two-pizza team was the magic that happened. And I’m funding two-pizza teams.

The Bay Area has become expensive because of essentially political dysfunction. I mean, it is basically the failure of the California state and the city governments that it has become so expensive. The incentives are not aligned, the politicians, they’re politicians.

So unfortunately, we’re just not well managed over there. There’s no, in my opinion, there is no practical reason why it should be so expensive. And if we were to lower the cost, which is primarily the cost of housing and the cost of taxation and transportation, which is very, very inefficient.

If we were to lower those costs, we would see greater growth and greater progress over here. We have the advantage of having the network effect, having Stanford, Berkeley, and having a network effect of the historical legacy of all our firms over here. And so we are milking that to some extent.

So it’s a balance, you know, maybe…

Siddhartha Ahluwalia 51:25
Let’s say a founder is raising 10 to 20 million dollars, but you really like the founder. Would you pass them because they don’t fit your ownership criteria and the check size?

Ashmeet Sidana 51:34
It’s possible.
But I may make an exception. Again, this is a business of exceptions. I have no rigid rules.

I have no hard and fast rules. You were bringing up ownership percentages and things earlier. I’m a little bit uncomfortable about those things, because people interpret them as rules.

They are not rules. They are just ways of thinking about fund construction. I have no rules.
I have no rules.

Siddhartha Ahluwalia 51:56
But have you ever participated in 10 million dollars to 20 million dollars pre-seed or seed rounds?

Ashmeet Sidana 52:02
I have participated in a double digit round.

Siddhartha Ahluwalia 52:05
Got it. No, thanks. And some of the questions that I want to ask, you know, in the second part of the podcast is, you know, we are going towards the conclusion of the podcast. Like your journey into venture capital was accidental when the founders of engineering capital met you. Tell us about that.

Ashmeet Sidana 52:24
You mean when the founders of Foundation Capital met me?

Siddhartha Ahluwalia 52:25
Sorry, the founders of foundation capital.

Ashmeet Sidana 52:27
That’s right. So I used to run product management for ESX at VMware.

VMware had done very well. Company got sold. And so I decided to go start another company.

And I literally started networking with the idea of starting another company. I had a list of ideas. I’d made like six ideas I had written down that I was going to go start a company with when I met Mike Schuh, Kathryn Gould, Bill Elmore, Jim Anderson at Foundation Capital.

And they changed my life. I mean, they literally said, why don’t you try your hand at venture capital? You see, you’re young, you seem smart.

You may enjoy the business.

Siddhartha Ahluwalia 53:00
How old were you?

Ashmeet Sidana 53:01
And I can do the math, but I was in my 30s.

And I was, you know, I was at a stage which was where, you know, the whole career path was open to me in terms of, you know, what do I want to do over here? And they made me an offer to be a, which was sort of a free offer. It was like, try your hand.

Siddhartha Ahluwalia 53:25
entrepreneur in residence

Ashmeet Sidana 53:26
Exactly.
I started as an entrepreneur in residence. And then it was venture partner, then general partner, and then eventually managing partner. So I had a great journey.

They taught me the business. And I fell into something that I just loved doing. I had no idea what venture capital is before I met them.

Siddhartha Ahluwalia 53:43
And you had a 10-year journey with Foundation Capital?

Ashmeet Sidana 53:44
Yes, at Foundation Capital.

Siddhartha Ahluwalia 52:32
So what made you start Engineering Capital and not continue with Foundation?

Ashmeet Sidana 53:53
Yeah, so I went to Kathryn. You know, now I’m in my 40s. I’m at Foundation Capital.

I’m a managing partner. The firm is doing well. We are growing.

And I went to Kathryn and I said, you know, I’m doing really well, but I don’t feel happy. And she said, one of the most amazing statements. She said, happiness comes when you can find the intersection of what you are good at, what you enjoy doing, which don’t have to be the same thing, and where there’s a market opportunity.

You have to find the intersection of those three things. And so she helped me design Engineering Capital. And to find, you know, what do you truly love doing, which for me is very nerdy, very geeky.

It’s really getting deep on the technology side, the early stage. I don’t enjoy managing people. Okay.

