Education in econmonics & investments

While I was a college student

Economics has been one of my favorite subject since my under grad days. (I was not an economics student, I was studied engineering as my major). Around 1996, while I was 19  years of age and in my second year under grad, I started regularly reading Economic Times on the newspaper stand in front of the college library. I dont remember how I got into that habit. I discovered that I had both liking and a bit of talent towards economics. Soon after, I changed the daily newspaper @ my hostel room from The Pioneer to Economic Times. I would read it from end of to end – except the pages which list stock quotes, these did not interest me a lot, since I was not investing in stock market. I more was interested in marco views, progress of economy and things happening with different sectors and companies.

Since than my interest in economy, companies, sectors, entrepreneurs etc has only gone up. Economic Times is my favorite news paper (thought I don’t read it regularly now), if I am reading some other news paper I always spend first open the business section. Fortune happens to be my favorite magazine, CNBC-TV18 was for a long time my favorite channel.

While I was working for someone

From 1998-2004 while I was working for different companies the dedicated time spent “purely on economics” became almost zero since their were other things taking my attention. Many times I considered starting online trading (to apply my knowledge of economics and make some investments), but could not take out time for anything other than one 10k investment in kothari pioneer mutual fund (which tanked and gave back on 8k after 3-4 years).

While I am a startup founder

In August 2004 I quit my tech startup job in San Francisco and was planning to do my startup – madhouse, I felt there is a need to learn more about economics and finance, so that I can understand and run these funtions in my business. So I started reading a lot of books on economics , finance, business financials, corporate finances. I was particularly influenced by the book Economics of Business Policy. I was again reading ET end to end, watching many hrs of CNBC-TV18. And whatever I was learning I was using a lot of this in the begining to create my business plan, financial models and later to run my business, raise money, manage finances and make a lot of other business decisions.

Obviously this time around my connection with economics became deeper and stronger, my understanding of public markets also went up. This time around I did open a demat account with ICICI bank and was all set to start transacting. But again not even a single transaction. I was unable to take out time from madhouse, also another reason was that my cashflows were always “tight” during madhouse days  and I needed all of it to run operations. Infact many times, I withdrew cash on credit card around 28th day of the month, so that we can meet the payroll requirements for that month.

While at madhouse I looked after finances and fund raising – which gave me a lots of on the job learning.  We started the company with very little money – so the cost management aspects were very important. All founders of madhouse were FTEs (first time entrepreneurs), hence raising money was quite a challenge, and there was a need to learn that well and execute. Madhouse raised a total of approx 2 Crore Ruppees (half a million USD). I learnt about a whole lot of things: business presentations, investor leads, approaching investors, pitching, getting rejected, learning from rejections

After being in business for 3 years, madhouse was acquired by Seventymm and I worked on closing the transaction, in parallel we also negotiated with a couple of other interested parties.

The Warren Effect

My next (and probably the most important) lesson in investing (as well as in business) was reading “Letter to shareholders” written by the “Oracle of Omaha” – Warren Buffet. I was introduced to them by a friend during the Madhouse days (sometime in 2006). I read many of the letters non-stop, was totally fascinated by the empire built by Warren – at that time it was 86 companies large, his style of running it and most of it by his way of describing it. Before this most business material I had read positioned running of businesses and investing as a “complex black art” which is extremely tough to master and only a select few can be successful at it.  But Warren made the whole “business + investing” sound so simple, something which takes only “simple rules + common sense + basics + patience + hard work” to do be successful at.  I realized that most of the so called business pundits are unable to grasp the formula of  “simple rules + common sense + basics + patience”.

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Warren Buffet

Reading the letters gave me a lot of confidence in my own ability of building businesses and making investments. Another important thing I started learning about “How to select companies to purchase?” and “How to manage the operations in a hand-off manner?”. Warren’s secret was that instead of purchasing the business, changing the management and stuff, one should give a new home to great businesses run by great management teams and ensure that management continues to run the business. Warren become one of my role model’s. Possibility of being involved in running of multiple businesses started fascinated me and that was one of the motivations for starting Morpheus (will do a separate post on that). But as I was still busy with madhouse, I was not able to spend much time with stock investing.

Just about 5 months back, through another  friend I stumbled upon “The Snowball – official biography of Warren Buffet” and read the 900 pages fat book in flat 3 weeks. The book again sparked the desire to learn about investing and after finishing it I purchased  “The Intelligent Investor, seminal book on investing by Ben Graham – the father of modern investing and teacher/mentor of Warren. Graham himself tought Warren the art of investing.

Right  now I am in the middle of reading “The Intelligent Investor”, which is the proclaimed to be the best book written even on investing and planning to read “Security Analysis” another monumental book on investing written my Ben Graham.

Final thoughts

I in my current role as a Partner at MVP, I look at a lot of start-ups and make decisions about which ones should we work with and It was important for me to be conscious about my philosophy behind making these decisions. Thats when I started reflecting on “Where am I ?” and “How did I get here?” – specifically on the economics and investment track. In a quest to answer these questions I started tracing the routes of eduction in economics and thru this post I wanted to share my learning experiences. Please share your experiences and thoughts in comments.

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VC’s and startups: Looking for the right mating call

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Think of VCs  and startups like animals in a jungle who are looking for the right partner to mate. Just because two lions of opposite sex are roaming in the same area and come across each other, it does not lead to mating. The process of attraction only starts if they give each other the right mating signals.

Similarly investors respond to certain signals and for the process of attraction to start startups need to give those signals out.

Important signals:

  • Team: experience , domain expertise , passion, staying power, etc.
  • Market: potential size should be very large , your products/service /  business model should clearly indicate what problem you are solving and why will you get a significant share of the market.
  • Return on investment (only thing that matters in the end to an investor):  An investor needs to see strong possibility of a 10x plus exit. Which is a function of:

    • A large market
    • Capability of the team with its products / services to take the business to a scale , within 5-7 years. So that the investor can sell his shares @ 10 times the investment price
Apart from the signals investors are looking for, everything else is pretty much NOISE at this stage and should be minimized.

Once the investor sees the right signals, the process of attraction starts. He will come closer to you and your business. That’s when he will look for further details about products , domain, detailed financials etc. He will also spend efforts to learn more about the domain and may involve some domain experts.

He further validates the same thing:

  • Whats are the odds of getting 10-20 X Return on Investment in 5-7 years
  • Whats are the odds of getting 5-10 X Return on Investment in 5-7 years

Once he is reasonably convinced about the RoI.  Next stage for him is to look for all reasons to say NO.  He looks for things about the team / market / product / competition / legal issues – which may put the odds of RoI at a big risk.

  • And if he finds anything which can seriously risk the RoI – he will back out
  • If not, things move forward
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