434. Deconstructing the Venture Mindset — The Data and Decision-Making Driving Top Tier Investing (Ilya Strebulaev)

434. Deconstructing the Venture Mindset -- The Data and Decision-Making Driving Top Tier Investing (Ilya Strebulaev)

Ilya Strebulaev co-author of the Venture Mindset joins Nick to discuss Deconstructing the Venture Mindset — The Data and Decision-Making Driving Top Tier Investing. In this episode we cover:

  • Venture Capital Mindset and Decision-Making Principles
  • Venture Capital’s Role in Creating Successful Companies
  • Sourcing and Selection in Venture Capital, Diversifying Networks and Meaningful Connections
  • Venture Capital Investing Strategies and Portfolio Management
  • Venture Capital Best Practices, Including Risk Management and Portfolio Analysis
  • Venture Mindset, Incentives, and Innovation in Startups and Large Companies
  • Investing in Venture Capital During Economic Downturns, with Insights on AI and Unicorn Valuations

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Transcribed with AI:

Ilya Strebulaev joins us today from Palo Alto. He’s the David S. Lobel Professor of Private Equity and a professor of finance at the Stanford Graduate School of Business. He is also the founder of the Stanford GSB Venture Capital Initiative and a research associate at the National Bureau of Economic Research. Ilya’s book, the Venture Mindset co-authored with Alex Dang is is set to release on May 21st. Ilya, welcome to the show!
Nick, it’s a great pleasure to be with you. It’s
a pleasure to finally meet you. I’ve seen you all over the socials with all your data and research and very excited to have a chance to double click and deep dive into some of the stuff. So early on maybe to start Can you talk about your path, or, you know, Stanford and venture capital and how you how you got into, you know, studying this industry? Of
course, well, my past is I did my PhD at the London Business School in the United Kingdom 20 years ago. And in five years of PhD, I don’t think I use the word venture, or capital venture capital even once, okay. In those days, PhD students and finance did not study venture capital. And then I moved to Stanford and became an assistant professor of finance. And I came to Silicon Valley, to the great, great Graduate School of Business at Stanford, I did not know what venture capital was. And I was doing research on how managers in large organisations, how executives in large companies make financial decisions. What happened was, I started teaching corporate finance to our MBA students at Stanford. And many of them, of course, wanted to pursue either startups, or to become venture investors. And so that’s when I first interacted with the world of VC. And very quickly realise that it is a very different world from traditional finance, the way venture capitalists make decisions is not exactly like we teach in finance one on one, and at Stanford are really elsewhere. Or how, let’s say startup founders raise money is not exactly how we teach to, to raise money to in the MBA programme, whether you’re a huge hedge fund a company doing IPO, or whatever. And I became interested in this, but I also realised there was not enough research. And there’s a huge demand at Stanford, to understand better, how to raise money, if you’re a startup founder, how to value companies, if you’re an investor, how to make decisions about how to invest in startups, if you’re an investor, and so on, and so forth. And so I became fascinated by this. And slowly, but maybe inevitably, I switched from being a generic finance professor interested in finance, in corporate finance, to being exclusively on how venture capitalists and now much more generically private equity guys make make decisions. And then I also started venture capital initiative at Stanford, which is really combined combines every all this, we get this amazing data about how every single one in the venture capital ecosystem is making decisions, and how it affects the outcomes of those decisions
are amazing. So, you know, I love the title of your book, whether we’re hiring folks for the team at new stack, or we’re investing in prospective CEOs, I always tell the team it’s all about the mindset and having that that right mindset to build a venture scale business. Talk about, you know, what the venture mindset is, and in why’d you write the book,
you know, first of all, Nick, because that is fascinating that you talk about the mindset, because I think that is really, really critical. And let me start with the with the bottom line, my purpose in writing this book is a very, very courageous, very brave, but also very ambitious, I would love to launch with your help the venture mindset movement, because I think it will be important for all of us, and also it will make really the world a better place. Now, let me now step back, I mentioned that I realised that venture capitalists make decisions differently. And I also realise that not so many people know about this, even amazingly venture capitalists because they spent decades Okay, improving their decision making because they had to succeed and survive in a very, very, I would say hostile environment, environment where after all all the time, the investments fail the environment where there are a lot of unknown unknowns, the environment where we don’t really know, we disagree all the time about the future, because the future is so unpredictable. And the environment where there is no continuity, there is no stability. And so they had to develop their own methods. Now, I also worked with a lot of, you know, traditional large companies, and most of them use