How to Make Smarter Bets and Achieve Extraordinary Growth: A Conversation with GSB's Ilya Strebulaev

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  Speaker 1:
  Good morning everyone, and thank you for joining us in this webinar. This is Mark Edwards speaking. I’m the Chief Investment Officer at Alumni Ventures and I’m thrilled to be joined today by Professor Ilia Reev of the Stanford Graduate School of Business and author of a newly released book, The Venture Mindset. We’re going to get into a discussion with Ilia, but leading into that I wanted to go through a couple of housekeeping and disclosure items and then sort of set the stage for the discussion just to keep my compliance attorneys happy.

  Want to disclose that we’re speaking today about Alumni Ventures and our associated view of the venture capital landscape. This presentation is for informational purposes only and is not an offer to buy or sell securities, which will remain only pursuant to formal offering documents. Please review important disclosure materials provided in the webinar, which you can access at avfunds.com/disclosures.

  In terms of the format of our discussion today, all participants will be muted throughout the discussion. We’re going to potentially have time at the end — we’ve got a pretty full agenda — for some questions, and there’s a prompt box in your control panel if you want to log questions. Taylor is helping out today and he will triage those questions, and if we can’t get to them live, we’ll follow up after the fact. In addition, we’re recording the session and so it will be available for listening afterwards.

  If there’s interest in going through the information during the webinar or learning more about Alumni Ventures or any of our investment offerings, we encourage you to book a call with one of our senior partners. Taylor’s going to put some information with links in the chat area so that you can access that and schedule something on your calendar, in addition to posting some fund materials, which give a little bit more historical background and information on our investing activities.

  So next slide. With that, I’m going to go and provide a little bit of an overview and some introductory remarks before we turn the conversation to Ilia about the venture mindset.

  Quickly, I wanted to provide a little bit of background. I know we’ve got a diverse audience on the call, but a little bit of background about who we are at Alumni Ventures and what led us to schedule this talk and this discussion. So Alumni Ventures is a national venture capital investment firm. We’ve been investing outside capital since just about 2014, with a lot of the leadership of the firm having decades of experience predating the formation of the company. But the company was really founded around two core principles.

  The first is directing our activities in service of investing on behalf of accredited individual investors. The overwhelming majority of the venture capital industry is focused on raising and deploying capital on behalf of large institutional investors, and we felt from the very founding of the firm that we wanted to try and bring a similar level of professionalism and portfolio construction, but focusing on the objectives of individual investors.

  The second, which sort of comes with that decision, is we’ve really built our business around the concept of being network-based. So by servicing a large network of individual investors, we are able to tap into the expertise that resides in those communities and the alignment that comes with it in order to be more effective in accessing highly selective and highly competitive deals, making better investment decisions, and adding more value to our portfolio companies after the date of investment.

  So with those two foundational principles, you can see here in this chart, we have grown the company nicely through a variety of cyclical environments to now manage a portfolio in excess of $1.3 billion of outside capital, which involves investments in about 1,300 individual companies. And in each of the last two years, we’ve been recognized by PitchBook — an information source — as the most active U.S.-based investor in venture capital in terms of deal counts and the number of companies that we work with.

  So obviously we’re very proud of the progress we’ve made, and I think the market presence that we’ve established is a huge asset of the firm. But ultimately, we want to be — and expect to be — judged by the quality of our investing activities and the performance of our portfolios. And this year we were recognized by another market research institution, CB Insights, as one of the top 20 firms in the U.S. with a view to the quality of our investing activities, which puts us in very elite company with some of the firms that you see here that are very well established, very largely California-based firms — the likes of Lightspeed and Kleiner Perkins. So we love to show this slide and are very focused on making sure that this continues going forward.

  Speaker 2:
  Hi everyone. Just taking a quick break to tell you about Spike Ventures. Spike is a venture capital fund for the Stanford community, offering 20 to 30 investments diversified by sector, stage, and geography. We co-invest alongside well-established lead investors, and we leverage our presence in the vibrant startup ecosystem around Stanford to secure access to some of the most promising investment opportunities.