That’s just not an activity that I enjoy doing. And so Engineering Capital is a bespoke firm that is an idiosyncratic creation to satisfy my happiness. And she helped me create that.

So yes, she’s the founder of Foundation Capital, but she is also in many ways the founder of engineering capital.

Siddhartha Ahluwalia 55:01
And how do you tell LPs when they ask you about key man risk and all these questions?

Ashmeet Sidana 55:07
Well, what I tell them is very simple. What I tell them is that you can either invest in a solo GP like me, or you can invest in a partnership. Obviously, your risk is much higher in a partnership.

In a partnership, by definition, there is someone who is a good investor and someone who’s a little bit less good investor. So you’re getting an average. So as it is, you’re getting slightly lower.

And then if the good investor gets hit by a truck, you’re going to get much lower. Because of course, the firm will continue. And you know, there’s never one key man.

Rarely, there is one key man in a firm like that. With me, I’m pure alpha. If you like me, invest.

If you don’t like me, don’t invest. If I get hit by a truck, there will be no more investments. We have a caretaker mechanism, we’ve got everything, your money is safe, everything will be fine.

And so your risk is much lower if you invest with me.

Siddhartha Ahluwalia 55:58
Got it. That’s a great answer. And I want to say thank you to you because you brought in, you know, I think one of the best investors that I consider along with you in Bay Area, Ashu Garg.

Yeah. You know, accidentally also like you paid it forward.

Ashmeet Sidana 56:13
Sure, absolutely. I was very happy to, you know, I recruited Ashu, I brought him in. And he reported to me and we promoted him and he’s doing a great job.

And you know, he’s doing a job that he enjoys. And so he’s a very different personality from me. And I’m happy to see him succeed.

Siddhartha Ahluwalia 56:29
Yeah. And, you know, Foundation Capital became a LP in Neon.

Ashmeet Sidana 56:35
I was not aware that they were an LP in your fund. Congratulations. That’s great.

Siddhartha Ahluwalia 56:41
Thank you.
So that’s why, you know, when I was doing my first set of podcasts with you and Ashu, this is five years back. So I kept in touch, you know, and later Ashu told me that, hey, I cannot be an individual LP, but we can, we have a formal process at Foundation, how we evaluate funds, you know, and we are the only fund in India, the Foundation has an LP position.

Ashmeet Sidana 57:05
Wonderful. Wonderful. I’m happy to hear that.

Siddhartha Ahluwalia 57:08
Thank you.
So you roughly managed 250 million dollars across.

Ashmeet Sidana 57:16
Yeah, maybe a little more, but yeah. Right.

Siddhartha Ahluwalia 57:19
But seeing that kind of success, so you never build an opportunity fund or anything like that, right?

Ashmeet Sidana 57:25
No, I’m a pure, I’m a pure play alpha. I mean, I’m going purely for multiple, I don’t do opportunity funds, I don’t do SPVs, I don’t do side funds, none of those things.

Siddhartha Ahluwalia 57:34
But have you, because fund management is a long business, have you seen carry come across any of your funds?

Ashmeet Sidana 57:40
Yes, for sure.
I have already been lucky that I’ve already, one fund is fully returned, one fund is more than half returned. Another fund is also, you know, some portion returned. So yeah, I’ve already received carry checks. I’ve been very lucky.

Siddhartha Ahluwalia 57:53
Yeah. And this is, say, it’s not like a 10-year business.

Venture Capital now has become like multi-decade business for some funds where they start a fund right now and they might receive carry much like 15 years from now.

Ashmeet Sidana 58:06
Yes. So if you, so there is definitely a timing and a luck element to that in terms of where, you know, when you get your first carry check. But in a good business, in a well-run business, you should definitely get carry checks in less than 10 years. You know, you should be able to do that.

Siddhartha Ahluwalia 58:24
I think in Bay Area, I find is the only place where solo GPs like you have succeeded massively. I remember talking to Semil Shah from Haystack and he was a solo GP. Right.

And you folks have built, like I think, some of the amazing franchises.

Ashmeet Sidana 58:43
You know, the solo GP, you can analyze it by using Coase’s theorem. You know, he got a Nobel Prize, I believe, in the 1930s or 1950s. He was a great economist, you know, who was studying the theory of the firm.

