Organizational Decision Making Make Decisions with a VC Mindset - Sun and Planets Spirituality AYINRIN

 Organizational Decision Making

Make Decisions with a VC Mindset - Sun and Planets Spirituality AYINRIN

Daehyuk Im

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Summary.   

Venture capitalists’ unique approach to investment and innovation has played a pivotal role in launching one-fifth of the largest U.S. public companies. And three-quarters of the largest U.S. companies founded in the past 50 years would not have existed or achieved their current scale without VC support.

The question is, Why? What makes venture firms so good at finding start-ups that go on to achieve tremendous success? What skills do they have that experienced, networked, and powerful large corporations lack?

The authors’ research reveals that the venture mindset is characterized by several principles: the individual over the group, disagreement over consensus, exceptions over dogma, and agility over bureaucracy. This article offers guidance to traditional firms in using the VC mindset to spur innovation.

Venture investors are the hidden hand behind the most innovative companies surrounding us. According to research conducted by one of us (Ilya), venture capitalists were causally responsible for the launch of one-fifth of the 300 largest U.S. public companies in existence today. They have played an essential role in unlocking the power of the internet, the mobile revolution, and now artificial intelligence in all its forms. Apple, Google, Moderna, Netflix, Airbnb, OpenAI, Salesforce, Tesla, Uber, and Zoom—these firms disrupted entire industries despite initially having fewer resources and less support and experience than their mature, successful, cash-rich competitors. All these businesses could theoretically have emerged from within an established company—but they didn’t. Instead, they were financed and shaped by VCs. Indeed, we estimate that three-quarters of the largest U.S. companies founded in the past 50 years would not have existed or achieved their current scale without VC support.

The question is, Why? What makes small and nimble venture firms from Silicon Valley, Berlin, and Beijing so good at finding and funding start-ups that go on to achieve tremendous success and drive innovative trends? What skills do venture firms have that experienced, networked, and powerful large corporations lack? And most important, are those skills replicable?

For the past decade, we have studied the most successful venture investors, analyzing how they make decisions and interviewing and surveying hundreds of their top leaders. We have also studied corporations, conducting numerous experiments focused on decision-making and working with many firms on their corporate innovation and venture efforts.

We’ve found that the way successful VCs make decisions is different from the way traditional corporations do: They use what we call the venture mindset. One of its hallmarks is a high level of comfort with failure. VCs expect up to 80% of their investments to fail. This is a feature—not a bug—of their business model. The investment thesis is that even if 19 of 20 start-ups fail, one investment will be a home run and cover the losses from all the failures combined—and then some. In other words, home runs matter; strikeouts don’t.

VCs don’t worry about protecting capital from failures and losses. They fear missing out on an opportunity that might change the destiny of a company or an entire sector. As Alex Rampell of venture firm Andreessen Horowitz (a16z) told us, “In the VC world, errors of omission are much more damaging than errors of commission.” Bill Gurley of Benchmark Capital echoed that sentiment in a Vox interview: “If you invest in something that doesn’t work, you lose 1x your money. If you miss Google, you lose 10,000x your money,” he said. VCs don’t seek common denominators; they look for outliers.

It’s more important than ever for large companies to understand how VCs operate. The playbook of steady, incremental growth served corporations well for decades, but the era of stability and continuity is coming to a close. Longevity of incumbents has diminished dramatically: Only one in six of the companies on the inaugural 1955 Fortune 500 list remains on it today. In the late 1970s, the firms on the S&P 500 had been on that list for 35 years, on average; by 2019, the average tenure was closer to 20 years. And rapid advances in technology mean that even the most stable industries risk being upended by start-ups that can reach scale on ever-faster timelines.

Today, few companies are safe from disruption. Established firms are frequently competing directly with fast-moving VC-funded newcomers, whose approach to decision-making and innovation draws from the styles and methodology used by their investors.

Our research reveals that the venture mindset is characterized by several key principles: the individual over the group, disagreement over consensus, exceptions over dogma, and agility over bureaucracy. Guided by these principles, VCs speed up decision-making and prevent groupthink from torpedoing unconventional opportunities. In this article, we offer guidance for understanding when and how incumbents should wield the VC mindset to spur innovation—and secure their survival.

