Shripati Acharya and Amit Somani, Managing partners at Prime Venture Partners sit together to discuss Shripati's early investment picks, lessons learned from investing in public markets, how founders can prepare themselves to build a successful company and more.

 

Shripati Acharya, throughout his career, be it as a business lead at Cisco or as a co‐founder of Snapfish, the world's largest photo site acquired by HP or at Transarc, which was acquired by IBM, Shripati has combined his passion to build great teams, an extraordinary desire to excel and a keen eye for spotting the tales.

Shripati has also worked alongside Mr Nandan Nilekani on the UIDAI project. Having spent substantial parts of working career in the United States and India addressing worldwide markets, Shripati brings a global management perspective. He enjoys the great outdoors and has hitchhiked through Europe and trekked the windswept mountains of the Himalayas and the Andes.

Listen to the podcast to learn about

0:52: How Shripati started investing in public markets

1:55: Early picks & lessons learned from them

4:15: Investing in Amazon & HDFC Bank

8:15: A company's advantage is not just it’s product. There’s more to it...

9:20: Lessons learned from public market investing that helped in private market investing

10:30: Why public markets took long to realise the potential of SAAS companies?

15:05: Product vs Service. What Scales?

16:30: Lessons startup founders can learn from public market companies

17:45: Why reading transcripts is a must for startup founders

18:30: Amit's experience of MakeMyTrip’s transition from a private company to a public company

21:20: How a company changes its strategy when it transitions from a private company to a public company

23:00: Role of luck in investing

Read the full transcript below

Amit Somani 0:23

Welcome to the Prime Venture Partners podcast. It is a privilege to have my own partner, Shripati Acharya, one of the founders of Prime Ventures with me today.

Shripati Acharya 0:31

Thanks Amit, Pleasure to be here.

Amit Somani 0:32

Shripati and I, of course, invest in private markets for a living, early stage investing. That’s what Prime Ventures does. But Shripati has also been a very avid public market investor, mostly in the US for the last 20, maybe 20 plus years. Shripati can you talk to us a little bit about what got you started on the public markets.

Shripati Acharya 0:51

So the story is that I was in my very first job. And I came across this book, which had just been released around that time by Peter Lynch, called One Up On Wall Street. So, public markets used to be this black box of really confusing things like how on earth can you decide what to invest in, which I never really understood. But on a whim, I picked up this book. And I read it and I couldn’t put it down. And what Peter Lynch was saying, at that time already, he was a legendary fund manager for Fidelity Magellan, with a storied record, which is still talked about. And what Peter talked about really, is that, you as an individual investor, can do better than the Wall Street analysts, hence the name One Up On Wall Street. And the thesis behind it was really what I really took to heart in what he talked about in the book. So the short answer is that, that one book got me into it. And then I ended up reading a bunch of other books there were no podcast in those days, a bunch of other books on investing, and that sparked my initial interest.

Amit Somani 1:54

So, what were some of the early picks that you made as you went along the journey? And maybe what are some of the more memorable ones that have done really well for you, along this journey.

Shripati Acharya 2:02

Actually, the sum of my early picks were total disasters. So, I recall buying some things which was into, I think farm feed for chicken. I bought something which was into nuts and starts trading in Dry Fruits. And this is like no idea. And that’s when one of the things which I ended up reading about in Peter’s book was that, you actually should have real experience with something. Only then do you have some insight about it. If you actually go ahead and read in the newspaper or a magazine, and you say, Okay, I read Barron’s and this is what it says and boy it sounds like a good idea. Let me go and research it, it makes very little sense. Because you have no extra information, no unfair advantage over somebody else. And for obvious reasons, a Wall Street analysts who is very smart has got huge powerful spreadsheets running around can completely outsmart and outexecute you on that. So came to the realization that it really does matter what you do know. And I came to the realization that what I do know is tech. And so it took me a couple of years of doing what I would basically call random investing, to start understanding that, tech is what I do understand and I should start focusing on that. So that’s how the initial investing years were. So in terms of like, what ended up really working, so it’s, it’s one of those things, when you actually make an investment with a certain point of view. And that point of view actually works out. That’s when you get the confidence. Otherwise, it’s just luck. So, you do require luck to be successful. But really what works is when you look at something, have an idea about why it might be successful, and over the years it works out. So that’s how kind of some of my earlier picks which I got excited about ended up.