what I would call the traditional mindset. And by the way, the traditional mindset works really well, in most cases. But the moment you face a lot of uncertainty, the moment you face a higher risk of failure, the moment you face some unknown unknowns, disruption in industry, the traditional mindset no longer works. And this is when I really for the first time realise that smart VCs use truly a different mindset. And so I went all in, with an attempt to understand this mindset and being a scientist, to classify and to go really, really deep, both in terms of data, but also in terms of stories. And after, well, 20 years, more or less of studying this, I came up with nine most important principles of venture mindset, where each principle is about how venture capitalists make decisions, and behind each principle are a lot of what I call playbook mechanisms. Because we need to be practical in what I teach my students at Stanford, we can talk big words about, you know, improve culture. Well, that is not even a principle. Okay. Let me give you an example of one of our principles is that I’m sure Nick, you know, agree to disagree. Now, that’s a great principle that, in fact, turns out to be very different from the traditional mindset. But behind this principle is, well what I’m going to do this. And we discovered a lot of specific mechanisms, how smart VCs implement that, and also how all of us from startup founders, to investors to in fact, executives in large companies that are interested in innovation, or read new to make decisions can implement those. So let me give you an example, about this specific principle, again, as one out of nine principles, and I call it agree to disagree. Now, if you think about the, let’s say, traditional mindset, and you know, I’m sure that many of your viewers and our listeners experienced that, okay, worked in large companies, let’s say participated in, in in group decision making meetings. It’s all about Pfizer, the big boss making decision? Have you been there? Yeah. So it’s about finding consensus. And in fact, in many large companies, sometimes you go through the iteration of multiple meetings trying to find consensus. And in some companies, procrastination is all about trying to find consensus, trying to make sure that everybody in the room coalesce around a decision. And do you know that in, in my research, I show that whenever VCs try to find consensus, they are not very successful. For example, if you look at the metric of success as how many startups that you invest in, go public. Okay, that is a useful metric of success. It turns out that the VC firms that try to work using consensus so that, you know, every single person around the table says, Oh, wow, we really should invest in this startup. Those firms are not successful. They haven’t. Yeah, they have a much lower probability of their startup that they invest in go public. So what this principle really means is that in the venture mindset, you need to ensure that you don’t need to reach consensus. In fact, consensus is not a good idea very often. Now, that is the principle. That’s why I called agree to disagree, how you implement it. Okay. So let me let me give you a couple of examples. One of my favourite examples, and in fact, we start the book with this example, is happened about 10 or 12 years ago? Have you ever heard about new startup called SAS? B? It’s SAS as an software as a service. B as a hard working I do not know No. Okay. So, so let’s go back to imagine yourself in some point in 2011 2012, and you met a founder before Have SARS be okay. And this founder in fact developed a kind of a new technology that allows people to communicate on mobile devices and be okay. Something we’re so now familiar with. And the investors, your investors, I actually observed the following. He has no clients, zero clients, zero. He has kind of working prototype, but not perfectly. He has, of course, a lot of large competitors. Think about WebEx by Cisco. Okay, well Bluejeans. Okay, or, or Skype. They’re already out there. Right. And, and I’m, also, by the way, the founder, you know, speaks English, but His English is not perfect. Now, what do you have invest in this? So here’s a story about a startup. A friend of mine, actually friends of mine, named rich Cash App, who is the was the head of Qualcomm ventures, the Venture Fund. I’ve had him on the show. Yeah, fantastic. He’s a great guy. And another guy who was at the time, his junior partner, his name is Patrick Egan. And now he is the founder and general partner of venture capital fund called counterpart ventures. But at the time, he was working on average at at Qualcomm ventures. So they found this top. And you know what happened, Nick, they fell in love with the with the startup, they met him in the Bay Area with the founder, they saw the prototype, and you can seamlessly you talk and see each other on various mobile devices and PC, etc, etc. Okay, well, Qualcomm ventures located in San Diego. So they went back, the two of them, and also the third guy session despondent. So all three in Qualcomm ventures really allowed the SASB. And they went, and every body turned them down, Nick, everybody else, you know, they had the Investment Committee, okay, everybody else, so not as consensus. But most of the Investment Committee said, you can’t invest in a startup where this big guys dominate, like Cisco, Cisco, Cisco will never allow you this startup to be successful. Okay, that would have been the end of the story. In fact, very often, that is the end of the story in traditional companies. But an average when he became the head of Qualcomm ventures, he designed a leeway. And his Liwa is for small checks. You don’t need consensus. In fact, one guy can do it. So one guy can make a decision to invest a small check. So that is a specific, specific, leeway. And what happened was that Patrick Eggen, put $500,000 of Qualcomm’s money without investment committee approval, without any consensus being reached into this small startup actually became kind of the first institutional check in SASB. A Nick, I didn’t pay attention to what you said earlier. But yes, you’re right, is that that investment, that check turned out to be the single most successful investment in Qualcomm’s history in startups. And that SASB became zoom, by the way, SASB was the real name. They just switched to zoom. Okay, soon after that,