You know, why do companies exist? And so solo GPs can exist because the US is very efficient and a very high trust and a very functional market. Again, there are issues and we have some other problems which are on the edges.

But largely speaking, the system works. You know, in India, you need much more capacity just to manage and operate in that environment. There are some inefficiencies that exist over there.

You know, a simple example is you need a driver, right? Most people have a driver. That’s a luxury over here.

That’s a necessity in India, just given the way traffic works. And so that’s a trivial example, but it’s kind of indicative of why solo GPs are able to succeed over here. But because of social reasons, it’s not a stable, long term system.

And so we will always see more partnerships than solo GPs.

Siddhartha Ahluwalia 59:52
But every decade, there are more solo GPs. For example, I believe Elad Gill is also a solo GP.

Ashmeet Sidana 59:59
Elad is a solo GP, Manu Kumar is a solo GP, Tim Connors, you know, did it alone. So there are a handful of solo GPs who are always, you know, building the business. And so there’s nothing wrong with it, but it is not the dominant mode.

Because most people are social animals, they like to work in partnerships, they like to work in a team. Some business models require a team. You know, if you’re playing hockey, then you have to have a team, you can’t play it as an individual.

But if you’re playing tennis, you can play it as a team, or you can play it as an individual. And so I choose to play tennis. You know, I choose to play golf, some people choose to play metaphorically speaking, I actually don’t play tennis or golf or any of these sports.

But metaphorically speaking, you can play it as a team sport, or you can play it as an individual, I’m playing it as an individual.

Siddhartha Ahluwalia 1:00:45
So as you have built in the last 10 years, you know, from your mid 40s to mid 50s, Engineering Capital, what are the differences that you have seen in yourself over this time?

Ashmeet Sidana 1:00:56
I’m sure I’ve changed. You know, I believe anyone who is developing and growing needs to change, you should be changing. And if you’re not changing, you are dying.

I mean, Jeff Bezos wrote a wonderful last shareholder letter, if you haven’t read it, I recommend everybody read it. When he retired as CEO of Amazon about the necessity for change and the energy that it takes to keep yourself different from the environment. So how have I changed in particular? I know I have become better at prioritizing and I have become even narrower in my focus.

I always believed in focus, I always believed in being disciplined and I have become much, much narrower in terms of what I do over there. Other ways, I’m not so introspective. So I don’t know, I would have someone would have to tell me.

That’s one of the disadvantages of not being in a team is that I don’t get a lot of feedback. You know, people don’t just walk up to me and do an annual review to tell me what’s going on. So I don’t have tremendous insight over there.

My kids, of course, will tell me all the time what’s wrong with me.

Siddhartha Ahluwalia 1:02:00
So one thing that I want to check with you is you have only invested in one company in India. Was that from Engineering Capital?

Ashmeet Sidana 1:02:10
The only company I’ve invested in India was Azure Power. That was from Foundation Capital. I have never made an investment from Engineering Capital outside the US.

Again, I like to keep it simple and I’m not expanding over there.

Siddhartha Ahluwalia 1:02:23
And in the US also, how many of your investments are in the Bay Area and how many are outside the Bay Area?

Ashmeet Sidana 1:02:28
The vast majority are in the Bay Area.

I have one company in Seattle and I believe I have two companies in New York and that’s it.

Siddhartha Ahluwalia 1:02:35
And when do you take exceptions like investing outside the Bay Area?

Ashmeet Sidana 1:02:40
Exceptions are exceptions. You know, you do it because you fall in love with it for some reason, right? I mean, you feel that it is worth making an exception for.

By definition, they have higher overhead, right? So I have a company in New York, that’s Diane Yu. The exception was obvious.

She was an existing founder of mine. She moved there and she wanted to start TidalWave over there. I was like, Diane, you’re killing me, but I got to write you a check.

So I literally flew to New York, sat with her in Penn Station and I wrote a term sheet in Penn Station and I handed it to her. And I said, if you’re going to start a company, I have to be your first investor. So you make exceptions because venture capital is a business of exceptions.

I think anyone who tries to follow rules is eventually going to get very badly hurt in venture capital.

Siddhartha Ahluwalia 1:03:27
And you invested in, I think, a company in Seattle called 1Password or earlier it was called 1Password and now Hawcx?

