How To Get a Job With a Contrarian Investor

I haven’t blogged consistently as much as I would have liked to in the past few weeks. However, as I started writing the answer to a question asked on www.showmedamani.com/ama, it went from a short form answer to a full-blown blog. It was the best trigger to restart my daily blogging habit.

The question asked: How can I learn more about investing? How can I get a job with a marquee investor?

The first question to answer is, who is a marquee investor?

A marquee investor is someone that consistently beats the market over a long period. Anyone that has invested for a living will tell you that beating the market is not easy; therefore, the select few that do, do it by refusing to follow the market. These investors few enter (or exit) investments against market sentiments because they figure out that the market has mispriced a stock, sector, instrument, etc.

Investors that invest against the market sentiments get branded as contrarian investors.  I consider myself to be one too.

I  understand why finance or investment professionals want to learn from contrarian investors, and it isn’t about the money.

Contrarian investors represent something far more significant, the ability to speak up (through their investment decisions) against the majority and – win. At its very core, contrarian investing is the classic underdog favorite story of David vs. Goliath.

It isn’t a surprise many contrarian investors get bombarded with requests for “ability to learn” from them. What is surprising (to me) is how individuals that want to emulate contrarians do it by approaching them conventionally. They send resumes with cover letters praising the portfolio picks, but their resumes and praises get lost in a pile of many deserving candidates.

So how can a candidate stand out?

The biggest challenge for contrarians is to find people that want to challenge the status quo. It takes a lot of guts to develop a contrarian thesis and an even stronger constitution to hold onto that belief. Contrarian strategies look incorrect for a long time before they look correct, and a contrarian can lose employees, friends, family, and investors by holding onto that belief.

Michael Burry’s predicament in The Big Short is an excellent example of how lonely (and frustrating) it can be as a contrarian holding onto their predictions.

Therefore If a candidate wants to showcase that they can think, act, and hold onto contrarian views, it shouldn’t it reflect in their attempt to seek a job?

Here is an exciting approach that I thought of (and could work on me, possibly):

  • Study your target investor’s thesis and learn how they pick their investments.
  • Try to find the next investment that would excite your target.
  • Prepare an in-depth investment recommendation note for your target.
  • Your note should highlight your ability to research, analyze, model, and recommend.
  • But it should showcase your nonconformist approach to investing, the ability to find information where no one is looking.
  • Most importantly, it should put it on display that you do not think about where the ball is right now, you think about where the ball is going to be.
  • Send that note to your target with a detailed cover letter explaining why you chose the investment you did and how you went about your process.
  • If you have gone a step ahead to tie up the investment for them too – major brownie points.
  • Most importantly: do not ask your target for a job or an opportunity to work with them. Just ask them for feedback on your investment note.

This approach requires effort. However, if one wants to run ahead of the crowd, like Usain Bolt, they must practice harder than everyone else too.

The Udupi Approach

In many cases, food-tech founders extend their line of products to capture as many customers as possible, if they aren’t convinced about the size of their target market. There is a business case for extending into multiple product lines to provide complementary options to a loyal target market, but the decision to go wide right at the start is like opening a new udupi restaurant in Mumbai  that serves all cuisines to cater to  every guest but loses its core of serving the udupicuisine. Therefore, I jokingly call a ‘go wide’ approach of an early stage founding team as the ‘udupi restaurant approach’ as this approach is harmful whether you are in food-tech or not.

Let’s be honest, sales matter. But when you have limited resources in an increasingly noisy world, the quality of sales matter even more. Therefore, it is important to build a niche and own that space in your target segment. That will make your customers your best salespeople i.e. they will recommend you to their network which will bring in tons of new customers. For example, when I randomly asked people in my network for the best place for South Indian food in South Mumbai the answer was Muthuswamy, for people in Central Mumbai it was Madras Café, in Bangalore it was MTR and in Hyderabad it was Chutneys. These people were willing to advocate why their recommendation was the best.

However, when I asked the same audience for the ‘best food place’s in their vicinity, – they were stumped. They almost immediately questioned me about what my preferred cuisine is, whether I was looking for a family restaurant or a date place, what my budget was etc. They did not know how to answer the question until they had some clearer direction. Can you imagine (now) what happens when your start-up does everything? Even your best and loyal customers will not know what to recommend you for!

What is dangerous is that they could be recommending you for something that isn’t even the path you planned.  More dangerously, the customer who is promoting your product may not even be in your target segment. And most dangerously, they may not be promoting you to people who fall under your target segment. Such a sale is more toxic than beneficial!

I understand that it is scary to be focussed but there is a lot of value in doing so. Customer feedback focussed on a concentrated product line will indicate whether you should pivot or accelerate your build-out. However, when there are multiple product lines catering to several audiences it pollutes the feedback, creating a lot of noise, making it hard for you to tune out the disturbance and assess what’s important in order to drive decisions – much like choosing what to eat at a Udupi restaurant at mealtime!