Amit Somani 3:57

Yeah, i think Michael Mauboussin, has this lovely book about the Role Of Luck in investing, politics, even professional sports is one of my favorite books. But coming back to some of the picks that have worked. I know, for example, you were very early on in Amazon, in perhaps HDFC Bank, maybe talk a little bit about some of the long held picks that have done well for you.

Shripati Acharya 3:57

Yeah, actually, Amazon has a case study in, how not to do investing in the sense, I had it for a very short period of time. I said, wow! it has actually gone up so much, maybe I should sell it. And we will talk about that a little bit in terms of the period of holding and the role of patience in all of these things. But the things which worked out well was actually you mentioned HDFC Bank as one of them. And it was the early days and India was just opening up really the early 2000s. And what got me interested in that, is that finance is like the underpinning of any economy and if the GDP is growing well, then the financial institutions are going to do well. But the question was which one should one invest in? And what I did was I just said, okay, maybe I should look at what are some of these banks. And fortunately HDFC Bank was something which was public, and started looking into it. And I started looking at, what are the interviews and transcripts of HDFC Bank, which are available. So, all public companies, as you know, have their earning transcripts available. So I started reading that up. And what I found is that what Mr. Aditya Puri was saying, was actually one comprehensible. So as a person who’s not a finance expert, you could understand what he was saying. And what he was basically saying is that, this is an extremely exciting market, yet you need to be very disciplined about going about this market. Which can broadly seem to make sense. And when you started looking at their record with respect to how they’re managing their risk, and what kind of loss ratios except, they were getting to, the numbers seem to make sense. So if you believed in India, which I did then and I believe now, it made sense to actually get into a bank. And after that there’s a question of which is the best possible bank, in one subjective opinion, one could actually get it. That was the HDFC. That’s how I ended up getting in there.

Amit Somani 6:18

Sounds great! Now, in terms of going on to the private market side for a second, we’ll come back to the role of luck and other investments you’ve done. When you started Prime Ventures, seven and a half, eight years ago, coming from so much availability of data and price to earnings ratio, cash flows, this, transcripts, etc. You don’t have any of that in early stage investing. You’re literally coming in at the first stage. So, what are some of the things that were really hard for you as you made this transition? And what are some of the things that you were able to, leverage already, because you’ve been investing for a while in the public markets.

Shripati Acharya 6:52

Yeah, this is a two part question. Honestly, it was a lot of trial and error, I would say. The thing which makes it really difficult, because in early stage is that you’re fundamentally investing on people. And to predict the behavior of people of how they are going to be once the company three years, four years, five years from now, is a very difficult task. But, the better you get at that in accessing out folks in what kind of organizations can they build? What is their decision making ability? How are they going to access out opportunities and figure out which ones to do and which ones not to do? It really is a bet on people. And it’s a bet on how people are going to act out in the future, which you have really no idea about. So what I realized is that this is a lot more about that than it is in public markets, first and foremost. And I think that was a learning process because there is no book about it.

Amit Somani 7:46

I have a question on that. So going, has it gone full circle for you yet, where you now learn to evaluate and you spend a lot more time with early stage founders. Have you taken some of those learnings and applied it back to new investments you’re making on the public markets in terms of looking at the CEO looking at how they’re communicating, etc.

Shripati Acharya 8:04

That’s a great observation. It’s absolutely true. So what I’ve realized is, that the company’s competitive advantage is not just the product. It’s not just the price, but it’s all the hidden things. What is the culture? What is the process? What are the incentives? How charismatic is the CEO? How much can they motivate the people, all these things matter so much. So you look at when you talk about Jeff Bezos, you talk about Reed Hastings of Netflix, you look at these folks, and you say, wow, you know, look at what they’re talking about, look what their vision is. And you can see that that’s percolating down through the organization. So it is not the same thing, as just comparing two companies and saying let’s look at the financials and what’s going on, because you know that the best management teams are going to attract the best people to work for them. So this is a much more long term indicator of their success, then one might Initially feel. So absolutely right. I think I much more now look at the culture, the management team and what the management team is saying about those things, how much emphasis are they playing on those things? Because now I realize that’s exactly what matters to our startups too.

