Venture capital firms notoriously embrace risk and take big swings, hoping that one startup will become a monster hit that pays for many other failed investments. This VC approach scares established companies, but it shouldn’t. Stanford Graduate School of Business professorsays that VC firms have proven best practices that all leaders should apply in their own companies.
CURT NICKISCH: So let’s dig into the VC mindset and what sets these decision makers apart. One thing that probably anybody would tell you if you ask them on the street is that this willingness to fail, comfort with failure is sort of at the heart of that mindset. Does your research bear that out? ILYA STREBULAEV: The way to think about this principle of home runs met and strikeouts don’t, is not to think about each individual project or each individual experiment, but think about a portfolio of bets that you have. I think when smart venture capitalists make decisions about how they’re going to allocate their budget, very often the most important decision is not about a specific startup, but the most important decision about the portfolio allocation.
CURT NICKISCH: So let’s dig into one thing that you just talked about a bit, which was this agree to disagree, which goes against a lot of companies that are consensus driven. And it goes against just this idea, I guess, that if it’s a good idea, everybody should recognize it and come around to it. But if you really try to go with consensus, then you tend to not have very pathbreaking, groundbreaking investments or ventures that you’re developing inside your firm.
If you are going to be appointed as a devil again and again and again, then in fact your influence is going to be diminished over time. Another mechanism that venture capital firms use is what I call a consensus minus X rule. So let’s say going back to the example I gave earlier about a partnership of nine decision makers. Consensus minus X, let’s say consensus minus two means is that the investment will be approved even if only seven people are in favor.
ILYA STREBULAEV: These practices might be well known. It doesn’t mean though that they’re frequently implemented in large organizations. You mentioned keep teams small. In all venture capital firms, teams are always kept very, very small. But in large companies, very often you go into a meeting room and there will be a lot of people.
CURT NICKISCH: Yeah, so much of decision-making in organizations is often about repeating past performance, right? Finding previous patterns and trying to repeat them. It sounds like you’re saying the venture mindset is almost trying to divorce yourself from that, and be open to exceptions, and be open to what’s different and what’s new.
The first, at the top of the funnel, you have a lot of deals. And I think of this as 100 to 10, using the automobile terminology, you are going to use a fast lane, which means that you are trying to make a very fast decision here as efficiently as possible. And here is one specific trick that venture capitalists use that I found amazingly efficient, and in all my work with large organizations, I observed that they don’t use this trick typically, before I explain this to them.
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