Читать книгу The Business of Venture Capital - Mahendra Ramsinghani - Страница 43

The Misconception. You calculate what is risky or rewarding and always choose to maximize gains while minimizing losses.

The Truth. You depend on emotions to tell you is something is good or bad, greatly overestimate the rewards, and tend to stick to your first impressions.

–David McRaney, Author of You Are Not So Smart

Every practitioner should aim to be a student of human psychology and behavior. We are primal beings and we function in ways that cannot be fully explained within the logical construct. This section addresses a few challenges that are likely to occur while making investment decisions, primarily due to randomness of human psychology and emotions.

Let's start with David McRaney's observation that we are not as smart as we think we are. His book points out as many as 48 ways we delude ourselves. But for the sake of brevity, let's focus on the few that are relevant in the context of venture capital investments.

 Emotions versus logic. In any investment decisions, practitioners create elaborate logical labyrinths to minimize risk or justify actions — but as human beings, we have equal parts emotion. Or mostly emotions, if you start to scratch beneath the surface. We have a tendency to ignore odds in our favor and often rely on gut feelings. Snap judgments. Love at first sight. You had me at hello… . we could go on and on. At work, we do stuff because we like someone. We want to earn points or be liked. Or we want to reciprocate, to feel good about ourselves. Research shows that when it comes to identifying risk, our brains are hardwired to respond from the gut. Investor Chris Sacca one said, “Never forget that underneath all the math and the MBA bullshit talk, we are all still emotionally driven human beings. We want to attach ourselves to narratives. We don't act because of equations. We follow our beliefs. We get behind leaders who stir our feelings. If you find someone diving too deep into the numbers, that means they are struggling to find a reason to deeply care about you.”⁷What Makes a Good Investor?A Good TherapistThe part that is really overlooked is that a VC needs to be a good therapist. Any CEO will tell you that it's the loneliest job in the world. You have to lead, be upbeat and confident … every CEO has doubts of hitting the next milestone, the next customer or the next capital raise. A good VC is someone who can host an open, transparent discussion and even give them a pep talk. At times, the founders get at each other's throats. It's very easy for VCs to get prescriptive and that's not helpful — what is helpful is giving them the tools to manage the issues and become stronger.⁵—Rob Hayes, managing partner, First Round CapitalYou've got to be a good listener. I find if the venture capitalist does all the talking, he doesn't learn very much about the people he's thinking about investing in. Very important to listen … and judge who looks and feels like they have the makings to be a real company. Eventually it becomes instinct if you do it often enough.⁶—Paul “Pete” Bancroft, former CEO of Bessemer Securities, former chairman of National Venture Capital AssociationIn his book How We Decide, Author Jonah Lehrer points out that “our best decisions are a finely tuned blend of both feeling and reason — and the precise mix depends on the situation.” Now, there is nothing wrong in healthy emotions but as students of human behavior, we need to recognize that sometimes, it's not necessarily logic that's at work. Without emotion, it becomes incredibly difficult to settle on any one opinion. We would endlessly pore over variables and weigh the pros and cons in an endless cycle of computations, writes McRaney.⁸ Thus, in any situation where the decisions don't add up, know that emotions, not logic, may be at work.

 Reciprocation, obligations and indebtedness. In a classic book on human psychology, Influence — Science and Practice, author Robert Cialdini writes that reciprocity is one of the most widespread and basic norms of human culture. Quite simply put, reciprocity is exchange — if someone wishes you well on your birthday, you do the same on theirs. Holiday cards, dinner invitations, horse-trading where politicians vote on bills just because the other politician supported their bill. Lobbyists play this game pretty well. Pharmaceutical companies are especially notorious, and curry favors at the cost of innocent patients — leading doctors snag “consulting agreements” or paid vacations to Hawaii, where they are gently reminded to prescribe more medication. It even extends to international aid. So why is this relevant to venture capital investments?Most venture capitalists have relationships — professional investors who are often aligned philosophically, intellectually. Such investors often syndicate investments, and may have made (or lost) money, standing side by side. If a VC “refers” or “brings you in” on a deal, this ritual of reciprocity starts. This creates a web of obligations that you may not necessarily be aware of. But this obligatory dynamic could very well impact decisions. The best antidote for such behavior is to raise it upfront, at the time of investment, and put it bluntly to investors: “Knowing that you have a longstanding relationship and a history of working together, it could work well in our advantage. How do we make sure this opportunity stands strong on its merits and our emotions do not hurt us?”