did not know that. Well, interesting. Well, you know, there’s a lot to get to in the book and a lot to unpack before we really dive in, you know, you’ve done a bunch of research on venture, you know, talk about the macro role that VC has played and continues to play in the economy in the public markets. Yeah,
that is something that I’m very, very passionate about. And the truth is, most people don’t know about it. So what my homeless student who is now a professor at University of British Columbia, will Grinnell and I showed is that in the United States, in the last 50 years, more or less every second company that went public, every company, okay. Was venture backed. Just think about this. In fact, if you look at all the large companies that went public, in the US, went public and then became large, okay. 75%, like three out of each four, were venture backed, just think about this in the last 50 years, okay. And indeed, every single one, like in top 10 that were in top 10 companies by market cap that were founded recently were venture backed. Okay. Also, we should There are over each dollar spent on research and development r&d by all these companies that were founded in the last 50 years, 92 cents, and 92 cents out of each dollar is spent by these companies that used to be venture back. Now, but that’s what we did next is that we compared this with all the other large developed countries in g7. You know, Japan, France, Canada, Italy, UK, Germany. Yeah. And it turns out, turns out that first, this country has never had until very, very recently developed venture capital industry. And this countries in the last 50 years didn’t produce large companies. Have you ever heard of French Google? Have you ever heard about, you know, Japanese Tesla? Have you ever heard about Canadian, air b&b, and so on and so forth? Okay, I can continue this this list. And we showed that venture capital industry in this country in the United States is causally that is the critical word causally responsible for the vast majority of this company. So had there been no venture capital industry in the United States in the last 50 years, we likely would not have had Google, Apple, Amazon, Microsoft, Airbnb, Netflix, and moderna. So you can continue the list. And obviously, our life would have been very, very different as a result, and is called it is causal. It is it is it is causal. And, and and
how you respond all these pundits that say that VC is just gambling?
Well, which is in fact, amazing enough, don’t gamble. In fact, do you know how I call VCs in this book? In our book? I call them risk reduction engineers. Yes, that seems to be exactly the opposite from gambling. Now, that’s something important to mention is that what is gambling, like, if you buy a lottery ticket, that’s gambling, okay. Or if you go to Las Vegas, it’s gambling. Gambling means that you can succeed. But if you succeed, once, it doesn’t mean that you succeed again and again, in the VC space. If you succeed once there is in fact, a high chance of you being able to succeed again and again, persistence, and so it’s persistence, what it also really means that there is a there is a method to this madness, so to say, there is a method to this gambling, okay. And this is what I called the venture mindset. Because it is true. And I think that is really important to understand. That’s really, you really want to understand the venture mindset and VCs that that is maybe the single most important thing. If you invest in one startup, however good, you are. Okay, there is luck involved. Always. So there’s a high probability of failure, and there’s always a luck component. So you might think, when you invest in one startup is kind of gambling, okay. But we see, and the venture mindset is not about investing in a single startup. It’s about the portfolio approach is about designing a process. That takes luck, out of many, many, many startups so, so if you don’t have this process, you know, many angel investors, by the way, may invest in 100 startups. And they don’t experience this one homerun. So the venture mindset, and this risk reduction engineering is about building a process so that as you invest in a lot of startups, you take the Luck out of the equation, even though in each eras, in each startup and every single startup university, there is a lot of luck. And I think that all of us, not just in the VC world. But outside there is a role. So I think could really benefit from appreciating this
100% 100% Couldn’t agree more. And we can’t get to everything that’s in the book. I’ve got my copy in front of me right here. It’s a fascinating read, I admit. But like maybe we can break this up into segments. So if we get into some of the specific findings from your book, from the various chapters, maybe we start with sourcing, what was the key takeaway to share with listeners with regards to sourcing investments?
