Shardul Shah — "I wired the money before knowing what they were building"

0:00Acquisitions to be successful, my view is they should be small or they should be large. Like middle-sized acquisitions are the most difficult for both sides to be successful. I have drunk the Kool-Aid of Wiz more than anyone on the planet, right? And so to then say I'm going to switch to iced tea is super hard, right? What's the way for somebody to sort of break into being in your awareness? Well, I'm not everyone's cup of tea. Am I crazy? Yeah, sort of. I don't know. When Google announced it was buying Wiz for$32 billion, one name quietly became the talk of venture capital. Shardul Shah, partner at Index Ventures, was one of the first checks into Wiz, and it wasn't luck, it was pattern recognition.

0:43Shardul has spent nearly two decades at Index building a reputation for finding the right founders before anyone else does. Datadog, Duo Security, Coalition, the list speaks for itself. Today, we get into the Google Wiz deal, his human-first approach to spotting the next generation of great founders, and where he's looking for his next big bet. I'm Eric Newcomer, the author of Newcomer, the subsect that tracks the inner workings of startups and venture capital. Follow me and my team's writing at newcomer.co. And without further ado, here is my conversation with Shardul, one of the top venture capitalists in the business today.

1:24All right, super excited. This is a big week for you. I'm here with Shardul Shah and the Newcomer Podcast. Thank you for joining me. Thanks for having me, man. So we're here, you know, in part, I guess we should have like, you know, party hats and stuff. Google's$32 billion acquisition of Wiz, the Israeli cybersecurity startup, cleared the check cleared this week. Is that right? Yeah, closed on Wednesday. Yeah. And Index, and you're the largest investor shareholder, right? Yeah. And so for the party hat, I'd prefer a cerebral valley cap. I mean, we could have been matching at least. Yeah. So I guess for people just paying attention, like explain, you know, why Google is spending all this money to buy Wiz in the first place.

2:10Yeah. Look, the best companies are always bought, not sold. Right. And it starts with the founding team. It's a remarkable run over six years, but it took over 20 for this to happen. The founders have had so much trust. They're such different personalities that when they came together to create Wiz, they created a culture that could move so fast in an existing category and really disrupt the market. So I think ultimately what you're acquiring, whether it's a small, medium, or large acquisition, at the core is a group of people and a culture that comes with it. One person close to Google when this announcement first came out mentioned to me it was just like in a world of AI, cyber attacks are going to become even more likely.

2:58Obviously, we need to be very aware of cybersecurity. In some ways, this deal is a sense that like Google needs to be ready if there is like a major massive cyber attack, if they need to defend their customers. Obviously, it's an offering that they can provide cloud customers. I mean, now, you know, since the deal closed, now we're at war with Iran and that's obviously increasing the risk of cybersecurity. So explain where Wiz sits in terms of cyber defense and why Google would want it and what they're really delivering to customers. I think you nailed it. There's a cloud tailwind, right? More and more workloads are going to the cloud.

3:34We've been on this transition for over a decade. Finally, for example, over the last five years, the pharma industry has moved all their data to the cloud. Second, there is a security tailwind, right? There's more need to secure against risks for large and small businesses across the world. And the amount of risk is varied. I'll come back to that in a second. And then third is AI. Everyone knows we live in an AI era. And with more AI workloads, there is a demand for more security. On the back of those three tailwinds, it just so happens Wiz is at the center. And that's not by luck. right? They've been intentionally crafting their business to be there.

4:18They started with a platform that served large enterprises from the get-go. And so it's really complimentary with all of the resources and the AI infrastructure that Google has. So take me back to the beginning. I mean, you, what I think I was reading, this was the Claude synopsis. So hopefully this is correct. but what you they stood you up for 45 minutes the founder before you your first meeting or what what were you what did you see when you first when whiz was first on your radar that's not how it felt like have you been to an indian wedding uh not a not a huge okay i've been to a 50 indian wedding now that i yeah okay so the this story is like 50 true like irrespective of the size right people are fashionably on time yeah and so my reception of asaf being a few minutes late was he was on time.

5:09So Claude's got it wrong in terms of his word choice. You were not offended by the... No. And I think a lot of individuals have had a similar experience with Asaf. But what started late really escalated because in 72 hours, we had a term sheet signed. Asaf and I had this unusual kind of chemistry and click from the first moment that we met. I can't really, I can't explain it, right? And you can't like prepare for that. All VCs are salespeople. I'm not the best, as you know, but you can't - You're a great VC, definitely, at this point with Datadog and Wiz, and we'll talk about that, but you're saying you don't see yourself as a salesperson.

