Make Decisions with a VC Mindset

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Strategy & Business Model Section | 1

Make Decisions with a VC Mindset

By Ilya A. Strebulaev and Alex Dang | Harvard Business Review Magazine | May–June 2024

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Venture investors are the hidden hand behind the most innovative companies surrounding us. According to a research conducted by one of the authors, 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?

Based on their research, the authors 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 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.

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.

The authors’ research reveals that the venture mindset is characterized by several key principles: the individual over the group (for this keep teams small, ask feedback in advance, and ensure juniors speak first), disagreement over consensus (for this assign a devil’s advocate and invoke a “consensus minus x” rule), exceptions over dogma (for this encourage alternative paths and Institute an anti-veto rule, and agility over bureaucracy (set ambitious timelines, avoid many approval layers, and don’t clutter the funnel). Guided by these principles, VCs speed up decision-making and prevent groupthink from torpedoing unconventional opportunities.

3 key takeaways from the article

1. Venture investors are the hidden hand behind the most innovative companies surrounding us. 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.
2. 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?  The answer is the way successful VCs make decisions is different from the way traditional corporations do: They use ‘venture mindset’.
3. Venture mindset is characterized by several key principles: the individual over the group, disagreement over consensus, exceptions over dogma, and agility over bureaucracy. 

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Topics:  Decision-making, Startups, Venture Capitalists, Angel Investors, Investment Decisions