  And Spike Ventures is part of Alumni Ventures — one of the most active and top-performing VC firms in the U.S., and one of the only firms committed to making venture capital accessible to individual investors just like you. So if you’d like to learn more about Spike Ventures and the opportunity to bring venture capital into your portfolio, visit us at av.vc/funds/spike. Now back to the webinar.

  Speaker 1:
  So finally, why do we get up every day to affect this business and why is this the industry that we’re in? There’s a couple of reasons.

  We think venture capital is a very, very dynamic space for a variety of reasons and should be appealing to individual investors — just like it is for institutional investors. The asset class has demonstrated, over an extended period of time and through different investing environments and climates, superior performance relative to what’s generally available in public equity markets, with a comparable level of diversification. So we are in the business of generating alpha and outperformance for our investors, and we feel that there’s opportunities to do that in venture-stage companies and private markets that are far more attractive than what’s generally available.

  Second is: the VC asset class, surprisingly, is almost entirely uncorrelated with the performance of public market equity securities. Obviously, the companies in our portfolio are subject to some of the same macro forces in terms of interest rates and GDP growth and inflation and those things that affect public markets. But overwhelmingly, the source of returns of venture capital comes down to performance at the individual company level.

  So from an investor standpoint, you can introduce venture capital into your portfolio without feeling, from a risk and volatility perspective, that you’re just pushing up your long-only equity risk.

  Third, and I think significantly, is that we’re undergoing kind of a secular change in the structure of investable markets, where the public markets are facing sort of an erosion of the number of companies that are available for investment, and the private markets are actually expanding pretty significantly. This is a secular trend that I think dates back to Sarbanes-Oxley, and I think we expect it to continue, where a lot of companies are either making the decision to stay private longer — certainly have the flexibility to do that — and as a result, companies that are going public and are available for public investment post-IPO tend to be further along in their journey. And a lot of the early value that can be captured during their kind of hypergrowth stage of development is really being monetized by private market investors.

  So for a lot of people, being excluded from having that access comes at a cost in terms of their expected investment performance.

  And fourth and finally, I think for a lot of investors, there’s a notion that VC is highly risky and scary, and there’s a significant risk of capital impairment by participating in the strategy. And while that is true at the individual company level, I think there’s a pretty extensive body of academic research that says if portfolios are properly sized and constructed in terms of the number of companies that are backed — with a focus on appropriate diversification — that the risk of capital impairment can be significantly reduced away. And so our focus at Alumni Ventures is providing a program that really, really focuses on appropriate levels of diversification such that some of the individual company risk profiles are largely mitigated out, but there’s still the ability to participate in the companies that have significant upside.

  So with that as a backdrop, I want to turn the conversation over to introducing Ilia and getting into a discussion of his book, The Venture Mindset. Ilia, your background here is up on the slide, but it’s probably a little bit of an eye chart. So welcome, thank you for joining us, and maybe you can give the people on the call an overview of your background just to set the stage for the conversation.

  Speaker 3:
  Thank you, Mark. It’s great to be here. Thank you so much for inviting me.

  Very briefly about myself — I’ve been at Stanford Graduate School of Business for 20 years, and I spent this 20 years studying venture capital and private equity. About 10 years ago, I founded the Venture Capital Initiative that gets together all researchers at Stanford — but also outside Stanford as well — to go deeply into all the aspects of venture capital research, including the ones that Mark talked about when he was discussing the previous slide.

  And I also have been teaching what is now one of the most popular classes at the Graduate School of Business — Venture Capital — but I guess it’s not just because of me; it’s because so many students of ours would like to become founders, and many of them would like to become venture capitalists and private equity investors. So last year we had more than 200 MBA students at the GSB waitlisted for my class.

