Transcript: Shruti Gandhi: Founder and General Partner of Array.VC on early stage investing

Host: This episode of Startup Project is brought to you by Bear.Tax. Bear.Tax compiles all your crypto transactions and makes it easy for you to file your taxes. Check out Bear.Tax, that is B-E-A-R.T-A-X, Bear.Tax. Hey Shruthi, welcome to the show.

Guest: Thanks so much for having me, Nataraj.

Host: So, I wanted to talk to you about, you know, Are We VC and what you're doing with investing in general, but one of the things that stood out to me is your transition into VC, and I'm very interested in career transition points.

And you're an engineer, and then founder, and then you moved into corporate VC, I think with Samsung.

Can you, you know, take me through the thought process what you were thinking at that point, uh, from, you know, being an engineer founder to moving to corporate VC, uh, and just just in term point of view of, you know, your personal career.

Guest: So, I think the two big inflection points of being a founder and then a venture capitalist were pretty linear path for me. In my life I'd already always wanted to be a founder. I grew up in an entrepreneurial family, uh, my dad's a founder.

So I just knew I kind of wanted to do that. But, um, as I embarked on that journey after being an engineer, I realized I didn't know a whole lot about venture back companies.

Starting a company in the traditional sense versus starting a venture back company are two separate things. So that's when I decided I wanted to get into venture and learn and reverse engineer venture back journeys.

So I got into venture and that was the whole inflection point of learning about venture. So once the goal was if I did that and I reverse engineer venture, I could go start another company in a few years.

I loved venture so much and I realized that in venture, I could help so many more founders who are in my position and like me, like technical founders who think they can build companies, but, you know, need a little nudge to open doors, intros, uh, direction towards growth, go to market, which I'd kind of learned along the way, that I decided to kind of dedicate my time in life to helping those kinds of founders make big businesses.

So that's how I stuck, then stuck in venture.

Host: Did you have an intuition that you'd be good at, uh, you know, being a VC? Were there like any data points or it it was just pure intuition?

Guest: You know, it's so funny. Venture job is so ambiguous from the outside. Most people think VCs help founders, which is like a very small part of the job. It is big part of the impact, but very small part of the day to day.

So, again, I didn't know what I would be good at or not. What I did want to know is the inside inside scope of what venture would be. So I went in with open mind, and I don't think anyone knows.

It's a it's a game where you can you don't get feedback for years. So again, you know, I think people who think they are good at it, probably are still wrong about it, you know, because there's no feedback loop for a long time.

Host: So you're working corporate VC, you know, in Samsung Next, and eventually you've, you know, started your own fund.

How how is it different from, you know, working in a corporate structure, you know, like Samsung Next versus, you know, uh, doing your own fund? Was there, did you feel like there's a difference in terms of decision making that happens?

And also like what a corporate VC goal is, like for example, the companies which are primarily investing the goal of, you know, acquiring or staying at the cutting edge of their particular industry, right?

Uh, was that limiting or, uh, was working at Samsung Next, uh, gave you more shops? At the same time, was it in any ways limiting?

Guest: Yeah, I think corporate VC is just different. Uh, you're investing with the mindset of helping the corporation that that you work for, and that it can be limiting depending on what the corporation's businesses.

And hopefully you're good at that, right? Like Samsung fortunately was in a lot of businesses because they're like a holding company and they have a health practice and they have a data practice and they're phones and they're distribution channel.

So it was a pretty good insight into venture for me. But, you know, if you end up going to like a firm that only does one or two things, then you don't get exposed to a whole lot.

And your decision making is limited to that lens of what the company does sometimes, um, because you're always trying to find synergy between the business and the co and the companies you're investing in.

But the downside of venture, oftentimes in a corporate venture is decision making generally on its own takes a long time, depending on the firm.

Sometimes there's like many hierarchies and layers, um, to decision making, and arguably good deals happen pretty fast these days.

So I think it's sometimes can be a contradiction as to how if you end up getting the best deals or not with that process.

