Sep 16, 2024 · 49m · news
Shardul Shah: How Index Makes Decisions & Why Benchmarks & Averages in VC are BS | E1202 · 20VC with Harry Stebbings
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In this episode of 20VC, Shardul Shah of Index Ventures challenges conventional investing wisdom, explaining why TAM is a trap, how the power law dictates returns, and how to master board governance and conviction-building.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Harry holds 25.9% of the talking time here. How this is scored →
Harry as informed peer 4.8 Guest teaching 4.3 Guest disagreement 3.2 Harry pushing back 4.0
speaking balance: gold is Harry, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 21:21 Shardul dismisses VC market averages
Shardul forcefully shuts down Harry's question regarding Greylock's market outlook on Series B returns, arguing that mean reversion and industry averages have no place in venture capital.
Hardest push from Harry ▶ 21:55 Harry presses Shardul on entry valuation inflationHarry refuses to let Shardul brush aside broader market trends, citing data on entry valuation spikes of 30 to 60 percent paired with public multiple compression.
Biggest teaching moment ▶ 12:53 Shardul reframes searching for good dealsWhen Harry asks if Shardul has ever landed a good deal on a great investment, Shardul rejects the premise entirely, explaining that seeking comfort or value deals fundamentally misinterprets power-law investing.
Harry holds his own ▶ 3:13 Harry uses Figma example to counter ShardulHarry counters Shardul's idealist view on corporate promotions by bringing up Figma's early multi-year ambiguity to prove why junior VCs must perform grunt work to gain leverage.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Harry as informed peer | Guest teaching | Guest disagreement | Harry pushing back | Why |
|---|---|---|---|---|---|---|
| Venture Capital Lessons and the Fallacy of TAM | 5 | 5 | 5 | 6 | Harry challenges Shardul's idealistic views on authenticity in VC firms by citing internal political realities and the 8 to 10 year feedback loop required for venture outcomes. Shardul strongly rejects playing firm politics, emphasizing that returning the fund is all that matters. | |
| The Influence of Danny Rimer and High-Impact Mentorship | 4 | 3 | 2 | 3 | Harry probes Shardul on how he filters meetings and utilizes team leverage after discussing Danny Rimer's influence on time management. Shardul explains Index's two-person meeting rule and high threshold for taking intro calls. | |
| Specialization and 'Concentrations' in Domain Investing | 6 | 5 | 3 | 4 | Harry asks about mental plasticity across stages and shares insights from interviewing 500 founders about early talent detection. Shardul clarifies his liberal arts perspective on concentrations versus majors and highlights team over market. | |
| Price Elasticity and the Pursuit of High-Conviction Outliers | 5 | 5 | 4 | 5 | Harry challenges Shardul's price elasticity rule in light of current valuation write-downs. Shardul dismisses the idea of seeking comfortable prices, arguing that venture is strictly about pursuing outlier returns. | |
| TAM is a Trap: Reflecting on the CrowdStrike Omission | 4 | 4 | 2 | 4 | Shardul labels TAM a trap and recounts Index's mistake in missing CrowdStrike by overthinking market commoditization. Harry presses on what specific lessons were drawn from that error. | |
| Capital Intensity, Failure Modes, and Fundraising Mythbusting | 5 | 4 | 3 | 4 | Harry asks whether top founders are naturally the best fundraisers and cites a live, confidential deal undergoing heavy dilution. Shardul refutes the fundraising myth using Datadog's Series A as evidence. | |
| The Conviction Building Process and Follow-On Rigor | 5 | 4 | 3 | 4 | Harry cites feedback from 12 of Shardul's industry peers, humorously noting three called him difficult to work with. Shardul outlines his rigorous, bottom-up process for rebuilding conviction during follow-on rounds. | |
| VC Averages and Benchmarks are BS | 6 | 6 | 6 | 7 | Harry quotes a Greylock partner regarding market multiple compression to argue Series B/C is a poor vintage. Shardul aggressively rejects benchmark averages, prompting Harry to press back on entry price inflation. | |
| Seeking Truth: Vigorous Debate and walking meetings | 4 | 4 | 2 | 3 | Harry asks how to foster vigorous debate without damaging interpersonal trust or team morale. Shardul shares a Secret Service anecdote about walking meetings to illustrate heading in the same direction during disagreements. | |
| The Logistics and Trade-offs of Virtual Decision-Making | 3 | 3 | 1 | 2 | Harry asks about the trade-offs of virtual decision-making across global offices. Shardul notes advantages like reading body language on Zoom alongside logistical time-zone friction. | |