Yeah, great. Well, first of all, what a sourcing is, is an ability to to find a lot of opportunities. And what is critical to understand is that smart VCs that leave according to the venture mindset, their aim is to make sure that they have a lot of different opportunities. Okay, and I call this principle get outside your four walls. So it is very unlikely you will find a venture capitalist in their office five days a week. Maybe they are there one day a week, maybe on Monday, okay. But most of the time, they are in a coffee shop, that at a industry fair, they’re in the plane, their attempt is to cast their networks wide, to catch as many opportunities as possible. And also their their goal is to find unusual opportunities, because it is unusual startups, unusual ideas that typically have a high chance of success. So here are some interesting piece of research, okay, and then a story piece of research is that I looked at the linked in profiles of May many, many, many, many venture capitalists, if any venture capitalist is listening to us right now, likely, my team and I looked at their LinkedIn profile. And we started their connections. Interesting, how many connections they have called their connections, okay. And then what we did is we looked also at the LinkedIn profiles of corporate venture capitalists, so those VCs who work in large companies, and then also, we started LinkedIn profiles of corporate innovators, for example, the head of corporate corporate development, the head of innovation, the head of r&d, labs, and so on and so forth. Okay, in the large company. So, the first finding is that if you’re a venture capitalist, you have a much larger LinkedIn profile in terms of number of connections, double that of corporate VCs, triple that of corporate innovators. So that is perhaps not that surprising. The second finding is much more interesting is that the connections with venture capitalists are much more diverse, across industries, because ages, across geographies, across different backgrounds, if you look at even corporate VC, okay, they’re not only they have a smaller network, but also it’s much less diversified. Maybe it is people with the same background, let’s say, you know, those I went to university with, or those are in my company, or maybe my prior company. As a result of that. Even if you’re a corporate innovator, you typically don’t question Eric, why’d you kind of shutting yourself off? You’re in the for warm? Yeah, from all those amazing serendipitous opportunities, as you’re saying, right. And so and so as a result of that, I think this is the power of sourcing, that is the smartest VCs make sure that their network is diversified in a meaningful way. And they go out of their way to find out this unusual, unusual opportunities. So did
you find correlation and returns with diversity and scale of network?
Absolutely. So if you look at for every single principle, by the way, in the book, we looked at the, what I what I call the procedures that venture capitalists used with the venture mindset, and how it has an impact on returns to our dimensioned, about consensus, and was the same about network, which is if venture capitalists work hard on their networks, and increase their networks in meaningful way, that does have an impact on the outcomes. So I already mentioned one, the IPL rate will can talk about other metrics of success, for example, multiples of their funds. So they’re built to raise a larger fund to they’re built to raise another fund. Okay. And I think that, you know, as my, my friend and my co teacher in the Stanford VC class, Brian Jacobs, who is co founder of emergence capital, a large successful venture capital firm in Silicon Valley. He likes telling our students at Stanford, the right time to expand the network was yesterday. Okay, but it is never too late, of course, right. It is never never too late. And I think it’s also important to ensure that you don’t you don’t just increase your LinkedIn connections, but also and try to find serendipitous serendipitous encounters, but do it in a meaningful way. Okay. Two examples. I promised you a story, actually two stories. One stories about myself. Now this story is about one of our venture capitalists with a venture mindset who mentioned the book. Let me start with a with a venture capitalist. Kevin Samuels is a partner at Venrock the storied, famous venture capital firm. She works in the biotech invest in biotech companies. And what is I think, is An interesting to observe with Kami is that she sets up a lot of meaningful connections with people. So one example is a founder called net David. She told us that, you know, very often she was driving back and forth to San Francisco, and from her from her office, and she would have like an hour long conversation with net. As a result of that, she ended up investing in many of her, in many of his companies, some of whom became became quite successful. So that is an example of a meaningful connection. story about myself is after I became venture minded, I now whenever I travel, I tried to, to go and try to meet and try to talk to people whom otherwise I would have never ever met, like last week. So whenever I travel, my goal is not always talk to the person sitting next to me, or standing next to me line. Okay. So last week, I was travelling that’s coming from from Dubai home. And I started chatting with the person standing next to us, then turns out to be he’s a journalist. And he’s an expert in horse racing. And he escaped from Dubai, Dubai World Cup, where he was covering horse races. Well, one of our chapters in the book is, do you bet on the jockey? Or do you bet on the horse? Of course, not in terms of horse races, but we started chatting. And now he is, I think, going to write an article about about what was races and venture capital.
Love the takeaways on sourcing? How about selection? You know, what, if you had to distil down sort of the most meaningful takeaways on your research with regards to selection? Yeah, what was that?