  Now this webinar is about the book that has just come out in the United States — and also, I arrived this morning from Korea. The first non-English edition, the Korean edition, came out in Seoul last week, and in the U.S. it already became a bestseller.

  Let me tell briefly about what is behind this book — mostly my motivation behind this book. Mark talked about different risks and different returns of venture capital investments, and that by investing in private assets, you potentially — if you do it in a smart way — can outperform public markets.

  What is really interesting is that I understood early on — and I’m originally a finance professor — that the way smart venture capitalists make decisions is very different from the way most of us, other investors in financial markets, executives in large companies, executives in small businesses, make decisions. And they make decisions differently because they are forced to do so.

  They face what I would describe as a rather hostile environment — an environment where they expect many of their startups to fail, an environment where they expect only a few startups to become extremely successful — to become home runs. And in order to survive and succeed in this environment, over time, smart VCs developed what I called the venture mindset — the different principles of how they make decisions.

  And as I’ve been studying these principles of the venture mindset, what I realized is that, first, all of us can benefit — and by “all of us,” I mean, well, all venture capital investors, all angel investors as well — but even beyond that, investors outside the venture world, founders, and executives in large companies.

  And so this book that we wrote with my former student — The Venture Mindset — is about nine principles that I’ve discovered on how venture capitalists make decisions that could be applied not only to the venture world but elsewhere. But obviously, all those principles are based on my research in venture capital.

  Speaker 1:
  Very good. That’s a good oversight. I’m curious to know — obviously the teaching aspect and the research aspect are incredibly popular and impactful on the Stanford campus, which is no surprise given the interest of a lot of the student body there. Was there something specific that really inspired you to turn that into this project and to put the book together?

  Speaker 3:
  Well, first of all, as I mentioned, it’s very difficult to get into my course, even if you’re a Stanford MBA student. And at some point, I realized that all those principles that I teach my students — I would like more people to get exposed to it. That’s kind of the first, and the way I started this.

  I first started by publicizing some of my research and insights on LinkedIn, and in fact, I’m doing this every day. So if you’re interested in the most recent research insights from my Venture Capital Initiative, go and check my LinkedIn profile.

  But then what I really realized — there was a lot of demand. For example, I’ve been working with Mark and a lot of leaders of large companies. In the past, innovation meant one thing for them, and nowadays innovation means something completely different — and they realize they’re not very prepared. But at the same time, they can take a lot of opportunities if they really understand how to make decisions better in this disruptive, innovative world.

  So I’ve been working a lot with the senior leaders of large companies around the world, and I realized they can also benefit from those principles. And so I think those two reasons were really the main, so to say, push factors for me over the edge — and so I started writing the book.

  Speaker 1:
  Yeah, yeah. Well, I completed the book last week and simultaneously felt like it was nice to be back at business school — even though I’m decades removed from my academic career and from the Stanford campus. But also very, very practical, as you say, for business executives that may not be explicitly in the entrepreneurial ecosystem, but need to be mindful of driving innovation in their organization. So you managed to navigate both those audiences quite well.

  So cutting to some of the specifics that I’m curious about as discussion points — one of the chapters that I really enjoyed is your discussion of the “prepared mind,” your term, and I wonder if you could sort of expound on that for our listeners — what you mean. And then I had a follow-up question once we kind of clarify what the concept is.

  Speaker 3:
  Well Mark, first of all, the prepared mind is not exactly my term. In fact, it was first pronounced by Louis Pasteur — a famous French scientist of the 19th century — who told the audience in his famous speech that observation, or chance in the field, favors the prepared mind.

  And in fact, many venture capitalists use the prepared mind principle — the prepared mind methodology — when they think about the investment space.

  So first of all, you have to think about this: the investment space is very competitive, which means that if you meet a very interesting startup, likely others already met either this startup or startups similar to this one. So the prepared mind means that you, in fact, would like to know — when you meet the founding team — how to compare them to everybody else in the same space, but also everybody else in other spaces that you’ve invested in or learned about.