| Mitigating Signaling Risk in Multi-Stage Seed Rounds | 4 | 5 | 4 | 4 | Harry asks if signaling risk poses a genuine threat to founders taking multi-stage seed money. Shardul dismisses signaling risk as seed fund rhetoric and details Index's three-sleeve allocation strategy. | |
| Structuring the Angel and Operator Sleeve Effectively | 4 | 3 | 2 | 2 | Harry seeks actionable advice on constructing operator and angel sleeves. Shardul recommends capping participant counts and avoiding capital from active customers to prevent conflicts of interest. | |
| Do the Best Founders Really Need VCs? | 6 | 5 | 5 | 5 | Harry confronts Shardul with quotes from Founders Fund partners asserting that elite founders do not need VCs. Shardul acknowledges bootstrapped outliers like MailChimp while defending the governance value of exceptional boards. | |
| How VCs Can Damage Boards and Companies | 5 | 4 | 3 | 4 | Harry quotes Vinod Khosla's claim that 90 percent of VCs add negative value and reflects on his own selling regrets. Shardul discusses liquidity misalignments and holding winners. | |
| The Future of Venture Capital: Specialized Boutiques vs. Multi-Stage Giants | 6 | 5 | 3 | 4 | Harry outlines a macro thesis on VC bifurcation between boutique platforms and mega-funds. Shardul reframes the analogy using the watch industry and highlights expanding into new categories like healthcare. | |
| Quick-Fire Round | 4 | 4 | 3 | 3 | Harry runs through rapid-fire questions covering public speaking, NY office lessons, and common VC mistakes. Shardul criticizes vague descriptions like calling someone an A-plus founder without evidence. |
Statements from this episode (38)
Shah: Total addressable market calculations are a trap for venture investors
“TAM is a trap. Like, go back and look at the S-ones of some of the biggest public companies today. Their market caps are bigger than what they thought the TAM would be.”
Stebbings: Investors fail by copying others instead of leaning into unique strengths
“After 2700 shows, I've learned that one of the biggest mistakes people make is they try and copy someone's style that's not authentically theirs, and think that's the right one. And actually, it's about finding where you are uniquely great in the three pillars…”
Shah: Assimilating to firm norms sets VC investors up for failure
“If your goal is to be the best version of yourself and your firm's goal is to be the best firm on the planet, there's no room for assimilation and confirmation, right? Conforming to other norms. So I think it's absolutely wrong. I think if you try to assimilat…”
Shah: Returning the fund is the only career metric that matters
“The game on the field, if you're a venture investor, is to invest in a fund returner. If you return the fund, don't worry about it.”
Shah: Default first meeting length is 30 minutes
“When I started my career every meeting default was an hour. Danny reminded me that I probably know the answer in 15 minutes, and so now the default first meeting I have is 30 minutes.”
Shah: Index Ventures requires two partners for every founder meeting
“Every meeting ideally would have two people in it. So that's a super high bar for taking Any meeting, like I'm asking to prioritize someone else's time in addition to mine, which means the threshold for a meeting is super high.”
Shah: Team quality is far more important than market in VC
“Like, there's this canonical question, I think, in our industry. Is it the market or is it the team, right? And I think many great firms would argue that it's market. In my view, it's very clearly the team.”
Stebbings: The best founders always start early in their careers
“One of the biggest determinants I found of success from interviewing. 500 founders is actually that the best always start early.”
Shah: There are no predictable human patterns for successful founders
“When it comes to patterns of selection and patterns within people, The only pattern is there is no pattern.”
Shah: Index Ventures' three rules to avoid missing generational founders
“The sins of omission for us distilled into three lessons. One don't be cute on price. Two don't overthink it. Three don't pass on generational founders.”
Shah: VCs fail by picking wrong investments, not overpaying
“But when I think about conviction in people at the earliest stages I think you can be really elastic on price. At late stage, if you have conviction, price is just a representation of like future expected, expected free cashflow, right? So you're probably not …”
Shah: All Index investments in Datadog and Wiz were high priced
“Every investment in Datadog I was at a high price every, it's not an outcome yet, of course, but every investment in Wiz has been at a very high price. I feel great about each of those decisions.”