So I don't know, it depends on the structure of the the corporate venture, but I would say that is like the biggest issue in corporate venture where you have a lot of process to get something done, you know, and you may or may not have access.

The best deals may not wait around for you.

Host: Yeah, and looking at how fast the late stage deals are happening, it's almost like a paradox, like how are these late stage companies doing so many deals so fast.

Guest: Yeah, exactly.

Host: So at some point you started your first fund, uh, Are We VC. So what was that fundraising process like?

Because uh, if you think about a founder's journey of capital raise, you're almost like 10x that version because your product is your, you know, thesis, right?

So what did you learn from the first time capital raise, you know, as a first time fund manager and as a solo fund manager? What was that process for you?

Guest: I would say you're right. Starting a company versus starting a fund is 10x harder, because you're asking for blind pool of capital from people. Starting a company, you get passionate about the idea or not.

If I pitch a company idea to you, you're going to like it or not. It's pretty binary in many ways.

Starting a fund, I'm asking you to back my vision and the promise I'm making that in the next few years, I'm going to do what I say, which can be, you know, difficult to convince most people. So for me, it was easy journey.

I actually did not end up starting a fund right away.

I left my previous firm to go start a company, and along that side some of the founders I'd worked with said, "We like working with you, you know, would you want to go invest in things and we can co-invest with you." And long way, in a long winded way, that ended up becoming a fund.

So my first fund was a lot of my founders who I'd worked with in the past, and so that was a kind of, uh, lucky break in many ways, and we ended up having a small first fund of $6.7 million at that point, about $7 million.

Host: And what are the some of the things that, you know, first time fund managers miss, uh, in terms of, uh, it it's easy to point out what first time founders miss, because you're always continuously looking at startups and you can easily, if you spend a couple of months, you can figure out what are the first time founders missing in terms of like understanding the psychology of investors and the speed, stage, and who should you reach out, etc.

But if you're trying to raise first time fund, it's much more harder than that, because there's not much knowledge about what and who you should raise from.

And so what are the a couple of things that first time fund managers usually take time to understand?

Guest: I think it changes. It depends. I think most people, again, feel like they I think your algorithm needs to be fine tuned in many ways. That's like the biggest thing. And I think as a first time fund manager, everything looks really good.

All the deals start looking really attractive, because you're suddenly in a position of power to make a decision of if the money should go to someone or not.

But the best deals are sometimes where the money doesn't, like the founders don't need your money. I can't, right?

Like so I think it's uh, one of those paradoxes where like you think you want to spend so much time adding value, and uh, sometimes the deals that you want to be part of are the not that.

Are the ones where founders come to you with very specific asks and you're not spending that much time with them.

So I think in the early days you feel like 80% of your time should go into that kind of decision making, but honestly, you need to develop an algorithm that can make decisions really fast with with a particular deal.

And so that's the pattern matching people talk about in the industry that you have to develop, um, very fast.

Host: And that pattern matching is part of, you know, what thesis are you going about, right? Like because it's often Guest: It could be thesis, it could be, you know, like the types of founders you're looking for. It could be, you know, many other like whatever it's not just the areas you're going after, but everything around it that kind of makes it an interesting deal for you.

Host: So, uh, you obviously recently, uh, raised another fund after that and now I think you're on fund three. How did the capital raising process or like your approach to the fund management itself change or your decision making change from, you know, from fund one, I think it's 2015 or '16, to right now?

Guest: That's a good question. I actually have been lucky to get and keep most of my fund one LPs even through fund three.

So the the process has been been a good different process for me where most of my LPs have come back and I and continue to invest more. With the fund three, we added more institutional LPs after that as well. So I think for me that was different.

I pitched to the institutional LPs before, but this is the first time I looked attractive to them, and because of the process, because of the kinds of investments we make, uh, the approach we take to investing and the categories we invest in.

So, you know, that was a different process for me, and uh, yeah, I think it was exciting.

Host: So, uh, talk to me a little bit about, you know, what your focus is right now in terms of Actually, let me take a step back. Right now, I think your fund size is about $50 million if I'm not wrong.