Let me mention mentioned just want to be to be mindful of time, and we have at least 10 to 12 mechanisms in our selection chapter. So so have a look at the book. But one example is that if you source many deals like 1000s of deals, how on earth can you select them? Because you need to invest? Maybe only only one investment? Okay? Okay. So here’s what I discovered, is that smart venture capitalists, start with a fast lane, and then move too slowly. What I mean by that, in their deal funnel, at the top of the funnel funnel, there are 1000s of potential opportunities. You just can’t manage all of them. Okay. So therefore, you pursue a fast lane. And here’s a trick they use, they ask a very specific question, which is why we should not invest in this deal. Right, so why we should not pursue this or why we should not pursue this font or why we should not pursue this opportunity to notice the critical, critical word and
not. And they asked that to the founder, they asked that of
themselves. Oh, that’s all by themselves. I saw I say, so you know, so I meet you, Nick, you’re one of my 1000s of opportunities, why should not invest in Nick. And that is called a red flag approach, or it is called a critical flaw approach. So once I asked this question, if I see something that is a red flag, well, maybe I don’t trust you, or maybe the market is really too small. Or maybe I don’t see product market fit right away. I will move on. And amazingly enough, over time, smart VCs even even don’t think about this, they asked this question subconsciously and this allows them very quickly and very efficient about this opportunity. So when I work with my Stanford students, most of whom would like to become founders, I tell them, when you first meet a venture capitalist, beta senior partner or junior partner at a venture capital firm, their first approach will be why should I spend even a moment with this with you? Why should I not invest in you? So therefore, you have to address this red flags potential red flags and you right away and then once the cut is what I call hundreds of 10, like tenfold then suddenly, venture capital is switched to slowly and then they start all asking all those due diligence questions. And then suddenly, you know, they can spend hours and hours and days in fact on average, according to my research, we spend almost 120 hours of due diligence time to make one investment.
Got it? Let’s let’s talk a bit about portfolio management right everyone’s favourite topic when it comes to working with existing portfolio companies. When is the right time to pull the plug? I enjoyed this part of of
the book. Yeah, that is, that is a great question and the this print this is the principal recall. It is time to double down and it is time to quit. Because sometimes you have to make a decision whether to double down on You investment. And sometimes it is time to pull the plaque. And I think pulling the plug is very, very tough for everybody, not just for VCs, but for VCs, specifically, because they’re very close to the founder, they’re very often on the board. And I think, if you again, look at my research, Nick, you’ll see that those VCs that are more likely to pull the plug, in fact, turned out to be more successful. So it’s not just about making an investment. But also it’s about deciding when it is time to end your investment. Now, it has stuff has already mentioned. In fact, the single psychological difficulty that we see is face most often is called by psychologists, the escalation of commitment, which means that I invest in you. Okay, I like you. And then maybe you’re not doing that well, but I feel kind of obliged, feel committed to escalate to invest more. So what are the specific methods? What are the specific mechanisms, that that smart VC is use? Okay, several examples. But one is that they ask their partners, in fact, in most in many in many VC partnerships, it is tougher to decide to agree on the follow on investment, because he had to convince your partners, they need to put more money in the same startup. So I talked about consensus, and the most successful partnerships, you don’t need consensus for the first investment, but very often you do need consensus for the second chip in the same deal. Okay. Another one is that many VC partnerships require that you find another investor. an arm’s length investor means the one who never put money before, either to join you or in fact, to lead the round. And those are very, very specific mechanisms. Another one, which is smart. He says, Now that it is inevitable, that most of the investments will not be successful when I say most, maybe 50%, maybe 70%. But it can’t be that, you know, every single investment is successful. So indeed, when I work with venture capital firms, and these days, I work a lot, because they come to me and ask and tell me earlier, you’ve started this hundreds and hundreds of venture capital firms. Can you tell? Can you come to us and talk to us about best practices, and then only what I observed most often, like I worked with five venture firms recently, and in every single one of them. Interesting enough, they’re not taking enough risks. Their startups, in fact, are not failing often enough. which means of course, they’re also unlikely to hit homeruns.
They have low loss ratios, they’re not taking enough that has low loss reader consensus decision making or doing
too number of things, consensus, escalation of commitment, incentives problems. And, you know, at least two cases, I told I told the managing partner is that you know, what, you look to me like a private equity firm, not like a venture capital firm anymore. And I think for them, it was a revelation. But there are specific, once you realise, is there a specific mechanism that you deal with this? And actually, I think every single, every single firm that I talked to already implementing all those mechanisms, they’re relatively straightforward, once you realise them, okay. So that when you read the book, think about if you’re if you happen to be an investor, or working in any partnership, as you’re reading the book, Think right away, how can I implement this practical mechanisms in my everyday life?
