Ep462: Amit Somani – The Same Analysis Won’t Apply Every Time

Andrew Stotz 00:02
Hello fellow risk takers and welcome to my worst investment ever stories of loss to keep you winning in our community we know that to win in investing you must take risk but to win big you've got to reduce it join our community to claim your podcast listener discount on my valuation masterclass boot camp, where students learn how to value companies like a pro and advance their career go to my worst investment ever.com to join for free. Fellow risk takers. This is your worst podcast host Andrew Stotz from a Stotz Academy, and I'm here with featured guests. I met some Omni Samani, I met, are you ready to rock?

Amit Somani 00:43
Yes, Andrew, I'm ready.

Andrew Stotz 00:46
I'm so excited to get you on the show. And you know, you and I had a really fun conversation when we first started talking. And, you know, I really want to say hats off to you, you gave me a book recommendation that just really, really hit the mark. And so I grabbed that book and really applied it. So I really want to tell all the listeners, you know, listen up, a mint knows his stuff. Let me introduce you to the audience. I mean, his managing partner at prime Venture Partners, a Bangalore based early stage fund for 20 years. Prior to this, he held leadership roles at make my trip Google, IBM Silicon Valley labs and IBM Research I met was part of the leadership team that took make my trip public on NASDAQ. In 2010. He was also the head of various teams focusing on search, mobile and advertisement products. At Google, one of his products, the search based Keyword Tool even won the Google Founders Award. Prior to his role at Google, he was a director for the enterprise search and discovery business at IBM, San Jose, California. And for those people who want to follow and learn more, you can find him on LinkedIn and Twitter, his two preferred places, and I'll have the links in the shownotes I met would you take a moment in Philly, for their tidbits about your life?

Amit Somani 02:10
Absolutely, Andrew, first of all, thank you so much for having me on the show. Very quickly, you know, I'm a engineer, turn Product Manager turn business person turn accidental VC. And, and kind of resonant with the theme of your podcast. I'm very curious and inquisitive and not afraid to fail and not afraid to roll the dice from time to time. So I spent the first you know, I grew up in India here went to one of the IITs went abroad to the US stayed there for about 14 years, I came back to India in 2007, like you already mentioned, worked at various companies like Google and make my trip. And now for the last six and a half years, I lead an investment firm which invests in early stage startups, globally, but largely based out of India.

Andrew Stotz 03:01
And maybe you can just tell us just a little bit more about what types of startups and kind of what's your company and your yourself your expertise or what you're looking for just in case someone's listening and they need money.

Amit Somani 03:14
Absolutely, we would be delighted that if somebody is listening, they need money, and they have some interesting things to discuss. So what we look for uniquely, every VC, venture capitalist looks for a great market and a great team, right? We do too. But the unique things that Prime ventures looks for, that we think are differentiated Are you know, why is the product or service that you're bringing to the market? 10x better than the current state of the art? Why is it 1,000% better, not 23% not 85% and in some sense, we're saying we want to bet and back the entrepreneurs that are really going to change the world and make it you know, an order of magnitude better. So that's the first thing. The second is we're very very focused on product and tech driven entrepreneurs, right so we're not really doing offline businesses and b2c brands and so forth. Really? How can you leverage technology to solve problems right? Whether it is in logistics or healthcare or education or you know what have you right so that's the second thing and the last thing which is also probably going to be related to what we are going to discuss today is the viability of a business model right saying all this is great you've got a great product you have it's very differentiated is backed by tech and product can you really build a business out of this and eventually a large company out of this? So those are the three things we look for is a 10x better is it backed by tech product and can it someday become a large company?

Andrew Stotz 04:42
And those I mean just that is some gold nuggets in particular that final one of can this become a large company. that's something I think for the listeners out there, that's the question you're gonna get, you know, you got the idea in your head. You've been working out with your friends and all that but that is the challenging question. And I think We're probably going to hear more about that. So I'm ready to get in to your worst investment ever. And since no one ever goes into their worst investment thinking it will be. Tell us a bit about the circumstances leading up to then tell us your story.

