Ravi Sheth started investing in startups over two decades ago, much before being an angel investor was fashionable in India. Alongside running a successful shipping business as a director at Great Eastern Shipping – India’s largest private sector shipping company – Sheth has held a keen interest in backing young businesses with the potential to disrupt markets. He now invests in startups through his family office Anchorage Capital Partners, which backs startups predominantly from the angel to Series A rounds.

Sheth recently joined the Lightbox team for a fireside conversation and shared insights from investing in startups over the years, the challenges and complexities of running a shipping business and more.

We bring you edited excerpts from the conversation.

“We entered shipping without knowing anything about shipping…”

So shipping we started because basically we were in sugar. We were the largest importers of sugar. We would import it and sell it. After World War II… America had built all these Liberty ships that transported arms and ammunition from America to the UK right before the Normandy invasion… and so post World War II, they were auctioning off these ships. At that time we were hiring ships to move sugar. So one of the London brokers called us and said, why don't you buy a ship. Then you can transport sugar on your ship. So we bid for one of the Liberty ships and won. That was in 1948.

So, without knowing anything about shipping, we just entered shipping. Nobody, I mean, nobody knew what a ship was. Nobody had even probably seen a ship. The other interesting fact was that HD Parekh, the founder of HDFC, was very close to my grandfather and he, in fact, named the company. He said, why don't you call it Great Eastern Shipping…

There was no plan of expanding the shipping business at all. Those days there were no business plans. People just plunged into something. That's part of the entrepreneurial spirit, right? We bought the ship for Rs 20 lakh. Those days it was a lot of money. We had some partners in those days who were willing to fund it. And that's how it started. Over time, it naturally evolved into our main business.

Early experiments with angel investing

I may be one of the (country’s) first angel investors. The first angel investment was the typical body shopping IT company. This was in 1998-1999. It did quite well. I sold it in 2001. This was during the whole Y2K boom. Everything just went up exponentially for a bit. 

The other major investment I made was this technology company that was competing with the Tatas and IBMs for all the front-end trading terminals of the stock market. The National Stock Exchange had just been formed. You had the Bombay Stock Exchange. But the government wanted to break the monopoly of the Bombay Stock Exchange and started the National Stock Exchange. The idea was to eliminate all the regional stock exchanges and have one national stock exchange. So now with the National Stock Exchange, you need to distribute, right? Anyone sitting in a town or village should be able to connect to the national order book. Because the best price discovery mechanism is when all orders, buying and selling, aggregate at one point. 

So you had the big boys generating the software on the front end trading terminals which sit in the broker offices. And at that time the internet was very weak. I invested in this business that was competing with the big boys. And I remember, there was a Business India article which said that we would fail. And the fact is that we were the only ones left finally. The company was called 63 Moons Technologies. At that point, I did not understand all the stuff about the National Stock Exchange terminals, etc. But I just liked the person behind the company. And you could say that 63 moons was one of the pioneers of the equity cult in India. That business actually did not generate much money. But based on that experience, the company evolved and went into exchanges itself – MCX and IEX are results of that change.

“Earlier nobody talked valuations, just about the business.”

In those days,  you left it to the entrepreneur… I was not qualified enough to interfere in the entrepreneur’s ideas. We didn’t really look at monthly PNLs… one just had faith in the entrepreneur. 

I think the times have changed now. Now the only difference I see is that earlier nobody was chasing valuations. Nobody talked about valuations. People just talked about the business. So there was no need to see PNLs because the assumption was that we'd make money through the normal route of gradually growing the PNL business. And then finally, IPO, etc. There was no Series A, Series B. All these concepts did not exist. You just built a solid business.

The day you start only chasing valuations, you lose your eye on the ball, on cash flow, risk management and the core business itself. Now I see business plans, and I'm sure my team also sees business plans, where we wonder how the hell this guy will ever make money!

“We’ve survived only because of risk management…”

When we take on debt, what we do is that we always keep two years of repayment aside. We don't touch it.  That's like zero cash. So regardless of what the markets are, we will always have cash in the bank to pay our obligations. So starting with about 60 shipping companies in India, we are the only ones left. Literally the only ones. I'm not talking about the state-owned shipping operation. In the private sector, we are the only ones left. And that's only because of risk management. And I think this is something that many startups these days just don't do. They run very low on cash. Then they have these new concepts called runway.  I would not get sleep at night if I had a three-month runway in my business. I need two years. Because you never know what goes wrong in business, in life. 