Ashmeet Sidana 1:03:35
No, I did not invest in 1Password. Hawcx is based over here. My company in Seattle is called Hedgehog, is the company that I have in Seattle.

I used to have a company before this called Tignis, which was also in Seattle, but they were acquired by cohu. That was one of my exits last year. So last year I had three exits, Air Gap, cohu and Robust got acquired.

And one of them was Tigness. And so I only have one company in Seattle. And again, the reason Tigness happened is because John Herlocker was in the office of the CTO at VMware.

He used to live over here. I knew him well. And he decided to move back to Seattle to start the company.

And so it was kind of a no brainer for me to become the first investor.

Siddhartha Ahluwalia 1:04:18
So these are existing relationships when you invest outside Bay Area?

Ashmeet Sidana 1:04:22
They’re existing relationships.

But again, I’ve broken the rules. I mean, Hedgehog, I did not know Marc Austin before. And so Marc started Hedgehog.

It’s a Seattle based company. It’s a great company. They’re on a roll.

So I’m very glad that I got in, but it was an exception.

Siddhartha Ahluwalia 1:04:38
And there’s a new trend that you know, which is happening is people are glorifying 100 million ARR companies in one or two years. Do you think that is sustainable? And that is the path that founders should aim to follow?

Ashmeet Sidana 1:04:52
I think founders should aim to follow a path of building large, sustainable, fast growing businesses. These numbers, 100 million in two years, these are vanity metrics. I don’t know what the gross margin on that is.

I don’t know how much capital you spent to build that. If you spent a billion dollars and made 100 million in revenues, you just lost $900 million. That is not a good business.

And believe me, there are companies which have actually done that. And so be very, very scared of vanity metrics. That is not what you should be focused on.

A lot of marketing is done around it. A lot of hype is done around it. And so that’s fine.

That’s part of the business. It’s part of the noise of venture capital. Remember, ultimately, you as a founder will make money if you can build a large, profitable business.

Leading indicators of high profits are high revenue businesses. Leading indicators of high revenues are high gross margin businesses. Leading indicators of high gross margin businesses is good product market fit if you can build that.

And so you look for those things. That’s what you should be looking for.

Siddhartha Ahluwalia 1:05:56
What’s your view on categories like vibe coding?

Ashmeet Sidana 1:06:00
I think vibe coding is the early indication of a massive transformation in the software development business. vibe coding is here to stay. But vibe coding is not sufficient.

vibe coding is not going to replace terrific, amazing software developers. But vibe coding is here to stay. And it will change the face of software development.

It will have as much impact as Visual Basic had on the nature of software development. Bill Gates famously said that one day there will be 1 million developers who will write. Today it sounds like a trivial number.

He said there will be 1 million developers who will write in Visual Basic. His great insight was that he knew that he wanted to get developers onto his platform. And that was the backdoor to making Microsoft into a great platform company.

And that is why IBM lost. IBM lost control of the platform even though they were the single largest company. And they’re the ones who gave the contract to Microsoft to develop DOS and then eventually Windows.

And so that history is very well understood of the power of developers. vibe coding is going to change the nature of development, of software development, which will change the nature of all products in the world.

Siddhartha Ahluwalia 1:07:18
So one observation that I have had recently across our portfolio companies is even if you’re selling to enterprises, the bottom-up motion has become more profound and a better motion to enter an enterprise than a top motion. Because at top-down, there’s so much noise with the CXOs because Microsoft is trying to sell AI to those CXOs. Every large company in the world is trying to sell to them.

So when a startup is trying to go top-down, it has become more and more difficult today because everybody is promising ROI. In fact, how many deliver is the question.

Ashmeet Sidana 1:07:56
You are right. But I would caution you, Sid, that don’t look for trends when it comes to how companies are built. The analogy I always give is you are trying to win a gold medal in the Olympics.

And if you are training and playing your sport and practicing for that, I mean, right now, the Olympics are being played in Milan. This happens to be the Winter Olympics. So the person who is practicing the luge is going to practice very differently from the person who is skiing.

And the person who is doing slalom is going to do it very differently from the person who’s doing cross-country skiing. And so you really don’t want to learn lessons if you are doing the luge from the person who’s doing slalom skiing. You really don’t want to look at that person.

