Why I dont invest in non tech startups #IIT #entrepreneurs

I was at the IIT Mumbai eCell event on Sunday and had a chance to meet students from various colleges all over India. The event was an eye-opener for me, given how many students were interested in entrepreneurship. This event had over 1200 people this year, and that was a 25% increase from the previous year. It is exciting to see the uptick in interest from students on becoming entrepreneurs in India.

I was on a panel with Suvir of Nexus Venture Partners and Bharat of Aditya Birla PE fund. A quick poll of the audience indicated that over 70% of the students were interested in starting their own venture and a similar percent were keen to build a non-software, or Internet / Mobile venture.

I clearly disappointed the audience when I said I would never invest in a non software / technology venture, and I had over 20 students come to me after the event to express their dismay. They were also very upset that I would be so categorical about my position both on a personal level and also as an investor at Microsoft Ventures. While they understood that Microsoft would not be interested in a non software company, they were curious as to why I would, on a personal basis, avoid these companies.

This post is primarily me addressing the question as a seed investor in the early stages of a company.

There are 3 parts to my answer.

1. Expertise: I dont have any knowledge, connections and value to add in a non-tech company. I invest primarily small amounts of money in an individual capacity so I can help the entrepreneur grow their business, besides just give them money. I dont have the background and intrinsic know-how of domains such as healthcare (if you want to run a specialty hospital) , education (if you want to start a school) or a restaurant.

2. Growth: My personal experience has been with about 30+ companies that I have invested in over the last 15+ years. I had invested in a Sports bar (restaurant) and also a real estate company. Both companies were started by entrepreneurs who I knew well for over 10 years. They both returned about 12% in interest each year for 3 years. Which is great, but does not move needle. Software and technology companies, grow much faster and in a short period of time. As an example if you look at the 39 companies that are “Unicorns” with over $1 Billion in valuation over the last few years, on average they have taken 5.7 years to achieve the $billion valuation. For non technology companies that have gone public over the same period and have a valuation over $billion, the time period has been 9.7 years. Almost twice the time.

3. Capital efficient in the early days: Do a simple analysis of the need for capital among the companies until year 3 and you will realize most of need very little money in the early (<1 year) and tend to be fairly capital efficient until year 3. After that they take a lot of money to get to $1 Billion. Since most of the companies end up failing, I’d rather put less money early in more companies than more in fewer ventures.

8 thoughts on “Why I dont invest in non tech startups #IIT #entrepreneurs”

  1. Makes Sense Mukund. Appreciate the effort you took for clarifying the investment thought process. I think we need to popularize the investors or the investment culture in non tech as well because its not so popular as in tech circle. As a country we should not focus too much on tech but the equal weightage shall be given for non tech as well.

  2. Mukund – what you say is true.

    However, you analysis has several cognitive biases. Survivorship bias (for the successful outcomes), anchoring bias( personal experience validates a universal framework), gamblers fallacy, confirmation bias, etc.

    what are the rational consequences of all investors thinking that technology has best risk-adjusted outcomes? too much capital chasing marginal investments. hence mean reversion.

    HAving been on the investments side, I spent a lot of time introspecting and analyzing my biases and their impact on my investment thesis.

    1. Let me add my own availability heuristic — The greatest investor of them all, is a non-tech investor. However Mukund is applying the first principle of Buffett, circle of competence, which I agree, but for the rest I’d rather follow “Be greedy when the others are fearful and be fearful when others are greedy”.

  3. Roshan – you make good points. I hope to ask Warren a question about his investment in IBM if I make it to Omaha this year! 🙂

    The point I was trying to make is that the returns on INCREMENTAL invested capital have been unimpressive in the tech sector. And therein lies the rub of “invest in what you know”.

    Last I checked most LP’s are not too excited about their venture GP performances despite the 50+ unicorns that Mooks is talking about.

  4. Fair points. I was once that student, who wanted to start something in a non-tech field, and felt the same dismay. So I understand what those students must have felt. But as an investor, you must too, do what is best for the fund. And I like the part about personal value add, it’s a great thought.

  5. Mukund – We have crossed paths. I run a non-tech, non-glamorous, possibly not a billion-dollar company in the furniture rental space. As an investor you have valid points and absolutely entitled to think that way. However, as an entrepreneur on the non-tech side, I find it disheartening.

    As a grounded “influencer” (I strongly believe that you are and I admire that) in the startup community, it would have been nice to project a portfolio approach rather than a sector approach. Your position seems to be that of most venture capitalist as well. Hence the disappointment.

    I agree – VCs and you are not banks – capital efficiency and ROI are paramount to you. But still is it proven that portfolio approach does not work and only tech portfolio works in terms of capital efficiency and ROI? I am not so sure.

    True that that “successful” tech companies do give higher returns for that particular investment. But given the surfeit of ideas floating and the probability of success being minuscule, the “spray and pray” approach on pure tech companies – could you prove that it gives better returns than a portfolio of tech & non-tech companies ?

    Does every company in your portfolio have to be a billion dollar company? Ideally of course, yes, isn’t that what we are all hoping for? But you and I know the chances of that, don’t we?

    How about a 70% investment in probable billion-dollar tech startups and 30% investment in more probable $100 mil non-tech companies? Could you possibly get maybe slightly lesser but more surer returns? Moderate risk, moderate reward. I don’t know I am just throwing it out there.

    You may argue that at an early stage how do you know that a non-tech company could make it to $100 mil. Fair enough. But here’s where your good old balance sheets and P&L statements could help you take a call. Invest in good cash flow revenue-making companies in the 30% of your portfolio. Rest leave it to your gut. I am not sure about this, but for early stage tech companies, do VCs bother looking at balance sheets and P&L?

    Now about not knowing non-tech. Trust me, the non-tech world is far simpler. I come from a investment banking technology side, but doing furniture rentals now. It is challenging but simpler. Revenues have to be more than cost of products and cost of running the company. “Dhanda” as they say. I am sure you could walk into our office and give us a observation which we may have never thought about. On the other hand, I am sure if I walk into a portfolio tech company of yours, I would probably take away rather than give.
    Sure we may have some heuristics developed which you may not have. But the point is, the business of non-tech world is more solid and simpler. That actually makes it more investible according to me.

    Lastly, don’t we have enough non-tech problems to be solved in India? Sure, world will be a high-tech place or already is. And India should have its fair share of great tech companies. But rather than asking entrepreneurs to fight it out with their silicon valley brothers, why don’t we encourage unique problems to be solved for India? Unique companies having wide moats with good cash flow (in Buffet’s parlance)

    I am not vouching for a Berkshire Hathway portfolio – I think that is the other extreme of the same argument. But asking for a more balanced approach by all investors. I am sure I don’t know all the compulsions and constraints of an investor. But would love to learn more.

    Ajith
    Furlenco

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