 A VC with ego — Why should I eat your leftovers? VCs tend to compete, often mindlessly. Paul Graham, founder of Y Combinator, one of the world's leading accelerators, writes:

A while ago, an eminent VC firm offered a series A round to a startup we'd seed funded. Then they heard a rival VC firm was also interested. They were so afraid that they'd be rejected in favor of this other firm that they gave the startup what's known as an “exploding term sheet.” They had, I think, 24 hours to say yes or no, or the deal was off. What surprised me was their reaction when I called to talk about it. I asked if they'd still be interested in the startup if the rival VC didn't end up making an offer, and they said no. What rational basis could they have had for saying that? If they thought the startup was worth investing in, what difference should it make what some other VC thought? Surely it was their duty to their limited partners simply to invest in the best opportunities they found; they should be delighted if the other VC said no, because it would mean they'd overlooked a good opportunity. But of course, there was no rational basis for their decision. They just couldn't stand the idea of taking this rival firm's rejects.⁹

 Pain + Reflection = Progress. One of Ray Dalio's principles is often quoted but rarely practised in the business of venture capital. VCs often talk about pattern-matching for success. But pattern-matching for failure is rare. Losses are often buried deep and quick, unless you need a favorable tax treatment. Logos vanish from websites and LinkedIn profiles. In a business where speed and “hit-rates” matter, the LPs suffer the pain, while GPs rarely reflect. Nor do LPs ask questions about lessons learned. Getting inside a “hot fund” matters more. Asking tough questions may not yield access to the elite funds. Venture investing still remains a game of hit-or-miss, with more losses than hits. But as VCs, we do injustice to our own ethos when we do not reflect on our own losses and mistakes. How will our hit-ratios ever improve? One VC told me about their first loss — it occurred when they got a call at 10 p.m. from a portfolio CEO. “I cannot do this anymore,” said this exhausted, overworked, underappreciated, and totally burnt-out CEO. The VC reflected that they had not worked hard enough to understand the CEO's personal challenges. And it was too late to offer support now, when the CEO had pulled the plug. Another VC's loss occurred when a company ran out of cash. In this case, the CEO was a quintessential salesman who could get orders but did not understand the implications of poor cash management, leading to a flameout. The VC blamed it on their own rushed fervor to invest in this company. Speed, trust, blind optimism can destroy any portfolio quickly. And therein lie the root causes of all investment losses. To address these, following a radically open-minded decision-making process can help.

 Decisions, biases, and harmful emotions. In the VC business, we often make rapid decisions with limited knowledge. Ray Dalio's fundamental decision-making principle asks to build deeper knowledge sets with utmost humility. In practicing humility, we assume we are not as smart (as we think we may be). If we reach out to as many people to gather as much data, we might make better-informed decisions. We should often ask, “How do I know I am right?” VCs only know if they are right after a longer period — say, five years, when portfolio companies succeed or die. But we can ask this question at every stage of our investment process. All investors go through two phases — gathering information and conducting analysis — before we commit. During these phases, a lot of opinions clash with facts. And we can be rushed into saying yes or no. Emotions and impulses can drive this instead of knowledge, data, and analytical skills. To develop and follow a rigorous weighted and probabilistic model of decision-making is not easy.What Makes a Good Investor?Good JudgmentVC doesn't necessarily take technical talent — it doesn't hurt — but it's more about people skills and the ability to assess whether there's a market for something,—C. Richard Kramlich, founder, New Enterprise Associates (NEA).¹⁰They see into the future, and they see what I call “situational awareness.” A lot of good venture capitalists, most venture capitalists — the good ones — can walk into just about any kind of meeting and, in about five minutes, figure out who's doing what to whom and exactly what the issues are, sort of cut through it and figure out what's going on … You sort of look at a given situation and project its trajectory reasonably well.¹¹—James R. Swartz, founder, Accel PartnersIt really pays off to come into [venture capital] after you've had a fair amount of experience doing something else. I think it's a business that you're probably better off entering in your thirties and forties than you are entering it in your twenties, because you need to build a frame of reference by which to judge people and to judge opportunities and to be able to judge markets and what's going on in the economy.¹²—Reid Dennis, founder, Institutional Venture PartnersVenture capitalists should guide companies based on real-world experience … if you had a good marketing job at Intel, that beats an MBA. An MBA is a little bit general for the venture business…. The partners [at our firm] can say to entrepreneurs, “We've been where you're going,” and really mean it.¹³—William K. Bowes Jr., founder, US Venture PartnersBrian Armstrong, CEO of Coinbase, has written a post about an anonymized decision-making framework that can bring a level of discipline in any politically charged, ego-driven process. Such an approach can reduce the role of harmful emotions in decision-making. Ego, greed, status-plays, and one-upmanship are rife in the VC business. Our own psychological biases will never vanish completely, but at least we can become more self-aware. The notion of radical transparency may seem idealistic but needs to be inculcated in our lives.

