Sramana Mitra: How many years did it take you through the $500 million to the IPO?
Dharmesh Shah: A little over seven years.
Sramana Mitra: This is basically what VC’s are looking for – to go from zero to $100 million in five to seven years. Not every entrepreneur has a venture that is amenable to that kind of timeline. This is hypergrowth. Hypergrowth is not a natural state of business. It’s rare and unique. If you don’t have a company that is going to go through hypergrowth, so what? Don’t get stuck on being venture capital friendly on your first venture, especially if you’re a first-time entrepreneur.
Dharmesh Shah: Also the entrepreneurs should focus on solving the customer’s problem and not the investor’s problem. It’s a bad idea to spend a bunch of cycles trying to convince investors that this is a venture-worthy idea. It’s very depressing to be rejected by VC’s. We were never successful in raising venture capital. It’s not fun being rejected by a bunch of VC’s.
Sramana Mitra: I raised money and got 47 numbers. 48th was NEA that wrote the check. My crime was that I was doing product development in India. I know you’ve been investing aggressively as an angel. How do you think about investments? What is the investment thesis?
Dharmesh Shah: I started in angel investing because I promised my wife I was not going to do another startup. I thought of investing as a way to live vicariously through other entrepreneurs. For me, it’s like having nieces and nephews. I started writing angel checks while I was a student at grad school. When we decided on HubSpot, I had to make a decision.
I’m a big believer in focus, especially after I had made the mistake. I thought it would be useful to do angel investing. HubSpot is my first priority. When I do angel investing, I’m going to be solving for time and not money.
I’ve made 95 angel investments throughout my career. For a vast majority of them, I’ve never met the founders. I never lead the deals. Historically, I don’t do follow-ons because that requires tracking. That has been my MO. Even though I don’t meet the founders, I still like to believe that I invest in people. My sets of input are different. I can tell you in 150-word emails whether someone is a jerk or not. I would take my angel portfolio and put it up against any early-stage investor on the planet.
Sramana Mitra: Which ones are your big hits?
Dharmesh Shah: Coinbase was a big hit. I was the first money in Okta, Dropbox, and Stack Overflow. They’ve already returned 30 times my original investment.
Sramana Mitra: Some of the ones that you mentioned are MIT founders.
Dharmesh Shah: Yes.
Sramana Mitra: Is that a big factor in your portfolio?
Dharmesh Shah: It may just be happenstance that they are MIT founders. It just turned out that way. They’re just good people. Not arrogant and not lacking confidence.
Sramana Mitra: Do you accept pitches directly or are you accepting pitches from people who want to bring you in?
Dharmesh Shah: Mostly the latter. Most of the deal flow comes from my immediate network. A lot of times, I invest in the same founder across multiple companies. In my experience so far, second companies end up being much better than the first one. I had this strong belief in cryptocurrency back when it wasn’t as cool. I felt like this thing needed to exist. I have a mini framework for assessing ideas.
The number one thing is the potential. If all the stars aligned, how big could this be? Number two is the probability of that outcome. The mistake people make is looking at the probability of success and saying, “I only have a 1% success rate. I better not do it.”
The right way to approach it is the statistical way, which is the expected value. Don’t look at the probability of success. Multiply that by the outcome if that thing is successful. The third is passion or proximity. Am I excited about this or is it close to something that I care about? Those are the three factors that I look for.
Sramana Mitra: What needs to exist out there that you are looking to invest in?
Dharmesh Shah: A couple of things. I talked about one recently in a podcast. HubSpot has a podcast called The Hustle. The episode just went live yesterday. A professional network needs to exist. I love LinkedIn, but someone needs to build something like that either focused on individual verticals or a different take of what LinkedIn is.
Number two is to apply NLP to software interfaces. That’s going to be a megatrend. Most software companies when they build a product say that their product is really easy and intuitive to use. That is misleading. Most software is not intuitive. Here’s the way it works. I have this thing I want to do with software. I have to take the thing I want to do and translate that into a series of clicks and drags based on my knowledge of that software.
That is not intuitive. What would be intuitive is to just type, “Remove background of this image.” The reason I call it a megatrend is it’s applicable across hundreds of industries. There’re two big shifts in terms of software. One is the shift to the web. Then we went to mobile. This would be another nonlinear jump in making software accessible. In order to find how many customers you sold to in the last 90 days from California, you go to the reporting tool and say, “I’m looking for customers and not prospects. Pick the geo and sort it by opportunity value.” Why not just be able to say it?
Sramana Mitra: This was a marvelous conversation. Thank you for your time.