Amit Somani 05:14
Absolutely. So let me talk about two related sort of investment mistakes. And you know, how kind of one led to the other and it could have been vice versa. So the context is that we're looking at a great company, this is circa 2015 2016, which has a phenomenal product in the women's health space. Keep it a little abstract, and great product, global audience. Amazing love, you know, has an app on the App Store on iOS on Android, what have you excetera loved it. You know, of course, we did our usual diligence, spoke to the entrepreneur and decided to back the company. However, there was one thing that was missing, that was the lack of a viable business model. Okay. And we said, well, it doesn't matter if you're building something that people love, it's great. It's got traction, it's got organic distribution, we will figure it out. Right? So that is what I would call at that time, mistake of commission, which is to say that, look, we know, maybe we should have thought a little bit harder about how the business model would come out, or the ability of that team to kind of manifest the business model. Right. So that is, that was one of the challenges. Let me fast forward a few years later. And we are of course, you know, we've invested a lot in the last eight and a half years, we've invested in 34, companies invest in about five a year, we meet another amazing company. And this time, they're saying we're going to paint the town red, it's in the FinTech, space, financial technologies and services, in payments. And you know, we're going to do this, that and the other. But there is no business model, don't ask about making money, we're just going to, everyone's gonna love this, and everybody's gonna use this, right. And we look at the team, it's an incredible team, we look at the market, it's a really big market in terms of the people they could serve, we look at the business model. While there is none. And this led to a very interesting, perhaps mistake of omission. We decided not to back this company. And this goes on to be a unicorn in three years. Okay. The first one doesn't go anywhere. The second one? And it's the same, the same question that one is asking, which is, is there a viable business model? So my learning Andrew was that, look, it's not the same, you know, kind of analysis of the same rigor that'll apply every time, you got to factor in timing, and not overly sort of pattern match, right, because things change, markets change, dynamics change. So while what might have been both very fair, fine and fair decisions, one leading to influencing the other was perhaps a big mistake.

Andrew Stotz 07:55
That's, um, so let me maybe let me share something about this. It's interesting, because I'd like to refer to the public markets for a moment. And having been in the public markets all my life, I know that if you identify a repeating pattern, and you act upon that repeating pattern, at first, it seems like it's a great idea, and you, you're going to make money from it. But eventually, other people are going to find that pattern, because it's so obvious, eventually. And the more money you put into it, you know, you put in $100,000, it doesn't cause that pattern to really show. But when you get 100 million, and when you get a billion, and you put it into that, all of a sudden, it dissipates like, like a little wave that's just gone away, and you're never gonna see it rise in that spot again. And that's what makes investing in the public markets so hard is that, even if you have AI and machine learning, and all this, the patterns that they figure out, eventually dissipate. So in that sense, it's a self correcting market. But I've never heard it been talked about in VC. And in private investing, what you're basically explaining is that when you think you've identified a methodology or pattern that works, you can find that that doesn't work another time. And that is so disconcerting.

Amit Somani 09:25
Absolutely, absolutely. Yeah. And it's a great example and great analogy you drew to the public markets, because, like you correctly said, once you find out some way to generate alpha or some way for your edge, you can sort of keep repeating it until everybody else latches on to it. Here, it is a little disconcerting to use your word because the market changes the appetite to invest in that market changes, the landscape changes, right? And a variety of the consumer behavior changes the business behavior changes. So the learning here really is that you should really continue to always Evaluate things from first principles basis, right? You do not want to just extrapolate from a past pattern that said, if you want to do everything, like a PhD thesis, you will never invest. And in a market like ours, which moves very fast, you usually have, you know, maybe a couple of weeks to make a decision. Sometimes it's a couple of days, sometimes if you're lucky, it might be a month, you do need to rely on your experience, but you also need to go to the first principles are saying, okay, for here, and now, what is the call I want to make? based on whatever I know, and what I need to investigate?