  And in the book we give a lot of examples of investors that, when they’re interested in a specific space, they would go out and meet every single startup in that space. In fact, one of the points I try to expose my students to — who would like to become venture capitalists — is that from their point of view, the prepared mind means the following: whenever they meet with the founding team, they have to ask themselves a question after that half-hour meeting or one-hour meeting — have they learned anything new from the founders’ team?

  Very often, venture capitalists who meet founders know much more than the founders about almost everything. Maybe that is not the best idea to invest in those founders. You would like to invest and fund those who actually know more than you as an investor. But in order to judge this, you need to have the prepared mind.

  And interestingly enough — both in evidence but also my research — suggests that the prepared mind is one of the factors behind those overperforming returns in the venture capital space.

  Speaker 4:
  Hey everyone, I’d love to take a moment to tell you a bit about Alumni Ventures and our Foundation Fund. AV offers smart, simple, and accessible venture portfolios. We built our firm to serve the needs of individual investors, and we’ve raised over $1.3 billion from a community of more than 10,000 investors.

  PitchBook ranked AV the most active VC in the United States in both 2022 and 2023, and CB Insights ranked AV a top 20 performing VC for 2024.

  So where might investors start? Some of the people we talk to are interested in our Foundation Fund — one of our broadest and most diversified offerings. This fund taps into our substantial investment engine, offering investors a robust and diversified venture portfolio with deals sourced from many of our investing teams and with renowned lead investors such as these.

  The Foundation Fund portfolio is spread across stage, sector, geography, and lead investor to help ensure a diversified and balanced mix in your portfolio. For an investor new to Alumni Ventures, it could be a great place to start.

  Ready to learn more? Visit us at av.vc.

  Speaker 1:
  So one follow-up question on that concept — which is something that I contemplate in our investing activities and managing a team that are facing the market — is we believe in the value of accumulated experience and wisdom, the importance of pattern recognition and appreciation of the lessons of the past in making investment decisions.

  But in venture capital, more so than I think any other investment strategy, you need to have a flexibility in your thought process — to really look around corners and try and identify market opportunities and strategies to capitalize on those opportunities before they’re widely understood and appreciated.

  And so I’m curious if there’s any lessons or anecdotes from some of the people that you encountered in your research on how to sort of mentally navigate that duality — because it doesn’t come naturally.

  Speaker 3:
  Absolutely, Mark. So the prepared mind is one of the nine principles, and all nine principles work together.

  So while you need to have the prepared mind in investigating a specific space, you in effect, first of all, need to come up with a space. And absolutely, if you came up with a space by reading about this in The Wall Street Journal or seeing it in Bloomberg — likely, you’re a little bit too late.

  In fact, as smart investors would tell you: conviction beats consensus every single time in the world of venture.

  And the way to think about this is that the venture world is about home runs. And what is a home run? By definition, it is an outlier. By definition, that means that at the time when you invested in this company, the rest of the people do not think it would be that amazing. Otherwise, the value would be too high already, and the returns would be normal market returns.

  As a result of that — and we see this again and again in the cycles of the markets — whenever investors all try to invest in the same space or in the same company, the subsequent returns are not always the best. And I’ve definitely shown this in my research, but I’m pretty sure that all of us on this webinar can sympathize and can show, through their experiences, the same phenomenon.

  So therefore, what smart VCs do is that they combine the prepared mind with a number of other principles. So let me show you one, Mark, which is very important: most VCs make decisions in groups.

  So at Alumni Ventures, you’re the Chief Investment Officer — but you’re not the only one making decisions. And what smart VCs have realized is that consensus is dangerous. That’s actually very interesting.

  Because what I did is I went into many venture capital firms and I studied their decision-making. For example, I studied how they make decisions — by consensus, by vote, let’s say by majority votes, or something else.

