“Decoding the Venture Mindset,” with Professor Ilya Strebulaev

“Decoding the Venture Mindset,” with Professor Ilya Strebulaev

Venture Mindset Principles

  • Focus on achieving significant successes rather than avoiding failures.
  • Different funds have different risk appetites based on their size and existing portfolio performance.
  • Missing out on a big opportunity can be more costly than making a mistake.
  • Venture-minded organizations beyond VC firms also use these principles for success.

Venture Capital Investment

  • Venture capitalists invest in startups that offer different business models or disrupt existing ones, not just in tech companies.
  • The world of venture is driven by power law, where the best in class is better than everything else combined.
  • Companies should adopt a "Pyramid of Bets" approach: core, adjacent, and new/disruptive.
  • Amazon is a venture-minded organization that experiments in its core, adjacent, and disruptive businesses.
  • Failures in the disruptive space are common, but executives responsible for failed projects may be promoted to lead new disruptive projects.
  • Venture capitalists use "anti-portfolios" to learn and identify decision-making patterns that can improve investment success.

Venture Capitalists and Cold Emails

  • VCs spend a lot of time outside their offices to find founders and deals.
  • Some successful VCs respond to unsolicited emails from founders.
  • A study found that the response rate to cold emails from fake startups varied from 8% to 15%.
  • More successful VCs with larger funds and higher multiples responded more frequently and faster to cold emails.

Decision-Making in Venture Capital

  • VCs should have a "prepared mind" and be ready to recognize and seize opportunities when they arise.
  • Successful VCs spend time preparing themselves and learning about the industries they invest in before making investment decisions.
  • The "double down or quit" principle suggests that large companies should either fully commit to a new venture or abandon it rather than continuing to invest small amounts of money without seeing significant results.
  • Professional poker players are more likely to fold than amateur players, avoiding the escalation of commitment and sunk cost fallacy.
  • Amazon follows the principle of "start small, scale fast, fail fast" to minimize sunk costs and facilitate project termination.
  • The concept of "flexibility over commitment" emphasizes adaptability over unwavering commitment.

Applying the Venture Mindset in Different Industries

  • Industries such as pharmaceuticals, Hollywood, and mining can benefit from the venture mindset.
  • Light speed Venture Capital formed a reinvestment team to objectively evaluate investment decisions and reduce escalation of commitment.
  • Khosla Ventures seeks the perspective of reputable and credible venture capital firms before investing in subsequent rounds.
  • Independent consultants and non-executive board members can provide valuable insights and identify projects that should be terminated.
  • Successful venture capital firms don't follow the unanimous consensus rule, instead embracing the principle of "agree to disagree" to catch unconventional opportunities.
  • Small teams are more effective in decision-making. The "Two Pizza Team Rule" suggests that a decision-making group should be small enough to be fed by two pizzas.
  • Appoint a "Devil's Advocate" to challenge assumptions and encourage disagreement.
  • Demand feedback from team members in advance of meetings, and make it anonymous to encourage honest opinions.
  • Junior members of the group should speak first, and experts should speak last to avoid biasing the discussion.

Advice for Entrepreneurs and Job Seekers

  • Angel investors should stay informed about companies in their niche and identify the pain points they are trying to solve.
  • Entrepreneurs should adopt the Venture Mindset, especially the principle of "double down and quit" to avoid wasting time and resources on unproductive projects.
  • When choosing a startup to work for, it's important to consider the quality of its investors, the time since its last funding round, and whether it's profitable.
  • Startups in the escalation of commitment phase should be approached with caution.
  • Before accepting a job offer, candidates should conduct reference checks and gather information about the company's culture and decision-making processes.

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