Guest: Yes, 56, yeah.

Host: So you're always writing, uh, first checks into the companies, right?

What according to you is the right first check or like a pre-seed stage check that a company should take to get to that next level, because right now what's happening is that like you see insane amounts of pre-seed rounds and seed rounds at insane valuations, right?

And you also see like solo funds launching about a billion dollar first time funds. Uh, you see that phenomenon as well. So when you think about in the category that you are investing, which is B2B enterprise companies, how do you think about that?

What is the minimum amount that a company should raise?

Or like, I'm sure you would you would have thought of, okay, if this is my target amount and x amount is going to, you know, individual company in the first check, and what you think is the right amount that a company should raise at this point of time?

Guest: Honestly, it's a good question, but I would say it's variable. It's all about your milestones, right? In the old school world, you would talk about raising money for the next 16 to 24 months, or 18 to 24 months, right?

That world has changed. I mean, honestly, the world itself changes in every few months, every few days. So planning for 18 to 24 months seems pretty, I don't know, not that optimal.

So I think with the fundraising process has changed in a way you should raise for mini milestones, um, and you should make sure that you have three to six month plans and you meet those.

So what I talk about at the early stage is, look, you're going to raise again even if you don't want to.

If you're doing well, people will come after you, but regardless, your company's going to look very different in three to six months than what you look right now, because in this stage, everyone's just raising capital right when they think about starting a company, like not after doing some work, right?

So I would say in this day and age, the pre-seed stage, which is when I'm just kind of thinking of starting a company and I've done some work, to three to six months later where I may have a customer, build out some product, it's totally different company, right?

So I usually say like raise as little as you think you need to get to those points, because your company will be valued differently based on the milestones you reach. So that's how that's one way to look at it.

Host: So, one of the things I've observed is most of the professional investors over time become more of a pool investors. That means they are looking for a specific type of company on a specific idea, uh, versus what is in the market.

Like you can always pick out based on the pitches you're getting, you can pick, uh, you know, what's looking better than you know, the rest of the 10 pitches.

That's one way to look at that's most of the first time investors do, because they don't have inherently, you know, advantage of, you know, brand or the deal flow built in.

But I think most of the seasoned investors who have been in the game for a while are often they have their own set of things that they're looking for. They know where the market is, where the depth of the market is more.

So I think you've wrote uh, in your newsletter, and anyone listening should check it out, shruthigandhi.substack.com. I think about 11 ideas that you're looking for, right?

Like talk to me a little bit about those areas that you're still looking out and would love to find out.

Guest: So first of all, the Substack is Shruthigandhi.substack.com. Yeah. But, um, thanks for the plug. But honestly, that was like written a year like over a year ago, and we've invested in quite of those categories already.

And I think it would be silly for me to say that those categories are still popular. I think just like the market you have to evolve as well.

So many of those are still relevant, but uh, I would say there's more and it's not just 11 things, we're looking for a lot more around that. But I would say that the what I look for is both the opportunistic and thesis driven.

I think sometimes they match up, because sometimes what things coming your way are also things you're looking for. That's when you can make very fast decisions. Being a focused fund helps you with that, right?

Like so I'm not looking at every category possible, and for us decision making happens within one or two meetings.

So I think for us having that clear prepared mind helps us get to those kinds of decisions faster, which is why I I go through the thought process of putting out there like what I'm looking for.

Host: So you are, you know, in the category of solo fund managers, which is obviously increasingly, you know, much more a phenomenon these days. Uh, but one of the things, there are obviously a lot of advantages.

You can move quickly, you can, you know, you can make quick decisions and you have clear ideas of what you're investing and what you're not. But there's also problem of like scaling yourself.

Like because if you have a big firm, uh, you have a brand attached to it. If you're working for VC firm, your deal flow is sort of like established pipeline and you get to sort of compound on that.

Obviously now you can compound because you have fund one, fund two, fund three, but at the same time now you have a bunch of portfolio companies that you have to interact with and sort of at least in the stage where you're taking them to their next round level support.