  What I found out is that those that depended on unanimity or consensus — meaning that everybody should agree to proceed with that specific deal for the deal to go forward — those venture capital firms were much less successful in terms of returns, in terms of the number of their portfolio companies that went public.

  What smart VCs do is that they use the principle that I call “agree to disagree.”

  Very interesting — because let me give an example. I talked to a very famous investor in a venture capital firm that’s been around for, like, 35 years. And what he told me — and then we looked at the data in his firm — is that every single time everybody around the table agreed it was a great deal — every single time — that was not a great deal. That was not a home run.

  In fact, every single time they had a home run, there was a lot of disagreement — a lot of disagreement.

  So “agree to disagree” means that even if there are some people at the table who really would like to proceed with the deal — and some people who do not want to proceed with the deal — you need to give some leeway to those who are in favor of the deal. Especially if it is a new space — especially if it’s something where the market does not exist yet.

  Speaker 3:
  Okay, let me give you an example — a very specific example. It’s already now 10 or 11 or 12 years ago that Eric Yuan was kind of pushed out of Cisco because he proposed to improve WebEx and had to found what turned out to be Zoom.

  Now, a number of VCs turned Zoom down. Why? It’s kind of easy — there was WebEx, there was Google Meet, there was Teams — those large conglomerates who were obviously offering fancy, competing products. And one day, Eric Yuan met guys at Qualcomm Ventures — Nagraj Kashyap and Patrick Eggen and Sunith Dedhia, who were team members. Nagraj was the head of Qualcomm Ventures.

  So, the long story short — they loved Eric Yuan. They loved Zoom. In fact, back then it wasn’t called Zoom — it was called Saasbee, “bee” as in hardworking bee. And they loved it. I won’t go into detail of why they loved it — there were reasons.

  They went back to the investment committee, and every single person on that investment committee in Qualcomm Ventures was against. Every single person. There were many. Only three of them were in favor. That would have been the end of the story, Mark — that, in fact, likely was the end of the story in many other partnerships that required unanimity or consensus.

  But when Nagraj Kashyap designed Qualcomm Ventures, he designed it in such a way that they could make decisions even if they were contrarian — even though the majority, even the overwhelming majority of the investment committee, was against. And so they ended up investing in Zoom. And obviously — and obviously — Zoom became one of those amazing home runs for Qualcomm Ventures.

  But that was not luck. Maybe it was luck with a specific investment, but it was not luck — because it was about the process design. And so for everybody on this webinar — whether you invest or whether, in fact, you make decisions outside of investing, elsewhere — always, always think about that.

  You have to combine the prepared mind — so the deep knowledge of the space — with the ability to make contrarian decisions, especially if it’s in a group decision setting. And coming back to my many sessions with leaders of large companies — this is one of the biggest insights from the venture mindset. Because it turns out that developing this contrarian viewpoint — this agree-to-disagree principle — it turns out to be relatively straightforward in a large company, and really in any group decision-making. You just need to understand what it is about, and you need to know how to implement it. And that is what smart VCs are doing.

  Speaker 1:
  Yeah, the Zoom anecdote was a great one. I appreciated that segment of the book.

  Shifting gears to one of the other principles — and a chapter in the book that I thought was very interesting — you used the horse betting analogy in terms of the significance of management team evaluations, betting on the jockey as an important consideration in investment decision-making.

  And certainly it’s an important aspect of what we evaluate, but in the context of a holistic review of an individual investment analysis, we do spend a lot of time looking at the horse and the track and the odds and everything else that kind of go into making a decision.

  And yet, given its importance and its significance, truly evaluating management teams I think is one of the most subjective — and therefore potentially inconsistent and subject to influence by bias — of all the aspects of our investment process.

  And so I’m curious to know — inasmuch as subjectivity can introduce some risks in your process as opposed to being an asset (and there are probably elements of both) — have you seen strategies that firms have used to create a level of consistency, objectivity both across teammates within the organization and then also with individual teammates over time?