And so the question will always come for startups, what do you put first, risk management or growth? And if you prioritize growth without having an eye on the ball, on risk management… some may go through because the business may scale up and then you're fine. But if you can't, what happens then?

I think, to some extent, venture capital is to blame. When you push entrepreneurs towards growth at all costs and they, in turn, want to spend money to show good monthly MIS… Now I understand that venture capital firms need to balance with the fund life. But the balance has to come from the stage at which you enter a company and whether a business plan is solid. The wrong goal that people chase is that they need to make 10X or 50X on the investment. 

“Never listen to anyone…ignore the noise.”

In the shipping business, you can lose rates at the rate of 90% a week. So what we do… and this would be useful even in your startup world, is that we literally take very long term averages and we see what is the median average, and on that basis, we buy and sell ships. We are very patient capital. Now, I’ll tell you the lesson to be learned. The lesson to be learned is never listen to anyone. 

So we get brokers coming to our office and we actually tell them, you are most welcome to come, we'll give you lunch, we’ll give you tea and coffee. But don't talk about the markets. When we have our quarterly analyst calls… they (brokers) say that you are sitting on 70% cash in your balance sheet. Why don't you go out and buy ships? We are not investing in your stock to sit on cash. Your job is to buy ships and you're not doing that. Earlier we used to be influenced, 15 years ago, when we were not doing so well. Now we do very well because we don't listen to them. We tell them, you want to sell the stock, sell the stock. We will buy and sell ships when we think it's right. 

So, we’ve done better as a business ignoring the noise. And this happens very often with entrepreneurs, when they get carried away with the noise. Therefore, one has to have courage in one’s own conviction. We are now a 75-year old business. In the first 60 years, we used to make mistakes. That's how long it takes to learn. Then 15 years ago, we started this model. We created a research team. We never had a research team and that was a big mistake. We went back 20 years to see the median values of ships and then we maintained a discipline… we would buy and sell only at those price points.

In my view, whether it's to do with my business, your startups, it's all about discipline. Discipline in cash flow, discipline in the model… In our business, the discipline is that regardless of the cash flow you are seeing, you just sit tight. Now, this rule does not apply at startups. But, you will have to exercise discipline in other ways. Okay, you’ve raised $10 million but don't go blow it up in six months. You should always raise more money than what the business needs. People are worried about dilution. But honestly, initially, whatever you need, raise $3 million more. Keep it aside. You never know where your plans could go wrong. So even if it means initial dilution, that's fine. 

“I’d rather back entrepreneurs who want to build sustainable businesses.”

They're all young. They haven’t not seen business cycles. So when I’m evaluating a startup, the idea has to be very appealing. Also, to a large extent it's intuition… is this person passionate enough? Does the entrepreneur have the grit to go through different changes and pivots, if the market demands. Another aspect I consider is simplicity… with some people you get the sense that for them it’s not about the lifestyle or valuation but genuinely about growing a business, solving the problem. 

The moment that an entrepreneur talks about creating $1 billion value in five years… I would rather back the entrepreneur that wants to build something sustainable. People who talk like that don't know how business works in the real world. The Excel sheet model is just so wrong, where they give you a five year projection that they will break even in five years from now. It’s important to find an entrepreneur who is grounded. That’s a judgment call and not easy to do, of course.

“We’ll see more young entrepreneurs disrupting incumbent brands.”

So the companies I've invested in now are doing two things and I think they're clearly the future. One is cyber security. Today, you only have the big four in India. You have one or two Indian players, but I think it’s a beginner market for everybody. So I think cyber security is a growth area. It may not be a $10 billion idea but clearly a $1 billion dollar idea if you really execute well. And, the other thing is the whole blockchain environment. Eventually blockchains will have to talk to each other. 

The digital world is here to stay. And there will be a lot of disruptions. Even if it's not the digital world, even if it's the real world, we’ll see young entrepreneurs disrupting incumbent brands, starting up and creating their own niche markets, because consumerism in India is here to stay. The poor are moving up to the middle and middle are becoming upper middle class. They want to spend money. There’s demand for more services, like Swiggy and Zomato, which facilitate life. After India’s independence, you had the Unilevers and P&Gs of the world. Today there are so many different brands that were probably doing a better job. Big companies, you know, are not nimble enough to move… You have a good entrepreneur, you have a good idea, you can create a brand from scratch.