short period – Pertinent Observations

Fundraising

The growth of a new company usually consists of one short period of high growth preceded and followed by rather long periods of steady growth. Sometimes there might be more than one period of high growth, but for most companies, it is that one period when there is a point of inflexion and growth goes to a new trajectory.

Now, my point is that if you want to raise venture funding, you better do it when you think you are on the cusp of one such inflexion. Usually points of inflexion are associated with some increase in “leading” investment, and a small chance that the company will get on to a new trajectory, and a big chance that the company will go under.

This crude chart shows the typical trajectory of a young company. The beginning of the red zone is when you should raise venture money

If you look at the picture here, the beginning of the red region is the state where you need to get venture funding. The thing with the black regions is that irrespective of how you fund those, at best you can expect steady growth. Now, venture capital funds, the way they are structured, are not set out to fund steady growth. The way venture funds make money is when one out of a number of their investments makes shockingly great returns, while the rest go under. They are not in the business of funding steady returns.

Hence, when they fund your company they value you assuming that in case your company is successful there will be steep growth, which will enable them to recover their investment. And if your company is in steady growth phase, it is never going to be able to do that. And you will have a case of your investors pushing you to do more or something different from what you had planned doing. The problem here lies in the fact that you raised the wrong kind of funding!

In times like this or at the turn of the millennium, when venture capital is big, it can sometimes become the preferred mode of fundraising for a lot of companies. The problem, however, is that most of them don’t realize that venture funding is probably not the best form of funding for them at their size and scale, and then get weighed down by investors.

On a similar note, you should go public once you know that there are no really big points of inflexion coming up, and that your company is set on a path to steady growth. Again that follows from the fact that investors in the stock market (where they pick up tiny shares in each company) are usually in it for long-term steady growth. And if you happen to take undue risks and they don’t pay off, your stock will get hammered unnecessarily.

Discrete and continuous jobs

Earlier today, while contributing to a spectacular discussion about ambition on a mailing list that I’m part of, I realized that my CV basically translates to spectacular performance in entrance exams and certain other competitive exams, and not much otherwise. This made me think of the concept of a “discrete job” – where you are evaluated based on work that you do at certain discrete points in time, as opposed to a continuous job where you are evaluated based on all the work that you do all the time.

A good example of a discrete job is that of a sportsman. Yes, a sportsman needs to work hard all the time and train well and all that, but the point is that his performance is essentially evaluated based on his performance on the day of the game. His performance on these “big days” matter significantly more than his performance on non-match days. So you can have people like Ledley King who are unable to train (because of weak knees) but are still highly valued because they can play a damn good game when it matters.

In fact any performing artist does a “discrete” job. If you are an actor, you need to do well on the day of your play, and off-days during non-performing days can be easily forgiven. Similarly for a musician and so forth.

Now the advantage of a “discrete” job is that you can conserve your energies for the big occasion. You can afford the occasional slip-up during non-performing days but as long as you do a good job on the performing days you are fine. On the other hand, if you are in a continuous job, off-days cost so much more, and you will need to divide your energies across each day.

If you are of the types that builds up a frenzy and thulps for short period of time and then goes back to “sleep” (I think I fall under this category), doing a continuous job is extremely difficult. The only way that it can be managed is through aggregation – never giving close deadlines so that you can compensate for the off-day by having a high-work day somewhere close to it. But not every job allows you the luxury of aggregation, so problem are there.

Now, my challenge is to find a discrete job in the kind of stuff that I want to do (broadly quant analysis). And maybe give that a shot. So far I’ve been mostly involved in continuous jobs, and am clearly not doing very well in that. And given my track record in important examinaitons, it is likely I’ll do better in a discrete job. Now to find one of those..