Andrew Stotz 10:33
And, you know, for an astute listener out there, they may also say, Oh, wait a minute, maybe you really didn't investigate or do your due diligence on the business model in the right way. Right. And so that's another angle that I'm thinking about that, you know, and then and then you think about, one of the great books that I have up on my bookshelf is the Checklist Manifesto, the idea of having a checklist having a structure, following that structure, but what you're saying is that you can't even sometimes rely on that. And it's just like, it's like quicksand. You know, you look at it, and it looks like yeah, I can get across this. And then all of a sudden, it's very different than what you thought. It's just, it's so fascinating.

Amit Somani 11:19
Absolutely. Now I'm a big fan of Atul Gawande, his book as well, the Checklist Manifesto. And we do have checklists, as you might imagine, you know, that said, Andrew, the challenge is that at early stages, it things change very fast, right, and consumer behavior changes very fast. So I have this sort of, quote, I often use that a young, you know, a very young pup, like a dog looks the same, like a tiger cub, when they're very young. Now, if you take an example of a company like Airbnb, which is in the travel space, since I spent a few years at make my trip, you know, who would have thought somebody would go and stay at somebody else's house and pay for it? Or you would let some other guest comments, stay here. And you know, the famous story is, as I'm sure all of your listeners have heard, if they were rejected 54 times right before they raise their first round of capital. And, well, 12 years later, it's $100 billion market cap company. Now that could have been like, hey, how is the business model going to be here? Right? I mean, or will people ever stay in mass in other people's homes and so forth? So yes, it is subjective. So I wouldn't say that, yes, we do have a checklist. Yes, we do evaluate it. But I think the idea is to look for enough proxies around that To try and a certain and sometimes you know, you just have to kind of, you know, hope and pray for some luck or some tailwinds to go your way, both for the entrepreneurs and for yourself as a VC.

Andrew Stotz 12:45
I think the other thing that I take away from it too is that you know, there's a lot of young people when they get into the world of finance, maybe the world of business, they understand formulas, they understand Excel models and all that stuff. And the first thing we learn as we become practitioners is that these are not very reliable things. Excel Can you can make an amazing model, but it's really just a very, very it's a tool, but it's not going to give you the answer. And I always say to my students at university and in my valuation masterclass on on day one, I say, if you need my course, feeling less confident, than I've succeeded,

Amit Somani 13:37
right? Absolutely, you have to have a beginner's mind, that's a trigger one more thought, Andrew, which is that, it doesn't say that you should just walk in cold as if you're walking into you know, play roulette, or a poker game, you do need to come with a prepared mind. So you do need to have not just your checklist, but also your thesis, how you look at this opportunity, how would you evaluate it? How would you evaluate, you know, the customer behavior of the business that they're trying to serve? So the prepared mind is very, very important. But like you said, the beginner's mind is also very, right. So I think it's some very famous person who has this code, right? The more I know, the more I realize how little I know.

Andrew Stotz 14:20
Yeah, and I'm thinking I'm visual, I'm trying to come up with a good visualization, because in some ways, it's like handling sand, you know, like, you know, you're you're trying to hold it, but, you know, you can never control it because there's so many and then the other one I thought about was like, taking care of kittens, you know, like they say herding kittens and handling kitten here, you can't squeeze too hard, you're gonna kill it, you know, but you got to provide some structure to keep them in. And so it's like, that's the way investing is, is that you know, sometimes you can rely on relationships. Sometimes you can rely on some models. Sometimes you can rely on customers and what you're hearing from them, and then you put together this tapestry or as we say, in the world of CFA, we talked about the mosaic theory where we're pulling together different pieces to create a mosaic. That gives us a final conclusion.

Amit Somani 15:12
Absolutely, in fact, if I may add one more thing, which probably also applies to the public markets, but even more so to the private markets, or the venture market, is you also have a notion of a portfolio. So if there was only one bet I was allowed to make every year or you know, three in a fun, then no, this would be really, really difficult business to be in right, it is difficult, it would be almost impossible. So when you're constructing a portfolio of 15, or 20, companies in a fund of say, 75 or 100 million dollars, like what we do, then you're like, Look, it's alright, you're gonna be wrong, you know, a few times. But so long as you have repeatability in your process, in your method, in your sourcing in your checklists. Overall, you're going to be just fine. Because when you when in investing in private markets, you will make a 1x investment could potentially return 50x. And which can pay for 10 other mistakes that you made on whatever might have been the reason.