Shah: Misjudging capital intensity caused his biggest investment failures
“And so I overestimated like uncapped market upside, underestimated the capital intensity of a company. Voted in favor with high conviction on the investment, and yeah, I think one of my partners is doing a great job of finding a path to, you know, returning ca…”
Shah: Datadog co-founder Olivier Pomel was initially not a great fundraiser
“When we invested in Olivier and Alexi Series A at Datadog, so he was not a great fundraiser.”
Shah: Follow-on rounds require rebuilding the investment case from scratch
“So I'm not thinking about averaging down my cost basis. I'm not thinking about incrementally increasing my ownership. I'm building a net new investment case on, can I create, you know, a fund returner? And with that, like I do all the work again. So if I think…”
Shah: Index Growth Fund returns followed power law over mid-tier multiples
“When we started our first growth fund our hypothesis was probably three to five X over three to five years, right? I'd just come out of a private equity firm as had some of my colleagues. And so we had like a, we had that mentality. And when we looked at the p…”
Shah: Index Ventures targets 5x upside on late-stage growth investments
“It's super dangerous. I think to say there's a safe two X, there's no such thing. And you alluded to this with the memory of all of the activity from 2021. There's no such thing as a safe two X. And so what we're looking for is definitely five X plus upside, e…”
Shah: Index Ventures makes Series B investments only by exception
“If we're making a series B investment, it's by exception, like elastic. Series B investment. Terrific return. Confluent. Series B investment. Terrific return.”
Shah: Functional software leaders command over 20% market share
“If you think about most software, like functional software areas, the market leader commands north of 20%, 25% market share.”
Shah: Wiz grew faster in four years than any company ever
“Bottoms up, the, you know, the business in, in, in four years, the company has grown faster than any company of all time with unbelievable productivity in different segments, in different geographies.”
Shah: Walking meetings are highly effective for team conflict resolution
“When you have a disagreement or challenging conversation, walking like movement plus heading heading in the same direction can actually be really stimulating. So it's actually a really good tool.”
Shah: Power law returns trigger partner egos that fracture VC trust
“It's especially hard in a venture firm in light of the power law, right? Again, very few companies are going to Create returns, which means there's likely to be concentration among different investors. Which suggests that you can have a skew of ego or insecuri…”
Shah: Sins of omission matter more in VC than sins of commission
“I really think that the sins of omission Are much more significant than the sins of commission.”
Shah: Pattern recognition and VC benchmarking are exercises in psychological safety
“There's so much long tail risk in a company that I feel like the exercise around pattern recognition benchmarking as just like two examples, risk mitigation as a third are exercises in psychological safety.”
Shah: Seed investors use signaling risk as a tactical objection
“In the seed market most seed investors are using signaling as part of an objection to work with a multi-stage fund.”
Shah: Index offers to underwrite seed rounds while splitting allocation
“Generally when I meet a founder at a seed stage, I'll tell him or her, I'll underwrite the entire round. So there's no financing risk, but We should split it into three sleeves. One sleeve is for index, one sleeve is for a seed fund, and the third sleeve is fo…”
Shah: Founders should avoid party seed rounds due to coordination overhead
“Like I definitely don't encourage founders to have like a party round. It ends up being, An exercise of herding cats.”
Shah: Founders should avoid taking angel investment from customers
“Don't take money from customers, right? It's fraught with a conflict of interest.”
Stebbings: Founders should not enforce check size minimums for angels
“Don't have minimums because some people can be amazingly helpful with five K and so don't rule them out because of that.”
Shah: Doug Leone is a great board member due to his intuition
“Doug Leone. Great board member in a very, very different way. ... Doug is incredibly intuitive. He can inspire confidence in, in a decision which is really, really different.”
Shah: VCs should buy and hold power law winners
“The goal is to buy and hold and let other people help inform like when to sell. So, and that's true for kind of the winners that make up the power law contributors, which is the business that we're in to find fund returners for like.”
Shah: VCs should sell immediately if a founder is unethical or incompetent
“If you come across an entrepreneur who you believe is on the spectrum of unethical to incompetent, you should sell immediately.”
Shah: Index distributed stock position one week after $1B acquisition
“We're a large investor in a company. We invested early stage company got acquired for about a billion dollars by a public company. And within a week of receiving our proceeds I asked our team to distribute the whole position.”
Shah: Power law lets VC firms survive market cycles longer
“Given it's such a, and the industry is so driven by the power law, like, I think people can withstand cycles longer than we probably give them credit for.”
Shah: 25% of New York Series A deals are in healthcare
“25% of series A's in New York are related to healthcare. That's a really different mix than San Francisco.”