Is it possible to give a quick overview of those practical mechanisms? Or is it too deep that you, you know, you got to know
you mentioned several of course, right. I already mentioned that very often. So I already mentioned salad mentioned, the ones that I didn’t mention. The one that I didn’t mention yet. And this is another principle in the book, another chapter is home runs matter. Yep. Strike out, don’t. So you mentioned Nick loss ratios. If you spend too much time about thinking about your loss ratios, your failures, that is not a good idea. Think about those startups that can become homeruns. In fact, one of the specific mechanisms is to look at your timetable and the timetable of your of your partners and colleagues how much time they spend on successful startups that they invest in, versus failing startups. The moment you spent more time on your failing startups are not startup that are not doing that. Well. That probably that is that is definitely problematic. So you have to like audit your calendar to see you have to you have to audit your calendar, you have to audit your portfolio, you have to audit your meetings in if in your meeting, you spend a lot of time on the start of that are not doing that well, and there’s always a star that is not doing that well, then it’s then it’s problematic. Another very practical mechanism that I recommend every single not just venture capital fund, but every single organisation to do is to carefully observe your anti portfolio, which means that investments that you kind of had the chance to make, but you did not make. And you know, what, I just recently worked with one venture capital firm, were successful in the past, and it turns out that their anti portfolio was more successful than their portfolio. And then you start thinking about, well, how did this happen? Well, and here’s the approach how you should do it, you should look at your funnel, which means that you’ve lost that you’re onto portfolio company that became successful at some point in your funnel. And you need to understand to make it practical, and to to change something specific, you have to understand where you lost those companies.
I mean, at the end of the day, does this one just need to ask themselves? Do I maybe just not have the venture mindset? You know, is this something that’s it’s not about? learned by others, it’s
not about having or not having an ego, it’s about whether you are willing to require it. So my my goal is in launching the venture mindset movement is that I think that all of us, who would like to have the venture mindset have an opportunity to acquire it. And indeed, I observed, many of my Stanford students acquire it. I observed many of startup founders I worked with acquire the venture mindset. And I observed many venture capital and private equity investors acquire the venture mindset. And perhaps most surprisingly, I observed many CEOs, C suite executives, heads of innovation in very, very large companies, very traditional companies require the venture mindset. So I think it is possible. And moreover, in today’s unstable, unpredictable environment, it’s not necessary. Just it’s not as possible, but I think it’s necessary. Yeah,
you had some interesting perspectives on incentives. My question for you is what is wrong about incentives that VCs get right?
Well, that’s a that’s a great question. Again, it’s another principle, another chapter in our in our book. But sharing the pie, and I think this is, would get there, what they get right about incentives is everybody
who can contribute to success has a chance to benefit. If at the end of the day, they’re successful outcome.
But if the outcome was not successful, that maybe nobody is going to benefit. In the VC world, in the startup world, we all know about now this, you know vesting appearance, they know that venture capitalists invest invented that back in the 1970s. Ah, yeah. You see, prior to the 1970s, the word vesting was not really used in this specific way. And it’s in Silicon Valley, but it wasn’t meant. And it was invented, in fact, by those VCs, that themselves worked in large companies in startups, and they got burnt, because they didn’t have those that that shareholder participating. Okay, that’s a, that’s a fascinating story that we tell in our book. But as a result of that, you spread the benefits around and you spread the benefits. And you give those benefits to those people who can meaningfully contribute. And amazing enough, I work with a lot of large companies. And maybe will approach this by saying, Well, you can do it in a startup, but you really cannot do it in large company. Because, you know, Nick, if you’re an engineer, let’s say in a very large company, like how can you meaningfully contribute to success? It turns out that there are specific ways that you can do it, as long as it gets as long as you get the venture mindset and by the way, many large companies in Silicon Valley and beyond and also beyond the world of tech, a successful implementing implementing those V VC type venture minds the type of incentives
while it’s so it’s possible in big corporations to they’re not the innovators dilemma will not get the best of every corporation, some will be able to adapt the venture mindset and be as innovative as their startup counterparts.
What are you Absolutely, in fact, I think that corporations can be more innovative than startups in many ways, because they have the resources and the people that startups typically don’t have, they can afford to fail much more frequently in startups. And as a result of that, it’s mostly about the mindset, and the procedures that large companies set up for themselves, as opposed to the opportunities. And then on the day, of whether you’re a startup founder, or if you’re a venture capitalist, you know what your options are limited, you have limited resources, you have a limited number of people, you need to survive. For most large companies, they are not in the survival mode, at any point in time. They can afford many, many things that a venture capital firm or a startup founder cannot afford. It’s about their willingness to do it.