When to Adopt the VC Mindset

Embracing failure might be the VC mantra, but established corporations need to be more strategic about risk-taking. They have operations that they need to protect and can’t “bet the farm” on a single idea. A simple rule: For routine decisions in a predictable environment, the venture mindset isn’t needed. But in times of high uncertainty and disruption, corporations must think like VCs and be poised to make bold decisions.

Suppose a firm is planning to launch a modified version of an existing product or is conducting a feasibility study for a mine expansion. The level of uncertainty is reasonably low for such initiatives, underlying assumptions follow linear rather than exponential laws, and discounted cash flow numbers are readily estimated. Thus, the tenets of the venture mindset, which are focused on questioning everything, are not necessary or even helpful.

In contrast, suppose a firm is developing a radically new product or service line, is reallocating budget from traditional marketing to digital and social media campaigns, or is considering acquiring a digital start-up in response to a threat from disrupters. Risky moves like these hold enormous potential—but they are often rejected in traditional corporate settings because they don’t easily generate the level of consensus required among various department heads and stakeholders to win approval. These are exactly the type of situations when corporations need to be fearless or, as Rampell put it to us, “conviction must beat consensus.”

At Greylock Partners, the VC firm that backed Airbnb, Coinbase, Facebook, and many others, partners can wildly disagree but still trust one partner who insists on doing a deal. This rule arguably made Airbnb possible: After hearing the pitch by the company’s founders, Reid Hoffman recounts in his podcast, his fellow investors were opposed to the idea. Understanding that universal approval often meant an idea was too obvious, he held firm despite the opposition.

VCs don’t worry about protecting capital from failures and losses. They fear missing out on an opportunity that might change the destiny of a company or an entire sector.

Of course, the magnitude of an investment influences the level of caution that corporations should have. This is true even at VC firms. For extra-large commitments, VC investors ratchet up the level of consensus required. At Founders Fund, a prominent VC firm, partners are free to cut checks for smaller investments, which are often very early stage and thus are the most uncertain, if they can convince just one other partner out of seven that the idea is promising. As the investment size grows, however, the number of partners needed for approval also rises. Unanimity is never a requirement, though—even the largest investments can proceed with just five out of seven partners signing on.

At corporations, sponsors of extra-large projects must be mindful that risking everything on one investment is unacceptable. Even VCs tend to spread their capital across multiple ideas and have checks and balances in place. So corporate managers should garner support by testing their idea on a smaller scale or cultivating other internal advocates.

Let’s now look more closely at the principles leaders can use to integrate the VC mindset into their organizations.

The Individual over the Group

VCs look for contrarian ideas because those are the ones that deliver outsize returns. They realize that sometimes just a single person at the table may understand the potential of a big idea—and that person must be heard. This is why VCs care so much about designing an environment that lets every individual in the room share opinions, concerns, and competing perspectives. At successful VC firms, individuals are not trumped by the group.

Promoting this principle, even loudly, isn’t enough, however. Specific mechanisms and processes are required because, without them, groups tend to converge on a single idea almost immediately, often without even noticing that they’re doing so. This well-known phenomenon is especially pervasive at large corporations.

One of us, Ilya, leads a course at Stanford where rapid convergence happens regularly. Students are split into “VC partnership” teams and asked to decide whether to invest in a slate of real-world start-ups. The start-ups are at the VC funding stage at the time of the class, so nobody knows which of them will ultimately succeed. Students review pitch decks, grill the founders, conduct due diligence, and then discuss with their teams which start-ups they want to fund. Ninety percent of the time, teams reach agreement among all six members on which ventures they want to back. Even when individuals make counterarguments, their voices are usually ignored, and consensus is reached quickly.

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The surprise comes when the results of the various teams are revealed. Groups almost always evenly split on their assessments, with half the teams believing that a given start-up is a clear winner and half certain that it is a loser. Confronted with the results, students realize that they might have ignored contradictory perspectives within their groups and jumped to a consensus opinion too quickly.

Are experienced managers different from MBA students? During the Covid-19 pandemic, our corporate innovation workshops shifted to Zoom, offering a unique window into decision-making within large organizations. This virtual environment allowed us to enter breakout rooms and observe team discussions. And we saw the same pattern: Teams quickly came to consensus on decisions, especially when influenced by a senior member or a perceived expert.