 Conformity (or groupthink). In groups, we like to conform rather than act independently. Time and again, studies have shown that our behavior changes, at times dramatically, when we are in groups. This might explain why you have some investors who say one thing in a one-on-one session but change their views when they are in a group. This is group dynamics at work — people don't usually want to be seen as renegades. Conformity is default behavior in human beings indeed, as it is seen as essential to survival in tribal contexts. McRaney points out that our desire for conformity is strong and unconscious — like the desire to keep everyone happy around a dinner table. But beware the dark place conformity can lead to — dishonesty. If you see groupthink and weak spines around the table, raise your hand and ask, “Are we conforming to look good to each other? Or do each of us believe this is a good decision?” The other interesting aspect of group dynamics is that it can decrease the quality of decisions, writes Dan Ariely in his book, The (Honest) Truth about Dishonesty. We have all seen this happen in large organizations and government entities: it's called bureaucracy, and it results in decisions being made via the lowest-common-denominator approach. No one gets fired. It's all good, but nothing ever gets done. It is rare for such a challenge to occur in a startup, but be watchful.

 Halo effect: Hero worship. Every business has its heroes. The lead singer of the rock band U2, Bono is a venture capitalist with TPG Growth and Elevation Partners. While we have not seen such star power in a startup's boardroom, it would be fun to speculate what a board meeting would be like. Bono walks in, sits down, removes his shades and says in his gravelly husky voice, ”We really should move away, really, really move away from that strategy.” Would there be a chorus of “ayes” followed by, “And now can we get your autograph, picture, and a hug?” We often subconsciously gravitate toward people who look like us, who agree with or compliment us, or are physically attractive, writes author Robert Cialdini. It’s called similarity, compliance, association, and cooperation. Such psychological nuances often make one board member persuasive over others, creating a halo effect. These aspects of human behavior may be especially troubling in the context of a venture capital. While these cannot be avoided, we need to recognize them and make sure that we can tackle them effectively. Watch for pandering when one board member excessively grovels at the feet of another VC demigod. They are setting the stage for groupthink.

 Networks: That overhyped Rolodex is not as useful as you think. VCs may have 1000+ connections on LinkedIn but a human brain only has the capacity to keep track of about 150 connections. Beyond that, it's all a pile of data. Research shows that the size of our brain determines the size of our “active” network, where we maintain these relationships in a meaningful fashion. And our prefrontal cortex can process only about 150 connections. Noted author Malcolm Gladwell pointed out in The Tipping Point that productivity declines once the size of the company grows beyond 150 people.¹⁴ In such networks, the grease of information and activities — getting together for a beer, a hike, or a game — keeps it running smoothly. The power of reciprocity works well and the network is alive. But if we try to expand the network without being able to nourish it meaningfully, the ability to impact and reciprocate in such a network crumbles. Bottom line: Don't believe in your own ability to tap in your 1,000+ LinkedIn contacts — keep your expectations low.