As you’re saying, you know, Ilya, I speak with many peers in the industry that have slowed down or pullback and investing admits the down market for VC PitchBook reported that 38% of VCs disappeared from dealmaking last year, is now a time to be slowing down.
I first of all, I can confirm the statistics. Because obviously, the venture capital initiative, we’re keeping track of all the VC activity, I think that those who are pulling out now are making a mistake. And by the way, many large corporations are doing this right, right now, that is a mistake. And by the way, if you look, historically, when I did look at the most successful venture backed company of the last 40 years, do you know that the most successful ones were founded and funded in recessions? Or in slow times. So in fact, your probability of hitting a homerun is higher when everybody else is pulling out. So when everybody else is pulling out, I think you should be pulling pulling in. And yes, right now is, I think, a great time to consider investing, for a number of reasons. One, everybody’s pulling out. So you have more time, you have more due diligence. In fact, one of my biggest complaints about the venture industry couple of years ago, when it was very hot, was that the competition was so tough, even smart VCs had to, to choose a trade off or face a very tough trade off between doing enough due diligence or just losing a deal because of the time pressure. Now, you can improve your decision making improve the outcomes by spending more time on
that likely, and likely see more good opportunities,
right, seeing more good approached by the weather and more good opportunities, because, you know, again, what happens in recession, is that there are more amazing startups being founded. Because some people leave large companies all laid off and start something right, something new. So they’re going their schedule. Absolutely. And also valuations are better relations, Allah was so conditioned on success, your multiple is going to be much, much higher. So all of this combined. Plus, of course, in a way right now, in this amazing environment of disruption happening across the space. Everybody talks about AI and generative AI. But the reality is, you know, I see amazing startups coming out almost in any single industry. I have hundreds of former students whom I am helping, advising clustering companies, and they come from across the spectrum. Yeah. And this disruption happening everywhere. So I think that is really the right time to pull in and start investing seriously.
Maybe maybe a quick question about AI here. Yeah. So in one of your publications, you mentioned that many unicorns are overvalued. Is this is this still the case with the AI may mania? You know, is AI, hit or hype?
Yeah. Unicorns are typically overvalued. And when I say overvalued, overvalued relative to their fair valuation, which means that if you hear that a janitorial company is now worth $25 billion. That really means that if that company will now have been traded on NASDAQ, let’s say it’s fairly likely would have been much lower than $25 billion. And that’s what my research shows again and again. Now, we did not do it for Jenai. Because because it’s very young industry, but I’m pretty sure it’s going to do the same. However, it does mean that it’s it’s hype. So many industries in the past, were real, disruptive Industries, a lot of a lot of disruptive opportunities. And yet, companies that were overvalued relative to to their fair value. So if you are either startup founder or staff employee, or invest in venture funds by venture capitalists themselves do understand this. Be very careful whenever you hear the word evaluation in the industry. Okay. And Nick, you know, you know better than most but you know the word evaluation actually in the venture capital industry means something else. It means in our technical jargon, post money valuation, which is on valuation. So post money valuations typically overvalued and more so for for unicorns. But everything I say about about AI, from my anecdotal experience with working with so many of my former students, and July startups to the way it is truly disrupting the business models of various industries. And perhaps some of them are being disrupted slower than other industries. But they’ll go into bed then on the day, modified changed, I think Gennai Gennai. Mo generika is a real game changer. Long term.
You’ll hear what was the biggest surprise that you learned in your research for the book specifically, was there anything very counterintuitive, where maybe your hypothesis going in was proven wrong?