So you have to bespoke, understand your own business, your own sport, and you have to win your own gold medal. And your gold medal will come if you can build a large sustainable business.

Siddhartha Ahluwalia 1:08:58
And what’s your definition of a large sustainable business?

Ashmeet Sidana 1:09:00
The 100 million ARR is still a good goal because I do seed stage investing. So I always tell founders that a lot of companies will get to 10 million, but very few companies really get to 100 million ARR. So I still spend time with my founders evaluating every decision through that lens of whether this is a 100 million dollar business.

Siddhartha Ahluwalia 1:09:22
And you mentioned earlier foresight, technical foresight was one of the factors that led to large outcome. Is the same for 100 million ARR?

Ashmeet Sidana 1:09:32
So 100 million ARR is the outcome of good business execution, which is a combination of factors. It’s a package deal. You have to have the technology, you have to have the sales, you have to have the marketing, you have to have the team, you have to have the timing, you have to raise the capital.

All those things are prerequisites and they all have to come together in approximately good enough fashion to succeed. Any one of them doesn’t have to be perfect, but all of them have to be good enough and work together enough to get you to that business. So that’s really where the 100 million comes from.

It comes from building a real business, a team that can execute a product that is valuable, pricing that works in the market, capital that is sufficient to take you, all of those things have to be present.

Siddhartha Ahluwalia 1:10:17
So today, in Bay Area, the seed rounds, as I discussed earlier, have gone up and you highlighted the right way the costs in Bay Area have gone up. For example, a family that is earning 300k in Bay Area is hardly able to meet their ends, which was, I believe, not the case 10 years ago.

Ashmeet Sidana 1:10:35
Very much so. The prices have gone up, the cost of living has gone up and that’s very unfortunate because it was not required, it was not necessary.

Siddhartha Ahluwalia 1:10:45
So in fact, the hint I’m coming on to it, founders from India used to move to Bay Area to start large enterprise companies. For example, founders of Freshworks moved early, similarly other companies, Icertis founder, he has been based in Seattle, but there are multiple companies like Postman, where the founders migrated from Bangalore. Now it’s becoming more and more difficult for a period of time, because you can remain on B1, only for such a short period of time.

Ashmeet Sidana 1:11:21
You know, relative to the value that you can create and the amount of money that is available to a software company, it’s still cheap. Bay Area is still cheap. That’s why Bay Area still exists, is because relative to that, I mean, if you can actually get to a $5 million, $10 million, $50 million business, then $300,000 doesn’t matter, it doesn’t matter.

Siddhartha Ahluwalia 1:11:41
But your founders usually want to move at stage zero.

Ashmeet Sidana 1:11:44
I understand. So that’s a very difficult challenge.

And I’m not focused on the cross-border market. I don’t study those dynamics. I have many immigrant founders, I myself am an immigrant.

But I’m not really focused on that. So I’m not clued into exactly how they are dealing with some of those issues. And frankly, becoming an immigrant to become a founder is a relatively new phenomenon.

Traditionally, the people who started companies were immigrants for other reasons. They had come for school, they had a job, and then they left to start a company. Because you need a base, you need some ability to stand on something before you’re going to start a company.

You don’t want to only eat ramen every day and literally start a company like that. So it just depends on the individual and the hustle and the resources they have around them. That’s what it depends on.

Bay Area is unfortunately expensive, and double unfortunately, that it is a choice that our politicians and our electorate has made to make it so. It is a choice. It is not pre-ordained, but unfortunately, that is how we run ourselves.

Siddhartha Ahluwalia 1:12:47
So apart from the talent density that is in Bay Area, is there a lot of enterprise buyers? That’s why it’s the ideal place for B2B software founders.

Ashmeet Sidana 1:12:57
In addition to talent density, there are enough early stage customers, some of whom are enterprises and some of whom are also startups. Even the startups make for a great ecosystem because they’re very good buyers. And so yes, that is the second reason.

The third reason is that it is also a great place to grow your company because there’s a lot of talent that you can get from these bigger companies. And finally, the fourth reason is that the M&A is more valuable in the Bay Area because the incumbents are here. So again, I can take the robust intelligence example.