Amit Somani 9:15

Wonderful! So I interrupted you, the second part of the question was some of the lessons from the public market side that did help you in private market investing, if there were any, if you can talk about that?

Shripati Acharya 9:25

Yeah. One big one is that you should operate in your area of competence. So I think Buffett talks about it, you should know what your circle of competence is. And so in private markets, there are some things we know and some things we don’t know. And same thing in public market. We talked about like how investing in agri feeds is not the smartest thing for someone like me to do on public markets. Similarly, when we are looking at tech at Prime as you know, we focus on companies which are where tech is like a very key differentiator, very key scaling component. Where the team understands tech deeply and the DNA is about that. And same thing goes on the public markets side. To me diversification is not going into tech and non tech. To me diversification in a public portfolio is really about different tech. And, so that’s one thing which i have, i would say, which i have taken directly from that standpoint. The second thing I would say is, that in tech companies, you cannot focus on bottom line profits early. In private companies it’s the same thing, you’re looking at growth rates, and profits come later. But in the early stage, and fast growing public companies as well, it is the same thing, you cannot actually start focusing on profits early, especially true for example, in SaaS. In SaaS, it’s a recurring revenue stream, which comes later. So you’ll see that, it took some time for public markets to realize that so two, three years ago, the SaaS public companies were actually not that highly valued. And now the market cap of all those companies have actually zoomed up as people have understood the value of a recurring revenue stream and finally its market size. So market size really limits, a small market size limits the total size of the company. And what as we know, Amit, now when we look at companies, we focus a lot about the market size, because it’s not just the market size today, it is the market size later with all the option value that this company has to enter those new possible markets. So it’s not just a simple spreadsheet, exercise and market size. The same thing is true for public markets, which is the companies which have a lot of option value to not only just enter one market, but a lot of other adjacent markets, it might be new and emerging is a lot more exciting company with a lot more potential for a better returns.

Amit Somani 11:41

Very fascinating! I’ve learned many lessons from you on the public market side as well, in some of the investments that you and I have both done. What are some of the kind of guiding principles that you have used, said that these investments have a material outcome, but can you talk a little bit about that in terms of this notion of concentration risk, how many stocks is too many? At what point should you just go by the market like SMP 500 or Wilshire 5000 whatever. How do you build a meaningful position? How do you get comfortable with a very large position something like an HDFC Bank or Amazon or Netflix might outgrow you in terms of the size of the portfolio, so a little bit of the some of those lessons learned would be useful.

Shripati Acharya 12:21

So basically, boils down to the simple formula, the returns is principal times, time times rate of return, which holds true in public markets, holds true in private markets. And that’s why when you look at public markets, the holding period is probably the one thing which I would emphasize more than anything else. So there’s you mentioned Michael Mauboussin, actually he has an essay about it. Which is that when the holding periods are large, you invariably do better than the markets. Actually, the odds are in the favor of the investor. But the odds decline a lot when you sell every year. So the holding period matters a lot. Because it also gives you the ability for the company to bounce back from any kind of setbacks which they might have. And so a good company, if you don’t hold it for a long enough period of time just isn’t the magic of compounding doesn’t occur. So that I think is the single biggest thing because most folks get impatient. So I think public market is not for the impatient at all. And it’s also volatile. So I think all those cases, just buying an index is better. The second thing you talked about is building a position is that again, over a period of time, building a position is much better than trying to build it all of a sudden, I think Fred Wilson had a very interesting blog about it of Union Square Ventures, where he talks about building a position in private markets of why doing pro rata makes sense. Because they start in seed, and then you add some more in later rounds is exactly what we do at Prime as well. And so you have to build a meaningful position times hold it for a long enough period of time, to get a good rate of return. And it applies in public markets and it applies in private markets. And in terms of concentration or the number of stocks in the portfolio that really depends on folks and the size of the portfolio and so forth. But in general, there are only so many things you can keep in your head at a single point of time. So, you know, it can be 15, it can be 25, or whatever it is, that’s actually something which people have very different points of view.