  Speaker 3:
  First of all, I think that is one of the critical questions that faces every single venture investor — especially at the early stage. There are many great ideas. But for every single great idea, there will be many, many teams that are going to implement — or try to implement — this idea. And typically, only one or two or maybe three teams are going to win.

  For every single Uber, there’s going to be Lyft. But how many other ride-sharing companies in this country? We know. How many search engines? We know now, even though back then there were many — and so on and so forth.

  So it’s all about not just the horse — of course, the horse is important — but the horse is, Mark, as you said, more objective. It’s easier to study. Financial analysts can study the horse.

  Now, the jockey — which is not, by the way, just the founders, but also the founding team, so the entire C-suite of the startup and sometimes people beyond the C-suite — there is a necessary element of subjectivity.

  This is, by the way, why I think AI will not displace people like you, Mark, anytime soon. Maybe in hedge funds — but not yet in venture funds.

  But at the same time, I think there are principles that venture capitalists follow. So subjectivity does not mean that there are no principles. And principles are mostly insights that smart VCs saw — that they really worked.

  So let me give you some specific examples — and I provide many, many more in the book.

  They typically start with something that is very difficult to define and very difficult to quantify — and then they try to observe it.

  Let me give you an example: charisma. Now, a founder with charisma has a higher chance of success. The question is: how do you define charisma? And there are many ways, but here is one practical way of defining it so that you can observe it:

  Charisma, by definition in the startup world, is the ability of the founder to attract high-quality personnel — where that founder has no resources. That founder has maybe no product yet, no market, no revenue, and so on.

  And it’s really interesting — with practice, you can see charisma right away.

  So, as I mentioned, I’ve been teaching the Venture Capital class for many years. And every single year, more than a hundred students come through my class, and I keep private notes.

  Now, of all the students — I’m one of those strange professors who meet with every single student one-on-one to talk about their startup. And then I keep in touch with those students after they graduate.

  Stanford, by the way, does not allow professors to invest in students before they graduate — but once they graduate, I can invest. So I also invest in many of my former students.

  Now, as I mentioned, I record private notes. And one of the private notes I record is whether I think that student is charismatic. And by charismatic, I mean: whether that student can attract other people to follow him or her.

  And that seems very difficult to define. And yet — it’s interesting — I now have more than 2,500 students, which means that I can apply the power of statistics on the subjective data. And it turns out that even my observation — and I’m not a professional investor, I don’t claim to be a professional venture capitalist — simply suggests that there is a pretty good correlation between my measure of charisma and the eventual outcomes: whether the student is able to raise venture capital money, whether the student is able to achieve unicorn status, a successful exit, and so on.

  So this is one interesting subjective feature that could be quantified — or rather, measured.

  Another one is — we all talk about passion. And in many ways, I think passion is overrated. Because as you know, Mark, many successful startups — you have to go along with them for years and years and years. It’s difficult to remain passionate for 10 years along the road.

  So it’s not really about passion — it’s about resilience. This is why I think many VCs try to understand how resilient the founders are, and how they communicate with each other in the team.

  By the way, statistics show that many startups fail because of the infighting between the founders. So they’re either not resilient, or they cannot disagree with each other.

  And this is also what I think could be — if not quantified — at least seen through, or filtered through. And this is why VCs spend so much time trying to understand the dynamics in the founding team. So this is a second example.

  So I give specific insights and practical examples in the book.

  What I think is really interesting is that, as you read the book — the chapter on “jockey versus the horse” — you see that you can apply the same methods of trying to find the best people to implement various strategies in a very uncertain world, even beyond the startup or the venture capital context. And I think that is what I found really interesting.

  In my presence, leaders of large companies, for example, actively employed some of those techniques.

  Speaker 1:
  Yeah, interesting. It sounds like we may need to speak offline about getting access to your list of the most charismatic GSB graduates. Just joking.