We’ve known about the perils of groupthink since Irving Janis’s foundational 1972 study of military disasters. Social psychologists such as Daniel Kahneman have since studied various tactics for improving group decision-making. But overcoming groupthink is tough, and most organizations have failed to crack that nut. VCs use three tactics to avoid this pitfall.

Keep teams small.

Many VC partnerships have only three to five partners. Even when you include junior team members, discussion groups still tend to be intimate and informal. This approach is frequently used by tech companies. Think of Amazon, where meetings with more than 10 participants are quite rare. Communication in smaller teams is faster and clearer, and there is greater accountability. The setup not only streamlines decision-making but also ensures that diverse perspectives—crucial for innovative outcomes—are heard and considered.

Ask for feedback in advance.

Many VC firms, such as Emergence, one of the first investors in Zoom, ask team members to share their position on an investment opportunity in advance of meetings. Each participant reads the investment memo ahead of time and submits an opinion independently, before hearing the opinions of others. This strategy applies not only to investment decisions. Google’s policy is to ask members of an interview committee to record their comments on each candidate individually, before they meet to discuss whom to make an offer to. To debias thinking even further, some VC firms make the advance feedback blind. When participants receive all the feedback to review prior to the discussion, they still don’t know what the senior partner thinks.

Juniors speak first.

Often, junior investment team members do most of the hands-on research: talking to customers, conducting reference calls, analyzing the market, preparing the investment memo. So they have unique insights into many aspects of an opportunity, which they should be encouraged to share. To provide fresh perspectives on customers, companies may want to consider bringing junior employees to management board meetings. Gucci and AccorHotels did exactly that when they created shadow boards composed of Millennials to help them get closer to their customers.

VCs realize that sometimes just a single person at the table may understand the potential of a big idea—and that person must be heard.

Allowing junior employees to speak first can also counteract entrenched power dynamics. People tend to pay immediate attention and defer to the most senior person in the room, so the best approach is to keep executives silent and let others take the floor—whether in a boardroom, a VC meeting, or the Oval Office. “You’re the boss. You talk last” is the advice of Jeff Bezos, himself a venture-backed founder who adopted many of the best practices of the VC mindset at Amazon. “Let everyone else talk so that they don’t get swayed by your opinion.”

With these three rules in place, you increase the chances that every voice in the room will be heard. But this is only the first step. You also need to manage expectations about reaching agreement.

Disagreement over Consensus

How does the performance of VCs that allow some disagreement about proposed investments compare with that of VCs that require unanimous approval? Ilya and his colleagues studied 700 VC firms and their IPO rates—that is, the percentage of their portfolio companies that go public, a key indicator of success—and found that firms with high IPO rates were less likely to adhere to a unanimity rule in decision-making. Those requiring unanimous approval often performed worse, particularly in highly uncertain environments with many unknowns. Research reveals that firms whose investors don’t force themselves to get on the same page tend to outperform others.

Unlike VC firms, corporations are prone to seeking consensus. Media stories recounting agonizingly long decision-making processes abound. Consider the British broadcaster BBC, where six or more meetings were required to make most decisions. Or Mattel, where under previous leadership, managers regularly sat through presentations of hundreds of slides as decisions dragged on and on.

To develop a venture mindset, senior leaders should consider two specific mechanisms from the VC tool kit.

Assign a devil’s advocate.

To ensure that opposing views are heard, many VC partnerships make it a standard practice to assign the role of contrarian to one person or to a small team. For example, a16z often designates a “red team” of people who are tasked with arguing against a deal. Similarly, when Warren Buffett contemplates Berkshire Hathaway’s biggest acquisitions, he hires two advisers: one to support a case for the investment and the other to make the case against it. By letting disagreement flourish, companies ensure that more time is spent weighing both sides of the most controversial ideas.

Invoke a “consensus minus x” rule.

To further fuel a shift in mindset, cultivate a tolerance for some degree of unresolved opposition when moving forward with an idea. Many VC firms have a version of the “consensus minus one” or “consensus minus two” rule, in which a decision is allowed go through even if one or two skeptics remain unconvinced, as long as the proponents are sufficiently enthusiastic.