5:56Well, I think salespeople can be really prepared, but you can't prepare for serendipity, right? And so sometimes you just click with someone. And it was both professional and personal. And we were finding ourselves completing each other's sentences. And so that was the first moment for me. It was on the back of another friendship I had with Michael Sholoff. Michael was the, at the time, he was the founder of Lacoon Security. Lacoon is this pretty deep cut into Greek mythology that clearly Claude didn't tell you about, but I encourage you to look up afterwards. He's this priest involved in the Trojan horse story.

6:38So Michael, who became a friend of mine, I invested in his company. I didn't know anything about security. And so he's like, I've got to make use of Sharduel as a board member. So he sent me hunting for customer relationships and helped building out his management team. Again, accidentally, Michael and I became friends. After Fannie and he had their first kid. I was on the top three of folks who got a phone call, right? Because we really cared about each other. And so Michael, by pure chance, introduced me to Asaf. And Asaf and I, by pure chance, clicked. Fast forward a decade, Asaf calls me on my birthday and he's like, hey, let's go.

7:20And it was done. That was time for the deal. It was done. It was clear like that this was going to be like it's you and Sequoia are doing the first round, right? Gilly, Doug Leone and I all joined the board at the first round. And so when Asaf called, he's like, we're working on a new company. Let's go. I was like, I'm in. He's like, do you want to hear what we're doing? And I was like, that's a detail, which is a true story. And a week after we had wired the money, we were together in San Francisco. He said, hey, Sheryl, we pivoted. I was like, okay, great. We didn't write a memo anyway. What are we working on?

8:02And so the only thing to invest in was belief in the founders. And again, we had the benefit of having a front row seat 10 years ago. So we knew their character. We knew the lessons they had learned. within Microsoft after they sold Odellum. And as a consequence, we knew how they were thinking about building a culture and a platform from the get-go. Do you remember how much money you put in right at the beginning? No. I couldn't give you dates. I couldn't give you numbers. It was like... I mean, I imagine it was small relative to the overall investment over time. Yeah, exactly. It was like a standard seed investment.

8:45Later that year, it was a we led the series a a few months later we let co-led the next round and then like we kept going and so over time we broke a lot of rules right we invested out of four funds which is the first time we've done that in index's history first time that many funds or across funds uh first time that many funds with datadog for example we also invested across funds um with I feel like this used to be out of Vogue and Venture and now everyone's concluded you have to double down on your winners to succeed, right? I think it's more complicated. So let's see, if I break it down in the industry, one of the things that's unusual about Index is we have one team across strategies.

9:34So like many other large firms, we have a seed fund, a venture fund, and a growth fund, right? But most other firms have specialization, which makes a lot of sense. Like people who think about early stage risk are often different than those who think about late stage risk. And so for those businesses, often doubling down requires like convincing a different group of people. Right. And they have a different apparatus to make decisions. And that's not all bad. Right. Because when it makes you honest, it's like somebody else has to review and say, are we doubling down on exactly bad investment? It's like a type of check-in balance, and it's a type of specialization that ought to support high-quality judgment calls.

10:16So it's a way of doing business. It doesn't work at Index. At Index, every time we've had a silo, it hasn't worked. So we converged, I think in 2010, we converged our venture and growth teams into a single team. So all of us are responsible for all of our distinct fund strategies. All over the world? Globally, yeah. because that's another area where firms also divide it up sometimes but yeah absolutely and we can come back to like why that's super hard and why we're like unusual in that dimension and it's not for everyone this is not like a pitch on like redesign your venture firm like it's just our culture supports one team across geographies given that you don't have separate growth investors does that make you more reluctant to do this sort of multi-fund well so within Within Index, it's so personality driven, right?

11:04So for me, in order to develop deeper conviction over time, I require context, right? So I spend a lot of time with the management team. I have a login to the product and I'm testing it frequently. I spend time with the go-to-market team. I spend time with the marketing team without crossing the boundaries of a board member kind of getting involved. And fortunately, I'm not an operator, so I can't really tell anybody what to do. But I can learn a lot from context for a company that helps because I can make high quality judgment calls on like who to recruit, when and how and why, which can change the trajectory of businesses.