  I’m curious to get a perspective — we’ve got about 10 more minutes, I believe. Obviously, the book is very well structured and very well researched. You mentioned the nine principles.

  I’m curious — as you kind of got started on the journey, was there anything that you learned along the way through your research that came as a surprise versus your going-in assumptions, or that was just sort of inconsistent with the hypothesis? Or was it largely confirmatory — even if it was insightful?

  And then I’m just kind of curious to get a perspective if there’s any sort of interesting anecdotes or stories from the research — a lot of which seemed to involve some shoe leather and getting out and having a bunch of interesting conversations — that you’d like to share with potential readers? Because that was really an attribute of the book that I enjoyed.

  Speaker 3:
  Thank you, Mark.

  When I started doing research in venture capital, many people told me not to do it — many of my colleagues. Because when I was doing my PhD, venture capital was not really a research field at all — because there was no data. Also, frankly, nobody cared about venture capital, kind of.

  And I think that before doing any serious research on venture capital, I had to overcome the data issue.

  The real reason behind this Venture Capital Initiative that I founded was to get the data in order. And that required a lot of collection, a lot of manual collection, reconciliation, cleaning the data, and so on.

  Now, I think one surprise — including to my colleagues — is that, in fact, we succeeded. And even when the results confirm intuition — for example, one result that confirmed intuition: Stanford founders — so founders who graduated from Stanford — yes, they’re much more likely to reach unicorn status if they raise venture capital funding.

  Speaker 3:
  So maybe not surprising, and definitely every single Stanford student thinks that, but still I not just confirmed this — I now know the quantification of that. So I can tell you the odds ratios, which is: what is the exact percentage — by how much in terms of percentages — the Stanford founders are more likely to achieve unicorn status. And the same for all the other universities, etc. So I think even confirmation is very, very important — and quantification of this.

  But yes, along the way there were a lot of surprises. A lot of surprises about, first, some variables that I studied that meant much more than I expected. And again, maybe, Mark, for smart VCs like you it’s relatively straightforward — but it wasn’t for me.

  For example, now we do know that serial founders are more likely to be successful. My data also confirms that. But I also found that serial founders who failed in the past are more likely to be successful. And that was initially a surprise to me. And I think that’s a very interesting discussion — of why that is the case. And I think it really dives very nicely into the venture mindset.

  Or it’s interesting that while educational background is very important — again, Stanford is a great example — your prior experience is even more important. Prior job experience. So we did look into: what is the probability of founders becoming really successful founders, leading these unicorn companies, if they worked in company A or company B?

  And it’s clear that some companies imbue the people with the venture mindset — with the ability to start and succeed on their entrepreneurial journey. And in fact, that propensity is more likely than an educational background. So that’s kind of — to me at least — it was a surprising result.

  I think there were two big surprising results to me. One more macro result was that before I started this myself, I did not realize how important venture capital is for this country. And I believe nobody did — well, because nobody did this research before us.

  Did you know that every second company that went public in the United States in the last 50 years was venture-backed? Do you know that seven out of the top ten companies — if you rank them by market cap today — were venture-backed?

  And moreover, there is causality — meaning that had there been no venture capital industry in this country, many, many of those companies that changed our lives dramatically would not have existed. So our life would have been quite different. So the venture capital industry is more important than I expected when I started doing this research. So this is a surprise at the macro level.

  A surprise at the micro level is that, as you correctly pointed out, especially working on this book, I had the chance to talk to hundreds of venture capitalists — and there are a lot of fascinating stories. Fascinating stories about how they make decisions in a very difficult environment.

  Speaker 1:
  Yeah, we’ve got a few minutes. On that question of decision-making, I think one of the interesting dynamics of reality in the venture world — which doesn’t come naturally to a lot of people — is what you describe as the concept of errors of omission versus commission.

