Top Insights From Ilya Strebulaev's Research & New Book

The Future Of Innovation Is Global. We Discuss It Here.

In this edition of 99%Tech, I had the opportunity to discuss with Stanford Professor, Ilya Strebulaev, and his new book the "The Venture Mindset. Our discussion shed light on this unique approach to decision-making, its application, and its implications for various organizations. Here, I’ll share key takeaways from our engaging dialogue.

Background: Ilya Strebulaev’s work at The Stanford Graduate School of Business

Ilya Strebulaev is a professor at the Stanford Graduate School of Business, focused on venture capital, private equity and corporate finance. His work has significantly contributed to the understanding of how financial decisions are made in environments characterized by high uncertainty and innovation.

Ilya’s Most Recent Book

Ilya has just co-authored: The Venture Mindset: How to Make Smarter Bets and Achieve Extraordinary Growth with Alex Dank.

At the heart of the Venture Mindset is a mental model for making decisions in an innovation-driven world characterized by uncertainty and disruption.

First, some context: Ilya shared that every second company that went public in the US over the past 50 years was venture-backed. Moreover, six to eight of the top ten US companies by market capitalization were also venture-backed.

Clearly, the venture mindset is up to something.

According to Ilya, venture capitalists (VCs) have thrived in this unpredictable landscape for over 50 years by adopting specific principles that enhance decision-making in fast-paced, innovative environments.

What is the Venture Mindset?

Venture capital decision-making is inherently different from traditional investment strategies due to its focus on high-risk, high-reward opportunities.

A recurring theme in our discussion was the contentious nature of home run investments. Reflecting back on my investment in Chime (at a previous firm), Ilya and I discussed how the most successful investments are often quite contentious, in this case even among fintech investors. That’s because they are outliers, and outliers are inherently unusual and unpredictable in their early stages.

He shared a compelling anecdote about Reid Hoffman of Greylock, who advocated for an investment in Airbnb, a concept initially deemed absurd by his partners – who would want to stay on a stranger’s couch? The willingness of Greylock to invest despite the lack of consensus led to a highly successful outcome. Ilya's research shows that venture firms that do not require consensus to make investment decisions are more successful, with a higher likelihood of their portfolio companies going public.

As Ilya told me: "Venture firms that do not require consensus to make investment decisions. Non consensus decisions are more successful, with a higher likelihood of their portfolio companies going public."

Five practical Insights for fostering a Venture Mindset decision process

Ilya provided practical insights into fostering non-consensus decision-making, which are applicable beyond the venture capital industry:

1. Keep team size small

The size of the decision-making team matters. Ilya advocates the two-pizza rule, which suggests that a team should be small enough to be fed by two pizzas, ensures efficiency and effectiveness.

Bigger teams kill venture decisions, and get riddled by indecision or consensus, both of which cut down on venture like returns. This is one of the reasons’ I’m so bullish on the growth of smaller venture capital firms and solo capitalists (in full disclosure I launched my own small firm!).

2. Create structured mechanisms to share information without bias

Everyone in an uncertain environment possesses unique information. It is essential to create mechanisms for sharing this information effectively.

One rule Ilya suggested which we have implemented is to have junior team members speak first during discussions to ensure that their perspectives are not overshadowed by senior members.

Another idea is to build in anynymous feedback in advance of meetings, to get a representative view of the group’s opinion.

3. Manage “expert” opinions: Ilya notes

Experts are by definition people who can pattern match in the past. The future might be different.” Fresh perspectives are thus quite important.

Create opportunity for non experts to speak first, lead diligence, and explore ideas creates open thinking (and avoids inadvertent bias).

4. Have a prepared Mind

The myth that successful VCs meet founders with revolutionary ideas sketched on napkins and instantly recognize their potential is only partly true.

As Ilya explains, Successful VCs have prepared minds that enable them to recognize great opportunities quickly when they arise."

To execute a venture mindset requires a tremendous amount of work ahead of time.

For us at Fluent Ventures, we study business models deeply across geographies, and only look to execute the models we’re familiar with. We try to stay in our lane, so that when we see something great/unexpected/different we like, we can jump on it.

5.  Hustle, including making cold calls

Contrary to popular belief, cold calls can work. Ilya's research involving 80,000 emails to VCs revealed a significant response rate, with the most successful VCs responding more frequently. This finding is especially encouraging for founders outside well-known ecosystems or those without extensive networks.

Insights from studying private equity historical returns

Venture capital has historically delivered impressive returns, albeit being a risky asset class. One of the fundamental principles of the Venture Mindset is that "home runs matter, strikeouts don't."

This means that while individual failures are inevitable, they should be embraced rather than punished. Without encountering failures, it is unlikely to achieve significant successes, or home runs.

"One of the principles of the Venture Mindset is that 'home runs matter, strikeouts don't.' Failures are inevitable, but they should be embraced rather than punished."

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Application of the Venture Mindset in corporate finance

The Venture Mindset is not limited to venture capitalists; it is a playbook for any organization. Large organizations, in particular, can benefit significantly from adopting these principles. Historically successful organizations often rely on traditional decision-making processes that emphasize consensus and risk avoidance. However, in a fast-changing environment, these processes can hinder innovation.

One principle, "double down or quit," highlights the need for organizations to continually reassess their investments. Just as venture capitalists decide whether to invest further in a startup, large organizations should evaluate their projects and be willing to discontinue those that no longer show promise. This approach prevents the escalation of commitment to failing projects, thereby saving resources and fostering innovation.

Application of the Venture Mindset outside Silicon Valley

The Venture Mindset is particularly relevant in emerging startup ecosystems, both in developing countries and in emerging ecosystems within developed countries.

Startups operate in environments of extreme uncertainty, where traditional decision-making frameworks often fall short. The Venture Mindset equips startup founders with a set of principles to navigate these challenges effectively. By focusing on "home runs" and embracing failures as part of the learning process, startups can position themselves for significant breakthroughs. Ilya emphasizes the importance of small, agile teams and the strategic use of unique information that each team member brings to the table.

Parting thoughts

For those interested in delving deeper into the Venture Mindset, Ilya's book provides a comprehensive and practical guide. You can learn more and order the book at www.vcmindset.com or find it on Amazon.

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—>We are considering a paid version, and would love your feedback. Would you be open to take 30 seconds to answer 3 questions?

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