Notice that I mentioned that Yaron and Kojin were at Harvard when they started the company and Cisco acquired them. What I skipped over there is that at one day they got in a U-Haul, they drove from Boston to South San Francisco, started the company and ran it over here, which is I think something that it’s impossible to know, but something which contributed to their acquisition by Cisco. They were a much more attractive company to Cisco because they were local and the team could be integrated.

And Yaron today is running Cisco Intelligence because he is local and he lives over here. And so it becomes a virtuous cycle which has existed now for about 30-ish years, maybe 40 years, you could say, depending on how you estimate when Boston basically died in the venture capital business. Remember, the venture capital business started in Boston.

Siddhartha Ahluwalia 1:14:21
No, I didn’t know that.

Ashmeet Sidana 1:14:22
Yeah. So venture capital started in Boston.

The first venture capital firm was in Boston. Route 128 was the heart of venture capital and all the great technology companies were created in Boston. But they made some wrong political decisions.

They lost the lead to Silicon Valley. And Silicon Valley is now making some mistakes, but it’s still surviving.

Siddhartha Ahluwalia 1:14:39
Because I remember during COVID time, a lot of people were trying to move to Miami.

Ashmeet Sidana 1:14:45
Yes. We almost lost that network effect and that virtuous cycle. But AI was a stroke of luck because again, it happened over here. And now it is again the heart of that.

And for the next generation, it will be there. But it is not preordained that the generation after that has to be here. And so that is a risk.

It’s a creative destruction, Schumpeter. It is economics that continues.

Siddhartha Ahluwalia 1:15:15
And you have said that AlexNet, not ChatGPT was a true inflection point for modern AI.

Ashmeet Sidana 1:15:21
Why is that? Absolutely. I mean, if you look at the technology, ChatGPT is simply the moment when people became aware of AI.

And so commercially, it was very important. And from a consumer perspective, it was very important. But the technical inflection point was AlexNet, because AlexNet is what demonstrated that by scaling a neural net, you get disproportionate outcome.

I mean, Alex Net, the magic of AlexNet was that they just threw a lot more compute at the problem. Yes, they had a lot of sophisticated techniques in it. They had been researching it for years.

But the basic idea of a neural net is very, very old. If you want some background on it, there’s a wonderful book called Why Machines Learn, The Math Behind AI. It’s a wonderful book.

Anil has done a great job of writing that book. Because not only does he explain the math behind AI, but he also gives the intuition behind the math. And so if you just read the first two or three pages of each chapter, you will see the history of why neural nets work and how they evolve, and why they are so powerful.

And AlexNet was the one which demonstrated that scale solves a lot of problems in neural nets.

Siddhartha Ahluwalia 1:16:35
You have said that, you know, the US IPO markets have become very hard for the founders and something is broken. What do you think is broken today in the US IPO markets?

Ashmeet Sidana 1:16:44
Yes, we have the US government, mostly, I think, unintentionally, but to some extent, intentionally, has made it extremely unattractive to run a public company.

Siddhartha Ahluwalia 1:16:55
Why is that?

Ashmeet Sidana 1:16:56
So today, to run a public company in the US, there is enormous regulation, there is risk of lawsuits, the buyers are not incented to be long term holders of your stock.

And the market gets dominated by short term buyers, hedge funds, etc, who will trade on littlest news about a company. And so if you’re the CEO of a company like that, that’s not an attractive shareholder. You want a shareholder who understands your business.

Today, most equity trading is done by algorithms slash human beings who don’t understand the business that they are trading. They’re trading based on some information and numbers that have no connection with the real long term business that is being built. And so that’s very unattractive to CEOs.

And so the only CEOs who are able to do it are who have scale, who are large enough that they can afford the lawsuits, and they can afford the regulatory overhead and the taxation, direct and indirect that comes from that. So that’s why the IPO market has become unattractive. Typically, companies went public.

When I landed in America, the threshold was 10 million in revenues. And then 50 million in revenues became sort of the threshold to take companies public. Today, even 100 million in revenues is not enough to take a company public.

And so that’s just unfortunate. I think it is a loss for the entire US citizenship, the entire US economy, that we have privatized all of these gains. And the average American cannot benefit from that.