  And I think most of us are kind of trained — certainly this has been a lot of my background, which involves two decades in private equity — in making sure when you make a decision that you address with a level of precision all the things that could potentially go wrong. And that’s sort of overwhelmingly used as your indicator of a good process and a sound decision-making framework.

  Whereas in the venture world, because of the payoff nature of investing in this asset class and the power law dynamics that exist — some of the biggest mistakes you can make in venture are saying no, and the deals that get away.

  And I wonder if there’s just any closing remarks on how people, as a practical matter, can start to incorporate some of that thinking into their own investing approach and/or careers. Because I don’t think it’s a natural human impulse when so much of the other activities in our lives are oriented towards avoiding the errors of commission.

  Speaker 3:
  Absolutely. Indeed — it is not natural. And this is really important.

  If you are just going to invest in every single deal because you’re afraid that you’re going to miss the next Google or next Facebook or whatever — then likely you’ll lose money.

  I think that the most important principle here that venture capitalists use is what I call in the book: Double Down or Quit.

  Which means that most VCs think about their first check that they give to the company as just a door-opener. The real decision, in effect, comes next. The real decision is whether VCs are going to invest again in the same company.

  And if you’ve been in the VC world, you know that the single most important contractual right that VCs care about is called pro rata rights, which gives them the right — but not the obligation — to invest in the next round.

  And this is really where the serious decisions are going to be made.

  What I found out in my research is that venture capitalists who are more ruthless — meaning they’re in fact less likely to invest in the follow-on rounds of the companies — those venture capitalists tend to be more successful.

  Those venture capitalists who use processes — design processes, decision-making processes — to ensure that they impose discipline on decisions are more likely to be successful.

  So I think the practical implication is that there’s a big difference between the initial decision and the subsequent decision on the same project.

  And I think that it’s really important — if you would like to apply this thinking not just to startup investments (which is an absolute must), but also elsewhere in life — whenever we deal with a project in your life that you have to make decisions again and again and again.

  First — we do tend, I think, to say “no” too much initially. But having said “yes,” we tend not to say “no.” Because we think, “Well, we already spent effort. Okay, we already incurred some cost.” And therefore we continue — no matter what.

  Psychologists have a wonderful name for it, which I really like: it’s called the escalation of commitment.

  And I think smart VCs found specific ways — rules, specific disciplines — to get around this escalation of commitment. And again, in the book we describe specific methods.

  Just to say, “You know what? Oh well, I know about this escalation of commitment, therefore I will not fall prey to it” — that does not help. That does not help.

  There are very specific ways that VCs deal with that. And I recommend everybody who makes dynamic decisions of this type to investigate and explore those tricks that smart VCs use.

  Speaker 1:
  Yeah, and I think one of the most compelling attributes of the way the venture capital market operates and is structured — and it’s certainly advantageous to capital allocators like ourselves, but I think it’s also beneficial for founders — is that the industry is really organized around this notion of an incremental, success-based approach where you can build an investment position as more information becomes available and more conviction results.

  And so we are very much aligned as a firm in our approach on maximizing the optionality in every decision that we make and creating that path — whether it’s through pro rata rights or just following companies closely — that when we see the green light, we’re in a position to take advantage of that.

  So I think we’ll end on that last insight. Hopefully my enthusiasm for your work has come through in this discussion, and I encourage everybody who’s participating in the webinar to track down The Venture Mindset. I think you’ll find it a great read.

  Ilia, thank you very much for carving out some of your time. I know you’ve been on multiple continents and have a busy travel schedule.

  Again, just to close the loop — there are some codes here for following up with specific information from AV or the ability to get on a calendar to have a discussion with one of our senior partners. When the webinar ends, I think there’ll be a brief four-question survey, which we would appreciate you taking the time to fill out.

  And for the questions that we weren’t able to get to — like I said, we will do our best to follow up directly and try and close the loop with you.

  And I think with that — thank you everybody. Thank you again, Ilia. And thank you, Mark. Have a nice day.