11:39But for index, it gives me more context. Now, second, as a personality, when I'm in the sausage making, I see the warts, right? And so as optimistic as I am, as a natural born venture capitalist, I have a fair amount of skepticism, right? And as a consequence, I can get really close to warts. And when I see flaws, I really study them. So no, it's not easy for me to develop deeper conviction over time. It's actually really challenging. You understand what the potential risks are of the business. No, that's actually not true. I think far more about the opportunity and the upside than risk calculus.

12:20I actually think it's a fool's errand to try to attempt risk calculus. I think it's overweighted in our industry. Right. And it's like human nature. It makes about you have to see sort of the big upside still. But I thought you were saying by seeing the awards, that's what gives you this sort of thought. Yeah, but like when you imagine if you start to see blemishes in the room and they start attracting your attention, all of a sudden it's harder to see beauty, right? Right. So it can be more difficult and challenging to see the whole picture when you're attracted to warts because you want to talk about problems to fix them.

12:54So it's hard for me. However, the good news about index is I don't make any decisions. It's a true partnership. And as a consequence, at every single phase, we're having debates. We debated the market. We debated the product. We debated the quality of the execution and traction. We debated gross margins. We debated strategy. We debated so many things. And very few of our investment decisions were actually unanimous. What does that tell you? It tells you we have a culture that promotes dissent because we want to get to the highest quality judgment calls. We shouldn't confuse the judgment calls that we serially made with the outcome.

13:37That doesn't mean the judgment calls were right. But we went as a group into really high quality judgment calls, which unlocks the ability to double down against conviction. And you can see there were like some of the best firms on the planet with the best minds that took a different view. They were not like wrong. They just took a different view. Right. So you end up building the largest position, even though there are three investors there. Yeah, absolutely. Right. So that's key. So what was the next key decision? Like, was there a particular round? Or when do you think you really like put more money in a way that others might have missed or that you're proud of?

14:14Well, every single one, right? Just like continuing. Yeah. Well, so the Series A, what's the context that maybe I rotated against? There were two key customers. One of the two I had introduced. And the buyer at that company is a, he'll remain unnamed, but he's an intellectual snob, right? And he doesn't do me any favors, right? So when he made a million dollar purchase order decision in four weeks and sent me a voice message that sounded like a country song, I had distinct asymmetric information. And I read into the qualitative of that signal more than the quantitative. Number two, soon after that, company received conventional wisdom, which is like, hey, founders, you guys have sold some customers, right?

15:09That's great. Now you should hire a couple of salespeople to see if we can scale the apparatus of the business. And right place, right time. There's an individual, Colin Jones. He was previously at Duo Security, a company I happened to invest in many years prior. And I knew Colin Jones's mentor, Jim Sibb, and I knew Sibb's mentor, Zach Erlacher. Erlacher is now a venture partner with Index. Sibb had joined another one of our companies subsequently. And I knew both Erlacher and Sibb were telling CJ, don't join a company pre-product market fit. The way to define pre-product market fit is$10 million of revenue.

15:47I was like, CJ, they are wrong. Asaf was being told, hire two salespeople. And I was like, Asaf, that is wrong. And so I got involved and CJ joined, right? That gave us asymmetric information because we needed the personalities. That unlocked the next round of financing. I continued to spend a huge amount of time with, you know, Kostik and Ami Lutwick. Ami is this genius who lives in the future, right? And it's so challenging to talk to him because he's always right, but it's Socrataic and he's trying to lead you to truth because he's such a teacher. What's his role? What's he do? He's a CTO. Okay.

16:29And Kosika is world-class product, right? Like top two, three product leaders I've ever come across. He's able to shape a promise that is current that he will deliver on. He's also challenging. And so there's constantly tension between the two. And when I started talking to them in depth about what the product roadmap and what the product vision would be, the opportunity that was present for Wiz just kept expanding. And so my view of what was possible for the business continued to grow. So we had to get more involved. And I can keep going with individuals like Dali Rajik, who I've been trying to recruit for a decade.

17:15When he joined the company, the impact he made on the business. Or Fasil Merchant, who literally I'd introduced to Asaf two years before he joined. I knew the inflections of the business. I'm going to stay on Wiz, but I want to digress for one second. For sure. I mean, you're clearly like, I'm convinced like a scholar of the people. Like has this like a sort of philosophy of really just like analyzing the team ever led you like astray? Or like I imagine it's tempting to be like, these are great people. The numbers, they don't say what the people should. Or like what, yeah, what do you do in sort of other investments where you've, have you found the sort of disconnect between the people and the money?