And at the same time you're trying to pick next companies. So how do you manage sort of focusing your time on? Like which areas are you primarily focused at any given point of time?

Guest: Honestly, I think you can never, I joke like at a given point, I'm thinking about six things and they're all different things. It's like deal making, marketing, LP management, so so many other things.

So, I wouldn't say that there is a prioritization of one thing at a given time. That's so as a solo GP, that's the the blessing and the curse. You get to do everything, but then you have to do everything. So, I think a solo GP is not for everyone.

It, you know, if you want to have a shared load and burden with someone else, it's fun to be working with other people.

But then again, that adds the complication of decision making, delays, not getting along with your partner, and all the other problems. So, yeah, there's pros and cons to everything.

Host: Do you see Are We VC evolving into that sort of a firm at later point? Or do you see always?

Guest: I mean, we are opportunistic about what we want to do. And, you know, it's you're always open to smart people joining and hiring right now.

So, uh, looking for someone with an enterprise background, hustler, people who, you know, understand how long it takes to build networks and and be in the venture journey and being here for the long term.

But, uh, you know, so there's roles, there's roles for people like that in the firm, but how we evolve depends on who comes on board.

Host: One of the block posts you wrote about is, uh, about, you know, megatrons or, you know, taking a billion dollar company into $10 billion company and the funds that have been investing in that.

One of the things we are also seeing is that actually there are two things that you can see.

One is the solo GPs going upscale, you know, like someone like Elad Gil leading 100 million plus round, uh, and you also see that, you know, these, uh, funds which used to primarily focus on, you know, 10 billion, you know, later stage, uh, startups are moving early.

Like what do you see happening in terms of like solo GPs going upscale versus, you know, big firms going, you know, downstream.

Guest: Honestly, it doesn't it's a matter of access, you know, and and access to founders and access to capital. You're a marketplace as a is a VC.

So I don't know if it's a trend or what, but it's just that there was a so much capital that LPs were looking for smart successful people to deploy it, and sometimes that happened to be a solo GP.

So I think it just uh, in the last few years, there's been change in trend. When I started in venture, solo GP was frowned upon, and then in last few years, that became a whole trend.

Host: Yeah. Guest: And so it just became that there was a lot of available smart folks like Elad who could raise that capital and could deploy it, and it didn't matter what stage they invested in. So they act like a firm, and if they can do it, then it's, you know, I don't think there's a structure around it. It's a beautiful thing about being a solo GP.

Host: And I think venture is also primarily about building long-term networks, right? I think that you you alluded a little bit there, uh, because it's primarily almost like a sales business.

And, you know, if you can create a good network and that network can compound over time, you get access to good deals. At least that has been my perspective.

But talking about, you know, late stage companies, one of the things we've seen is also some corrections, and I've personally seen like insane amount of early stage valuations in terms of pre-seed and seed. So what do you think is happening?

Uh, is this a supply constraint? Is this like a lot of money chasing few deals? Or is this like we have suddenly seen more capital that has come into the investing ecosystem because of earlier exits?

Uh, what is happening in terms of this increase in valuations, and even though the public market is correcting, the private, you know, markets are still running through the roof.

Guest: I think private markets are also correcting, but at the same time, there is so much money that was raised in the last few years that people still have to deploy it.

So, when you think about it that way, there's still not that many high quality deals that make it to B, C, D plus stages. So when a good deal gets to that stage, you're chasing it to win it, and then competition creates high valuations.

So I think that's just like a simple like microeconomic supply demand rules.

Host: From your vantage point of view, is is late stage more competitive right now than it used to be?

Guest: Well, I think used to is I don't know what you're asking me is it 2021 versus like five years ago. It's definitely more competitive compared to five years ago, but not any different than, you know, like six months ago.

Host: Yeah, because the reason I ask is one sometimes I see insane valuations coming from very reputed, you know, um, investors who I thought in my view had more leverage than let's say a solo GP. And looking at the fact that the valuation is so high, so even a branded VC doesn't have the leverage of negotiating the founder down, then who has the leverage?