Andrew Stotz 16:10
So let me ask you one last question. And that is in relation to this. And step four, since I have a lot of young people and students and I know that people, you have a lot of followers that are young folks trying to build themselves into their careers, for someone that wants to end up in their career where you are today. What advice would you give them?

Amit Somani 16:34
be insanely curious, be a learning machine. Like you said, I'm not familiar with the CFA or others term of mosaic. You know, Charlie Munger often talks about, you know, mental models and latticework of frameworks. So read a lot learn from different people, you can learn something from everyone dabble in a variety of different areas. If you're a CFA don't just read CFA go read something about physics or gene therapy, or computer science or artificial intelligence. So that would be one suggestion I would have is be insanely curious.

Andrew Stotz 17:07
Fantastic. Now, let me ask you, let's go back in time to these decisions that you made about investing. And I want you to think about a young person or anybody that's out there right now facing a similar situation, they've got to decide Are we going to invest in this or not? based upon what you learn from this story, and what you continue to learn? What one action would you recommend our listeners take to avoid suffering the same fate?

Amit Somani 17:37
Yeah, so I think either you have to go with your own. I always say in early stage investing, you can't borrow conviction, you got to get your own conviction, because it is subjective right? It is not going to be 100% objective. You can't borrow conviction, you can't borrow conviction, right? So you got to like no matter what I say you got to go figure out. So there is got to be something which is pointy head right to use a dog bird Dilbert Scott Adams term that really catches your attention, right? There could be many things that are not right about the opportunity, one of which I cited today, which is perhaps the lack of a viable business model. But if entrepreneurs are through the roof, or have some crazy insights about the market, or a vision for the future, or the early customer traction is phenomenal. Or this market is just at the beginning, right? Like if you look at crypto and blockchain now you say, look, this is gonna be around for 20 years. Right? So that's something that has to be one thing that is through the, through the roof through the charts, right off the charts, that should catch your attention, if it's all a little Whoa, hum. Right? You know, it's kind of like, Yeah, kind of maybe, then it's a no. So I think that's one thing that I would say specifically on the business model, I haven't really figured it out. So if one of your listeners has a recommendation for me, I'm open, because at the earliest stage where it's literally your two guys in a gallon dog in the garage, you know, you're still gonna have to make that subjective call, and have some combination of God data and conviction.

Andrew Stotz 19:07
Well, I think that's great advice right there that you can't, you can't escape it, there's going to be a point where you're just gonna have to make your play make your bet. Alright, last question. What's your number one goal for the next 12 months.

Amit Somani 19:21
We are, you know, just launching kind of our new fund. And so we're very, very excited to continue to invest in a few new areas. Basically, companies backed by AI ml. we're really, really excited about, you know, decentralized finance since I'm on your podcast, right? So crypto blockchain and the application of that to financial services, that's like a big thing. And then gaming tech, right. So these are three new areas beyond what we normally already do. So I'm very excited to learn about these areas, from some of the best entrepreneurs that are trying to solve these problems and also hopefully to contribute to them by both Bringing capital and our expertise to bear

Andrew Stotz 20:03
alright listeners you heard it if you're in any of those areas hmm I think you got someone to talk to well listeners there you have it another story of loss to keep you winning my number one goal for the next 12 months is to help you my listener reduce risk and increase return in your life. To achieve this I've created our community at my worst investment ever.com and when you join you get that special podcast listener discount to the valuation masterclass boot camp as we conclude, I mean I want to thank you again for coming on the show. And on behalf of a Stotz Academy, I hereby award you alumni status for turning your worst investment ever into your best teaching moment. Do you have any parting words for the audience?

Amit Somani 20:47
Oh, thank you. You know, Andrew for having me. I would just say stay curious. Stay learning.

Andrew Stotz 20:54
Fantastic. And that's a wrap on another great story to help us great grow and protect our well fellow risk takers. This is your worst podcast host Andrew Stotz saying. I'll see you on the upside.