17:56You know, where I've been wrong and I'm most insecure is making judgments of people over Zoom. I think I have a really hard time finding connection and like feeling someone over Zoom. And it's reciprocal. I think, I mean, I think the first time we were on together was over Zoom. This is way more fun, right? Yeah, exactly. You sort of... Yeah. And I think it's like body language. It's micro expressions. Right. I have more comfort with pregnant pauses and like space in a room. And so it's very idiosyncratic for me. I have partners who are phenomenal at like reading people over Zoom. And so I don't make decisions now.

18:39Like I won't invest in a founder over Zoom. An example, Asaf introduced me to someone actually. I met them on Thursday morning over Zoom. And I was like, guys, you know, there's something here, but I don't make decisions over Zoom. And I had some health stuff going on in the family. So they were like, we're on the next flight. And I was like, whoa. And they're going through Italy. I'm like, I could just buy you a better flight. And they're already in air. And so they land in New York City. And 6 a.m. on Saturday, we start with a walk around Central Park. We hang out, lunch, drinks, et cetera. 2 a.m., we finish at McKittrick, hotel oh my god i don't know if you've been to is that isn't that where they used to do the those live shows the um am i crazy yes sort of i don't know uh but you are crazy but i'm not sure about this story i'm thinking of sleep no more but oh yeah that's totally different that is that i thought that was called the mckittrick maybe i'm making up mckittrick hotel became sleep no more that i would not recommend as like founder dating or like dating in real life you don't even talk It'd be terrible if I just found her dating.

19:47Dude, my wife was so creeped out when I took her there. I mean, for some people, it's a terrific experience. Not your... Not my scene. Yeah. But it's shut down now. McKittrick, what I'm referring to, has this incredible speakeasy bar where you walk up and they don't have a menu and you tell them the direction of the drink that you want. Okay, okay. And then you walk next door and you get into this full laundromat. And you walk through the laundromat to get to the, like basically a mahjong parlor in the back, which has an incredible mood and ambiance. And you get to see five different, I think it's about five different acts of close-up magic through the night.

20:27So I'm a nerd. I love magic. You guys love magic. I absolutely do. This is one of the things I definitely know about Index. You were like at magicians at parties. At our office opening in New York, I insisted that we have a magician from McKittrick come over. So we finished the night at 2 a.m. at McKittrick, my favorite place, perhaps on earth. And we shake hands on working together, right? The day of. The next day, we talk about numbers. Like, what is the deal? The next day, I tell my partners I've done this. And I ask for forgiveness, not permission and like i think approximately two two weeks later the company actually incorporates sorry and what company is this it's still in stealth oh wow it's the next one people should be chasing if if a founder gets you to be out till 2 a.m they're gonna get your money and they're like what what time in the day you're like this wouldn't still be going on if he's not he's not ready to check like i once learned that from uh olivier at a data dog um he told me about the concept of a no battery.

21:32Okay. Right. So like at the beginning of the day, your no battery is completely full. By the end of the day, it's like wiped out. So the way to get money from me. You try to get information at the end of the day. Exactly. Just keep talking to me. And eventually I just can't, I can't hold it. So, so we're, we're sort of telling the whiz story. We, we learned the lesson of like, you know, keep investing and sort of the firm deciding on conviction. Like, I guess another key point in the company's history, which maybe you fit in as a board member, I don't actually know, is sort of the will they, won't they with Google and sort of like, oh, do they go public?

22:07Do they sell at a lower price? Like, what can you share about sort of that decision and how you thought about things? Yeah. You know, at a high level, I've been on both sides, right? On supporting Wiz, for example, with acquisitions, supporting Datadog with acquisitions, supporting Coalition with acquisitions. And on the other side, 10 plus companies of mine have been acquired by other businesses, Duo by Cisco, Signal Sciences by Fastly, and many more, right? So I've seen both sides. I think for acquisitions to be successful, my view is they should be small or they should be large. Like middle-sized acquisitions are the most difficult for both sides to be successful, right um and i think it's really important for there to be a shared concept of success right so small small and large is kind of the most important um zip code to plan mid-size just because people don't get excited and they just walk away or i'm trying to understand you're asking what are the common reasons that mid-size deals fail or how come yeah so the most common reasons are like integration um number two is not important enough to the company or exactly it's neither here nor there, right?