The big benefit of an IPO is that anyone can go up and buy that share, can analyze the stock and can participate in the gains of that. Companies like Microsoft, Amazon, they went public at hundreds of millions of dollars of market cap. People forget that.

Not billion, not even 1 billion, less than 1 billion market cap, they became public companies. And then all of the gains from that point on to trillion dollars today, the gain from less than a billion to a trillion, that’s a 1000x gain was the benefit of whoever wanted to buy that stock. Today, that’s very unfortunate that we are talking about SpaceX going public at a trillion dollar market cap.

That 0 to 1 trillion has now been privatized. That’s very sad.

Siddhartha Ahluwalia 1:19:10
Similarly, NVIDIA. People made so much money in NVIDIA.

Ashmeet Sidana 1:19:14
Yeah, at a very low valuation because it participated in that original ecosystem.

Siddhartha Ahluwalia 1:19:19
Is there a way to bring that back that ecosystem? Because then it creates so much inefficiencies, like a company at 100 million is even not able to deliver value to its stakeholders.

Ashmeet Sidana 1:19:30
It is absolutely possible to bring it back. The reason that this has happened is because mistakenly, the bureaucrats and Washington DC and the elites believe that they are protecting the widows and orphans and the uneducated people who are not well informed from making a mistake in buying that stock. What they have done instead is they have prevented people from buying stocks, which could be very valuable.

Your 401k, your pension plan, your retirement account, they should all have benefited. Most of them can only participate in public stocks. And so right now, there’s a movement to allow people to invest in private companies.

Instead of that, we should be doing the reverse. We should be allowing companies to go public. People don’t realize but the number of public companies in America today is half of what it was 20 years ago.

We should be four times the number of what we were 20 years ago. And I think a good government could make that change very quickly.

Siddhartha Ahluwalia 1:20:30
I think India has reversed. In India, it was very hard to take a company public. Now you can take a company at 10 million public in India.

Ashmeet Sidana 1:20:36
So that’s also dangerous, right? Because then you end up with fraud and you end up with people actually losing their savings and making mistakes. And so there’s a balance here.

This is clearly a dynamic equilibrium. I think in America, I don’t know the results in India, but in America, we have clearly swung way too far on the side of not being able to take a company.

Siddhartha Ahluwalia 1:20:54
And has it affected the returns of seed stage investors of not being able to take companies public? Because when you landed in venture capital 20 years ago, taking company at 100 million was possible to public market.

Ashmeet Sidana 1:21:07
So it has affected it in the sense that the exit windows have gotten lengthened. Fortunately, because the market cap and the total value creation went up while this was going on, total returns are still very attractive, but the window has become much longer. And that brings an inefficiency to the market, but we’re able to survive it so far.

Siddhartha Ahluwalia 1:21:28
And do you see any trends that are hinting towards, today companies like OpenAI, Anthropic should have been public.

Ashmeet Sidana 1:21:35
Yes. Why is Anthropic not public? Why is SpaceX not public?

Why did Tesla wait so long to go public? All of these are dysfunctions of our regulatory and legal environment. They are not technical dysfunctions, they are not financial dysfunctions, they are legal, political, regulatory dysfunctions.

Siddhartha Ahluwalia 1:21:52
And I think that is causing also some of the ripple effects, which I think folks don’t discuss. Like though there is a narrative against SaaS, like Anthropic launches some version of Claude and, you know, it sends the SaaS stocks down by 50%. But I believe if Anthropic were a public company, and people had a view into the finances and the gross margins of Anthropic, this would not have happened.

Ashmeet Sidana 1:22:16
Well, that’s a particular instance. And we can argue about the pros and cons, whether that’s a good thing or a negative thing. I think it’s not the government’s job.

All I’m saying is, it’s not the government’s job to decide. The government should free the shackles and allow us to have public companies. And individuals should be able to choose.

It’s just that simple. I’m just saying, I’m arguing for freedom.

Siddhartha Ahluwalia 1:22:36
Thank you, Ashmeet. It has been an amazing conversation with you. The second time has been more beautiful.

So thank you again for making it happen. And I really enjoyed it.

Ashmeet Sidana 1:22:44
Thank you, Sid.
You are a wonderful interlocutor. I enjoyed it.