At Venrock—the firm behind Intel, Apple, and DoubleClick—partners vigorously debate every deal, and then the partner who initially presented the idea makes the final investment decision unilaterally. “Our investors always ask me, ‘How does your investment committee work?’” Venrock’s partner Bryan Roberts told us. “Well, we don’t have an investment committee. No voting. At all.” All partners provide their perspective, question the lead partner’s judgment, and play devil’s advocate. But the decision is ultimately in the hands of one partner.

If nobody opposes a decision or raises critical issues, that often means that people in your organization are not motivated to ask tough questions. Silence in the room does not always mean consent; rather, it may be a harbinger of disaster. As Alfred P. Sloan of General Motors once said at a meeting, “Gentlemen, I take it we are all in complete agreement on the decision here?” Hearing no objections, he continued, “Then I propose we postpone further discussion of this matter until our next meeting, to give ourselves time to develop disagreement.” He understood that perhaps the most alarming sign is no disagreement at all.

Exceptions over Dogma

If silence occurs too often, it is probably time to revisit the rules and introduce more exceptions. Even when an idea is rejected, VCs make room for individuals to find ways to keep it alive. To institutionalize the belief in exceptions, VCs make two practices standard.

Encourage alternative paths.

Zoom may never have become the reality of our daily lives if one VC firm hadn’t believed in allowing exceptions to the rules. Qualcomm Ventures, Zoom’s early backer, initially rejected the opportunity to invest in the start-up. Most of the team found the idea too controversial and risky: Cisco, Skype, and Google were all already in the teleconferencing space. However, the Qualcomm team had three strong believers in the Zoom idea: Nagraj Kashyap, Patrick Eggen, and Sachin Deshpande. They took advantage of a work-around that allowed them to make a relatively small seed investment that didn’t require the full team’s approval.

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Similarly, the company that launched PowerPoint may not have become successful if not for Dick Kramlich. His colleagues at the VC firm NEA declined to put more money beyond the initial investment into the company that created the tool. But in a break from usual practice, NEA allowed Kramlich to open his own wallet and become an angel investor. It was a risky bet, but when Microsoft acquired the enormously successful company, in 1987, it worked out pretty well for him and NEA.

Institute an anti-veto rule.

When Kashyap left Qualcomm Ventures to set up M12, the venture arm of Microsoft, he denied himself veto power. The team was welcome to go against him and invest in a deal if he didn’t like it. He could not veto the decision. However, he reserved the right to move forward with an investment even if everybody else was against it, calling it anti-veto power. The aim was to help unconventional opportunities secure funding. Consider M12’s investment in the game-based learning platform Kahoot. Many were skeptical about it, and the team voted the investment down. Kashyap went ahead with it anyway. When Kahoot went public, in 2021, the returns on the deal exceeded the total capital of all investments M12 had made that year.

This practice has also been key to success at Venrock, where every partner can make investments even if the rest are skeptical. Without this, the Dollar Shave Club, a successful grooming company, may not have existed. The reasoning behind the approach is clear, according to Nicolas Sauvage of TDK Ventures. “We are not in the business of averages but in the business of extremes,” he told us. “Truly innovative ideas and companies are rarely cookie-cutter ones. So as not to miss them, no one—including me—has a veto right over what our investment directors want to proceed with.”

Agility over Bureaucracy

Almost nothing is worse for a start-up founder than waiting months for a response from venture investors. And nothing could be worse for VCs than losing out on a great deal to competitors who move more quickly. So smart venture investors have made their processes superagile. For instance, FJ Labs can’t promise to invest in your ideas (indeed, 97% of pitches are rejected), but it guarantees a response within two weeks. By moving so quickly, it was able to invest in Coupang and Rappi, popular apps in Korea and South America, respectively.

In our experience, similar decisions within traditional firms take months and involve many people from disparate parts of the organization. Bureaucracy creates decision paralysis—and for innovation, moving slowly and being indecisive is a death sentence. Take IBM and its corporate innovation entity, Fireworks Partners. The fund was launched with fanfare but didn’t survive even three years before disappearing. What is astounding, as Josh Lerner of Harvard Business School found, is that some of the first investment opportunities proposed to the fund were still in the internal review process when IBM gave up on the entire Fireworks venture.