23:21So it doesn't receive the TLC needed to make it successful. Number two, because it's neither small nor large, the acquired entity doesn't have the space to make an impact, right? Those are the two most common failure modes. And so as you can tell, it's more human psychology than like, how does the product fit into the strategy? So small and large is number one. Number two, I learned this from Roy Resnick, who's one of the other co-founders of Wiz a decade ago at Adolom. One of his mentors who's now passed is Zohar Zisipel, a legend in the early tech scene of Israel. And when Adolom had an acquisition offer from Microsoft, the first question Zohar asked the founders was, what do you want to do?

24:18And I actually think it's a profoundly important question. And I do subsequently tell founders what I think. But the first question is always, what do you want to do? What, I mean, you know, Datadog is public, you know, that's your, one of your other huge investments. It's, I just checked, it's like 44 billion right now or something. market cap yeah 40 44 um i mean at some level yeah i mean it's bigger than the price we're talking about with whiz but i assume you make more money off i don't know how much you're still letting things ride with data data dog but you know a clean acquisition you get paid in cash as a venture capitalist that's a very desirable outcome or how do you think about the advice that vcs give of you know go public go the distance versus everybody getting paid is you know a great outcome?

25:08Oh, so I don't think about optimizing exit. Like obviously from a fiduciary standpoint as a board member, one of your responsibilities is to try to maximize shareholder value. So you think about that, but I wouldn't confuse that with the shareholder interest of in what period of time, how much return do you generate? I think that's, you have to be, as a founder, You should be really conscientious if a partner, an investor, a board member that you involve cannot distinguish the two. I'm not sure I can. So you have to dumb that down a little bit for me. What do you say? As a board member, I'm responsible for everybody.

25:46Okay. Right? As a shareholder, I'm responsible for myself. Right. Different. Okay. So you have to be able to acknowledge your own interest and what's in the collective interest. But it's – which is speaking to one part of your question, right? One part of your question is like, well, for the investor, it can look very different. You know, part of, I think, the job of an investor board member is to push entrepreneurs past their limits, right? And remove anything that's in the way to really experience the fullness of ambition. And even sometimes, you know, kind of bring the goalposts further apart.

26:38And so the same has been true for Datadog, right? Like years ago, they actually, years ago, we talked about like a billion in revenue as a far off milestone, right? Now we're talking about like a completely different level of revenue as a achievable milestone. own. So you're constantly kind of pushing where the company can be, whether it's a M &A or an IPO is more of like a moment versus a strategic, you know, direction to push ambition. Does that make sense? It does. But there also, you know, there's subtlety to it in that. So it's like, okay, you, you're like a shareholder, you're a board member.

27:22You also, you know, I imagine being an index and like a, you're playing a repeat game. So even as a shareholder with LPs, you're like, listen, doing great by founders and like honoring the founder vision in some ways is also in our like fiduciary interest. So you have that sort of complicated calculus. They're like, the founders themselves have like, how much more do I want to keep working on this versus exit? And then they also have the sort of obligation of like, well, is this so much a better deal? I mean, it's just, do you try to turn this into like a math calculus or like how much is Is it pretty soft?

27:55This sort of, oh, how much more is this than I would have thought versus how much do I want to do it? You try and turn that into numbers or you just sort of live in this sort of soft, squishy thing? It does depend on the relationship with each entrepreneur. So last year, there's one entrepreneur who's got a terrific business that's growing super well that was attracting acquisition interest. And I was like, hey, ask yourself two questions. Like one, can you 10x your company? And number two, do you have the stamina to do so? If the answer to both questions is no, you should probably sell. Right.

28:33If the answer to the first one is yes and the second one is no, maybe we think about building a succession plan. If the answer to both is yes, what are we even talking about? Stop wasting my time. Interesting. And those were sincere. It wasn't like, oh, I'm leading him to what I want. You were like, it depends on which one it is. Well, it can still be a conversation, right? Which is like - You sort of have a theory of which it is. The starting point is like, well, what is, again, what do you think? Like, okay, you think it can be 10X, right? Like, let's talk about that. What is the plan to like 10X?

29:06And I might disagree and say like, well, I don't think the opportunity is here. I think it's there. Or you're saying it's 10X. That sounds to me like 50X, right? So it's still a conversation, but the starting point is like, I think it's a sincere and useful framework. If someone does not see the opportunity, right, then it's like, okay, we need to like search for the opportunity. Like it's a, again, it's always a conversation. In terms of stamina, it's so introspective, right? Like, you know, we debate like how much is our job to listen to and not to put an intention, but how much of our job is to inspire entrepreneurs?