Amit Somani 14:19

Very interesting! So, any other lessons learned, again, going from the reverse, from the private market to the public market things that you have seen on the private market side one, of course, you mentioned is the founders and paying a lot more attention to the founders as you go make this transition.

Shripati Acharya 14:36

So one of the things which we have seen is, which actually relates to the founders is how their ability to build an organization. Because, ultimately you have to go ahead and build an organization. And in private markets, you actually have a lot less evidence of that. So in public market, you have the benefit of evidence. So in private markets are actually predicting what their ability is of the founders and those who have actually had prior experience running organizations cctually is very, very useful because they’re able to think scale. The second thing, of course, is product versus service. You think about what scales. So you’ll see the same thing that the premium in public markets for product companies will always be higher than it will be for services companies, But services companies will typically have a linear rate of growth, product companies will have that non linearity in it. So the operating efficiency etc, comes from the product focus. And you need the same operating efficiency in private markets. Because if you’re not able to do that, then you’re not going to get venture returns. And that’s where a lot of venture capital, at least in the initial stages in the world is overwhelmingly on the tech side, because tech has the ability to scale very fast, and hence provide returns which are meaningful in a risk capital adventure.

Amit Somani 15:50

Yeah, I guess the Fang stocks Facebook, Apple, Amazon, Google and Netflix. It probably accounts for 20% of the market cap of S&P 500 and maybe 10 plus percent of the profits. So, clearly your technology is eating the world. So having operating leverage is very, very important. One other thing I was thinking about and we talked to some of our founders around this, you mentioned earlier about SaaS companies, you mentioned about reading transcripts, what are some of the things that founders can do to kind of better prepare themselves. In terms of watching the public market, even if they’re not investing in it. Most of them are probably sitting on this podcast saying, let me go build my company. But they’re probably lessons that they could learn, even on an operating side metrics side, are their things that you encourage them to do as they go along in building their private company?

Shripati Acharya 16:36

Yes, one thing to realize, of course, is that ultimately, what is success for a private company, and a lot of cases the liquidity event is an IPO for a very successful company. And I think that over a period of time down the road, Indian markets will become a viable liquidity vehicles for tech companies in India, because tech is now just becoming such a large part of our lives. And so it has to reflect in the stock market as well. So I predict that we’ll have more and more public tech companies in the Indian public markets. You’ll be surprised how much metrics and data is actually talked about and how much the CEO’s of these public companies go look up the transcript of zoom or look up the transcript of some of the other SaaS companies HubSpot, Okta, which is into the single sign on and so forth. And you’ll actually see the founders talking about net revenue retention, year over year. They’ll also not talk about certain metrics, what you’ll find is that they will typically not talk about their unique customer metrics, because that’s too much information. But of course, in private markets, we need to talk about those things before we invest and know them. So I think it’s a good idea to understand especially I would say, if you are a B2B SaaS entrepreneur, you must go and read a few of these transcripts, and they’ll tell you like what both companies focus on what the analysts focus on. And honestly those things are very similar to what we look at in the private market as well. So, reading transcripts is an excellent idea, it also gives you a sense of actually, some the mistakes which are made. So you will see many of the SaaS companies which miss their numbers talking about how, the sales efficiency and the sales execution challenges which they face. And we find it has a lot of parallels to the challenges which our private company founders also face. You were, of course had the, let me actually turn it back on you Amit here. So you had the privilege and the opportunity of seeing an Indian company, MakeMyTrip, go public in NASDAQ, and you’re actually there when the bell rang. So I would like to ask you, turning discussion to yourself?