What is the cure for analysis paralysis? VCs have three answers.

Set ambitious timelines.

The only way to find out if an idea will skyrocket or fail is to try it. Spending months debating possible outcomes won’t dramatically reduce the risk. NFX, the Silicon Valley–based firm and investor in DoorDash, Lyft, and Trulia, sets its bar for speed exceptionally high. It makes this promise to founders on its website: an initial response in four business days; a decision in nine days; money in the bank in three weeks. Note that NFX, like other VC firms, does not commit to seeing the project through no matter what. It gets in the door quickly by writing the first (and often a sizable) check but reserves the right to pull out at future investment stages. Speed does not imply a bias for yes, of course. According to Ilya’s research, VCs close the deal on only one of every 101 opportunities they consider, on average. But being picky doesn’t mean you can afford to be slow.

Imagine how such speed could transform many corporations. Ilya and his Stanford research fellow Amanda Wang conducted a study of more than 160 VC arms of large corporations around the globe. A comment from one of the interviews summed up a common sentiment: “Quite honestly, if something came to us completely fresh with a six-week deadline…I wouldn’t ruin our reputation by pretending we could do it. I’d say, ‘This is for someone else.’” Lack of speed is one reason many of the best start-ups don’t bother knocking on the doors of corporate venture entities—and why many corporate investment arms don’t reach their fifth birthday.

may seem that VCs have an advantage in being agile because of their small size, but even very large organizations can act fast. McDonald’s rolled out its instant delivery offering in a matter of weeks, having sensed the threat posed by delivery apps from other fast-food chains and new entrants. Amazon, which has more than one million full-time employees, managed to launch its Prime Now service in just 111 days. WeChat, an app with more than one billion users today, was once a side project of the giant tech company Tencent, but seven engineers launched it in just a few months.

Avoid many approval layers.

VCs tend to be small, but it’s their streamlined operating model that is even more important than size in their ability to move fast. In VC firms, once a partner decides to invest in a start-up, the deal can quickly be finalized. But their corporate counterparts, according to the Stanford research, tend to use a two-tier decision-making process, often requiring additional approval by a committee outside the team. Syndication calls, premeetings, and corporate politics immediately seep in. The number of bosses included at each stage does more than slow down the process. It also makes decisions “regress to the mean”—that is, to safer and less controversial proposals.

To avoid that problem, companies such as Amazon, Google, and Netflix give more decision-making rights to their executives and let them decide what to invest time and money on. As with VCs, the charter and goals are carefully defined, but after that the individuals can make investment calls themselves without jumping through bureaucratic hoops.

Don’t clutter the funnel.

Innovation dies in the bureaucratic swamp. What you need is a deal flow. Consider JLabs (Johnson & Johnson’s incubator), which reviews thousands of applications for collaborative partnerships and accepts only a small fraction of them. To carefully review and process so many opportunities, J&J must be disciplined about decluttering its funnel. It can’t leave opportunities sitting there for extended periods.

Some companies maintain a broad slate of projects, many of them with high-level champions, but fail to significantly advance any of them. Indeed, in our work with large companies, we have found it common for senior executive teams to have the same discussions about the same initiatives in successive meetings, without ever coming to a clear resolution. That makes it hard for new ideas to gain traction or receive adequate attention from decision-makers, who might be preoccupied with revisiting existing proposals.

. . .

Large, incumbent corporations are often worthy of admiration. Who could fail to stand in awe of FedEx and its incredible logistics network or admire Toyota for its pioneering advances in manufacturing efficiency and reliability? But what works well in centrally controlled environments may not succeed in times of uncertainty or disruption. As we have seen, the traditional corporate approach can be costly: Former stalwarts GE, Kodak, Sears, Nokia, and Nortel all experienced serious—sometimes fatal—challenges because of disruption in their industries.

In contrast to slow-moving businesses, VCs are not consensus seekers. They love arguing, fighting for their view of the future, hearing new perspectives, and kicking ideas around. “There are no firm rules in the venture capital business,” VC investor Reid Dennis once said, “except that there are no firm rules.” Our research, however, suggests that VCs do have a playbook, full of creative and successful practices, that decision-makers everywhere can use to emulate an industry that has backed the most innovative companies in the world.

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