Guest: I think that is a different question. Venture is changing from a firm brand to a solo brand. Venture is a solo sport, and you win maybe because of the the fund you're at.

I mean, by promising all these amazing resources your fund may have to offer. But end of the day, as I said, smart founders don't need all that. They want some good amazing board member, and it's a individual decision versus a firm decision sometimes.

So, I think that is and by the way, firms have to kind of it's a consensus based decision sometimes making sometimes where you have to convince people to go a high in a valuation offer and things like that, and the solo GP may just be able to make that decision fast.

So that's again about speed. So there's a lot of factors here, and markets certainly have changed with that outlook of where founders may not just want the best brands, they want the best solo brand investor at this point.

So that's and people have moved around so much that it doesn't even matter what firm they're at anymore.

Host: Yeah. Uh, I think also if you're at a firm and you're not even interacting with the whole firm, you're mostly interacting with, you know, a couple of people at the firm, right? Someone is responsible at that firm, and if that person moves, you're basically network is moving to a different form.

Guest: Exactly.

Host: So one other thing I wanted to ask you about is, I've seen you deploy, uh, not just uh, invest into companies of not just from your fund, but also through a combination of SPVs. Uh, right?

And I I do see the strategy of, you know, fund runners also using SPVs as an option to provide, you know, other investors to get into a, you know, investment or company.

And that has been a little bit selectively even among, you know, our funds, like that Colless does this and some other early stage and late stage funds do this.

What has been your strategy or perspective about, you know, doing that and doing that more often versus less often?

Guest: Honestly, for me it was a function of just growing up. For the strategy I wanted to have, I didn't have enough capital. So I was using that as a way to deploy the strategy I wanted to have.

Now that I have a larger fund, it's a separate strategy. I don't do that many SPVs at this stage. So I think it depends.

But it is a great opportunity for people to get started and just dip their uh, feet in the business to understand what it means and if you really want to do it long term.

Host: Yep. We are almost at the end of the conversation. I want to end by asking this, uh, one question, uh, where I think in one of your blog posts you wrote about earning your luck. I phrase it, uh, slightly differently as linearly pursuing non-linearity, but that really resonated with me and how how do you earn your own luck?

Guest: Such a good question. I feel like that phrase I keep that coming to me all the time that I kind of operate on well is the harder you work, the luckier you get, you know? So earning your luck is exactly in that fashion for me.

I think you have to go show up. I think you have to pay your dues. I think you have to be humble. I think you have to learn. I you think you have to learn the ropes. I think you have to put in the hard work.

And oftentimes, the interesting thing I'm seeing is even, you know, I've been given given so many opportunities in my career that I always want to give back.

But what I found is anytime I try to work with someone who I want to give and train and give back to, it's almost like I'm not seeing that kind of hustle, which kind of makes me wonder like I don't want to end on a negative note or anything, but like the the true hardworking people who can create magic, can create hustle, stay positive.

I mean, all that is are actually a rare breed. A lot of people over promise under deliver. And so, yeah, I would say that earn the earning your luck is all about all the fundamentals of that I mentioned. And yeah, it's not easy.

It's always I always say like it's always easy to go get a drink with your friend and chill versus go hustle, right? And and and work at odd hours.

And that's what truly differentiates you from winning versus in the long term versus just kind of tip in your toes, unless you're born with that network and and success and such, which I don't know, you have to then put it to good use still.

So I still don't know that many young successful people who just kind of let it come their way. They they work hard for it.

Host: The way I look at it is you have all your outcomes come from your 20% work, but to hit that 20%, you have to work for the 100%, because you don't know which 20% is actually you're going to give that outcome. Um, but thanks for taking time. I know you're extremely busy and um, you made time for us and uh, glad to have you on the show.

Guest: Thank you for having me and uh, yeah, I'm hiring. So please anyone listening here, if anything I said resonated with you, please apply and get in touch with us.

Host: Thank you.

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