Well, I had many hypothesis proven wrong. But that’s why I like being a researcher, I love I love when I have a conjecture, and it turns out to be incorrect. So but truly one of my biggest surprises is at a very personal level. When I started studying this venture capital industry, I was told by everybody, you know, really, you will not learn anything, because it’s a very secretive industry. People don’t like sharing their secret sauce, and so on and so forth. Okay. And it turned out to be not the case, that was one of the biggest surprises. Like just for this book, I interviewed like dozens and dozens of people. But in the last 20 years, we did go and started like hundreds and hundreds of venture capital firms. And everybody really would love to share how they do it. And of course, we’d love to learn from others as well, I have to say that was one of the big surprises is a secret of industry. But I think a secret just because, you know, yes, there is, there’s not much data, there isn’t much quantitative stuff to study, even though we’re trying to change that. But that’s not because people really hiding in the bushes and trying to try to keep whatever they do close, close, close to themselves. That was a big surprise. Another big surprise was truly is how this venture mindset could be useful, not just to our professional life. You know, the idea was, of course, to make sure that other venture capitalists, startup founders and large organisations can learn from the venture mindset. But how can all of us, in our personal life, use the venture mindset? I already mentioned how I changed my travel behaviour, when now I, on average, meet, I guess, with four or five people, when I travel, that I started conversation with that in the past, I would have never ever talked to Okay, and sometimes it leads to serendipitous outcomes. But but people who you know, who read the book told me, Oh, gosh, I changed my approach to education. I changed my approach to finding work. So we’re, in fact, Alex, my co author, and I just wrote a very interesting piece about about how to use the venture mindset when you’re laid off. Which unfortunately, is happening more and more, but, but you should use this as an opportunity to restart yourself. And so that was one of the biggest unexpected, unexpected surprises for me. How my friends and I can use the venture mindset in so many different life circumstances.
Perfect. Well, yeah, if we could feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about?
Well, I think you really should interview every single protagonist, whom I mentioned in the book, every measure that you interviewed, an average cash app is amazing. Here’s the deal if you didn’t yet interview his his former colleagues at Qualcomm such and despondent Patrick again, such an effect is still at Qualcomm, Patrick is counterpart ventures, you should absolutely have them. But you know, what every single person who were mentioned in the in the book, every single venture capitalist, as well as every single founder, I think, really shouldn’t be shouldn’t be on your on your show.
Amazing. Yo, yo, what book article or video would you recommend the listeners besides your book?
Of course, that was my first thought, you know, my, my wife laughs at me because I sent her a WhatsApp message recently saying, Gosh, I’m reading this book. Finally I found the book I really, really love. And she responded to me saying, well, what’s the book was the book I want to read it and I said, Well, it’s my book. But in terms of the in terms of the books that I really love, you know, I will be very counter intuitive is that I do love non fiction books that are not about business. I think that many investors and founders, and also executives in large organisations can learn a great deal about fascinatingly written books that are about decision making that is about decision making. That is not about business. And sometimes we can learn more from those books and then about the business books. Here’s an example, one of my favourite books is titled The guns of August. And it is written back in the 1960s, I believe, by the decision making that led to the First World War, it was written by Barbara Tuchman, and if you’ve never had the book, and if you would like to learn a lot about decision making that is applicable today about all the pitfalls about all the problems of miscommunication and how to resolve those problems as well, I think I think that would be the one of the books that I would recommend guns of August by Barbara Tuchman.
Perfect. Yeah. Do you have any habits, tactics or techniques that are a secret weapon, I
spend a lot of time in my wine cellar. In fact, that’s how we ended up started writing the book, the COVID hit, and I decided, okay, now it’s time for me to clear the mess in my wine cellar, I’m into fine wine, I have a lot of bottles, and I never had time, you know, to classify catalogue, etc. And Alex, who is my former student, and as my close friend, we formed the bubble, the remember bubbles in COVID times. And so we dressed up because my wine cellar is a constant 54 degrees. So we were hats and scarves and sweaters and coats. And we spent hours there, imbibing as well as catalogue and classifying and discussing stuff. And at some point, Alex said, you have so much that failure, I think, you know, you need to write a book. And I said, Yeah, let’s do it. And so my secret weapon is to go down to the wine cellar, spend time down there to cool. And also to talk to my friends when they come over to my place. I love
it. It’s like outside the four walls, it’s collecting knowledge and is having a little fun at the same time. And then fun. Finally, here, Elio, what’s the best way for listeners to connect with you and follow along with that book, The venture mindset?
Well, the book is out. So so make sure to get a copy. And if you have any questions, just email, email, my standard email or team at the mindset.com. And also, my team and I are very active on LinkedIn. I’m posting the new recession sites on my LinkedIn about several times a week about unicorns, about factors of success and failure about the the country to counterintuitive principles of the venture mindset. So I think the best way to connect is to follow me on LinkedIn, and actually participate there by commenting and suggesting.
Well, I give you a huge endorsement for the follow on LinkedIn. I’ve been a fan for a long time he is yes. Strebel. The book is the venture mindset out on May 21 24. Sir, thank you so much for the time and the insights today. It was a pleasure.
Thanks so much, Nick. Thank you.
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guests know about it. Share your thoughts on social or shoot them an email, let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same accomplishment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over prepare, choose carefully and invest confidently thanks so much for listening