Amit Somani 18:37

Yeah, so Shripati the interesting thing was when you were in a private company, you were primarily managing your numbers, your revenue, etc, and the board. And so there was no such thing as what we call QSQT. For those of us that are born in India there is a famous movie, “Qayamat Se Qayamat Tak.” Is that phrase changed for us forever, In August 2010. It became “Quarter Se Quarter Tak.” So everything was on the granularity of quarter. And the rigor because you were getting a daily report card. So every day the market, the stock would go up, it will go down, something happened, there’s some travel issue, 9/11 happened, unfortunately a year after we went public, okay causes an issue on your stock price. Kingfisher goes bust causes an issue. So just building predictability into your business at a quarter to quarter level in terms of revenue, EBITDA, profitability, transactions, etc. that was very important. And that was a hard transition to make to say, “hey, look, how do we keep predictability going here?” So I would encourage folks to as they’re going along, and certainly later stage companies, that’s not okay to tell the board, I’ll make it up next quarter. Well, in public markets, you don’t have that choice the stock will pay, you will pay indirectly and your other investors will pay for it. And over time, if you don’t have credibility, people will stop believing what you’re saying. Even though you may be correct that this is the one quarter issue and get fixed and so forth. The other thing I would point out is read a lot of S1s. When a guy at least in the US, when companies go public, you have these red herrings that they file, the S1s. There’s so much information on the history of that company. So, Zoom was an interesting example, Airbnb as and when it goes public, and that becomes available. So you actually get a history of how the company was built. So that was another interesting thing.

Shripati Acharya 20:20

Quick one, like, how did the company manage the transition, going from private to public?

Amit Somani 20:25

It was a lot of challenges on the change management side, believe it or not, so there’s a lot of just saying, look what we can and cannot share with each other with a very open transparent company. But now some of these numbers if you share it, it becomes a matter of sort of risk, predictability, like I said, was very important. There was huge emphasis on compliance, which our CFO here at Prime loves for me to talk to our founders, saying, when you are public, there is no choice, I mean, somebody will go to jail. If you This is not like we’re get a Ding! from the board or something will happen or you get a letter from the regulator. So I think just the change management to say hey, look, now we’re a big large company, which has public market investors. So predictability, compliance, governance, all these things became even more important. So, those were some of the changes. The other thing that was a dramatic change in terms of strategy, was once you’re public, everything is an open book. It’s like an open book exam. So all your strategy, all your risks, everything is out there, that a lot of these late stage private companies get away with because I don’t have to tell my nearest competitor, what I’m up to. So we were the only ones public in the online travel space. Everybody else was private. So every rumor has it that every time earnings quarterly release would happen, everyone would be up all night reading every metric, every transaction, every risk that we were citing out there, but you don’t have their data. So how do you deal with that? So some of those things, you have to set a higher bar, I think as a public company than a private one. So, I’m going to turn it right back to you as we wrap up here. So some of the best decisions you made, maybe some of the worst decisions and one important thing you said earlier, I wanted to come back to it. What’s the role of luck? Maybe a little bit on best decision, worst decision on the public side. So anything you want to talk about the role of luck in terms of sourcing or finding these investments?

Shripati Acharya 22:12

Yeah, talk about the worst decisions, actually everybody talks about the best decisions. The worst is really a thing we talked about Amazon a little bit earlier, was selling what I would say the errors of omission, really. Which is felt that oh, this company is so exciting, yet it is too expensive. And let me like actually wait for it to be a little bit more affordable before I actually get in. And the best companies always look expensive, but it is the other things because they keep growing and growing and getting into new markets. So not getting into some of those really big tech plays while I was in the valley, where we had a ringside view and the ground floor view of what is happening. To me, those are the worst decisions because stuff is happening right in front of your eyes, and you don’t know. So that is one so not just not observing certain things. Now you asked about the role of luck. And I think that, we all need to understand, that any investment, which works out well, has got a huge role of luck, not just one even just take the HDFC Bank example. The management team, the fact that they were able tol execute again and again and again over a 20 year period. I mean, that’s why we have so many books being written about the bank and so but obviously, you cannot predict that. The management can change and so forth. And especially when it comes to getting into new markets, and companies get into new markets and how they handle those transitions, you have no idea. So, I think that that luck plays a huge role in that and but again, boils down to I’ll say can you increase his chances of getting lucky by betting on the right management, something which we do in private markets, is there all the time.

Amit Somani 23:43

Wonderful! Shripati, this has been really exciting. I know we could go on for an hour or so here. But thank you so much for being on the podcast.

Shripati Acharya 23:51

Well it’s a pleasure, Amit. Thanks for having me.