36/2019

The Nuances of Our Rejection Strategy

Over the past 6 months, there are many founders who have received an email telling them that we are passing on the investment opportunity. Within that email, we also make it a point to include 3 reasons why we cannot invest in their startup.
Writing a rejection email with 3 reasons lets my team and I crystallize the debate of whether we want to continue to invest our time in evaluating a startup or pass on the opportunity and move on. If any team member proposes 3 reasons that the rest cannot refute, we do not consider the opportunity worth taking further.
This practice was put in place so that we didn’t get into the FOMO trap of looking at everything, keeping conversations live and refusing to reject anyone so that we could participate when the startup receives validation from another investor. I rue many such FOMO investments. I have learned the hard way that unless there is our own conviction behind an investment decision we are basically gambling, and we all know that when you’re gambling – the house always wins.
Secondly not deciding on a deal prolongs the time a deal remains in our pipeline making both individual and company KPIs look bad, puts unnecessary pressure on the team member looking after the deal to keep updating the founders on the progress and just leads to an overall sense of lethargy that comes from decision paralysis.
Secondly, as a salesperson, the most frustrating feeling isn’t to be rejected by a customer but to be chasing one that wouldn’t give you a definite yes or no but continue to string you along for days (sometimes months) with the carrot of maybe being interested. Almost always those sales did not fructify and if they did, the time I spent closing the sale wasn’t worth the reward. Getting a quick no was always less painful than the torture of not knowing. It’s almost like ripping off a band-aid – the quicker the better.
While I empathize with founders that a no hurts the ego (for a few moments), the 3 reasons we provide justify and explain why we decided to respond that way, helping the founder to understand what we (as the investor) were thinking. They can then either decide to move on and stop wasting their time chasing us for an investment or spend some time contemplating the changes we suggested, There have been cases when startups have made the necessary changes, come back to us and we reconsidered our decision!
My team and I do not think that we are any kind of ultimate authority for evaluating a business plan and deciding whether a startup is worth investing in or not. We simply know why WE would not invest in a startup and are unapologetic in letting the founders know that we are mere mortals making a decision with the following disclaimer:
Please note, these are only recommendations and as venture capitalists, we are only required to be right 20% of the time to be amongst the top VCs in the world. We can be (and are) wrong 80% of the time in our investments, so please do not consider this as the final word for your business.
Barring the odd founder who will find the time to write a 2-page long email rejecting our reasons for rejecting their start-up, the general response from founders and even people who refer start-ups to us has been very positive.
Would you prefer to know whether we are rejecting your start-up? Would you like to know why?
16/2018

Your discounting campaign is suffocating your business!


Uber & Ola have finally found out that their long-term discounting campaign only helped in distorting the market. However, markets will eventually come back to normal and the fuel behind the discounting campaign (read: investor cash) will dry up as investors focus on the real numbers that drive a business i.e. profits & margins.
Many founders continue to be inspired by the discounting campaign tactic but the economist in me will tell you that long term discounting will cause more harm than do good for your venture. Therefore, any strategy that involves a discounting tactic should have a clear objective backed by an expiry date.
What is discounting?
Discounting is different than having a pricing advantage i.e. a cheaper cost base for providing a product/service. Discounting means that you have decided to take a cut on the margins that were promised by your business plans to achieve an objective. It could be to get rid of old inventory or to gain significant market share in a short span of time. On the other hand, a cheaper cost base allows the venture to provide the product/services at a cheaper price while maintaining promised margins.
Why are you discounting?
Discounting works best in a market where the product/service offered is homogenous and the customer will be inspired in choosing your offering over the others is a discount. Many founders use this example to defend a long-term discounting campaign but I counter that if your venture is a new entrant and it offers no other significant advantage over your competitors expect its deeply discounted price, then why are you entering that crowded universe when you have no other significant advantage?
Some founders will argue that discounting can also be used for snatching away market share as a new entrant in a crowded market or a market dominated by a few players. I can agree with that view and this may lead to a temporary influx of customers but those initial numbers are irrelevant. Only those customers who come back for a repeat purchase are important because they have made a shift in their buying habits because of what they experienced the first time they bought your product/service at discount and were motivated enough to come back and buy it at a full price.
What happens in most cases with founders is that they get scared of removing the discount because they will reveal the real numbers of the business which they themselves do not know nor want anyone else to know.  Then that discount tactic becomes a strategy to distort investors perception and most importantly their own.
When should you use discounting?
The most important decision before embarking on a discounting campaign is the frequency you expect your customer to engage in the behaviour of buying the product/service whether it was from you or your competitor. Next you can figure out how many times a customer needs to buy from your venture so that initial discount pays for itself from future margins. If the answers to anyone of these questions is over a year, then the discounting strategy shouldn’t be pursued because the return on the investment in discounting is too far out for it to make profitable sense to pursue. Secondly the long period to profitability from discounting a customer has inherent challenges as many new entrants come into the market and the there is a risk of a change in customer behaviour which would lead to the entire investment in discounting becoming a complete loss.
Alternatively, if your average customer has the propensity to make multiple purchases from you in a year such that the initial or interim discounting campaign pays off quickly it makes economic sense to pursue a discounting campaign to attract the customer, gain the customers loyalty and enjoy the temporary increase in revenues.
Conclusion
Unfortunately, I continue to see business models & MIS reports that are pursuing discounting campaigns with scant regard for the economics of the campaign. These founders are revelling in the temporary high that the vanity metrics bring to them, blissfully unaware that the business is dying a slow & painful death as the discounts eat away at the foundations of the business.
If you as a founder are thinking about pursuing a discount campaign, please think through the economics of the campaign viz how will the initial discount pay for itself? how long will that take? what is the return of the investment in the discount? what is the probability of that achieving that return?
Without adequate thought and planning behind a discounting campaign you’re just gambling with your business and if you want to run a gambling business then open a casino.