The Pseudoscience of Venture Capital

The venture capital industry likes to portray itself as hard-nosed and rational, backing only the most promising startup opportunities identified through diligent research and analysis. However, a closer look reveals that much of the VC world operates more like a pseudoscience than a data-driven analytical discipline. Pseudoscience refers to beliefs or practices that are considered scientific but lack a basis in empirical evidence or rigorous methodology. Unfortunately, many aspects of VC decision-making fall into this realm of pseudoscience.

Simplistic Rules and Platitudes

Pseudoscientific thinking loves to reduce complex concepts to catchy platitudes, rules of thumb, and simple heuristics that have a surface plausibility but lack empirical backing. The VC world is rife with such simplistic rules guiding investment decisions. Some of these "VC proverbs" include only investing in founders willing to forego a salary, favoring hot current industries like AI or biotech, refusing to consider businesses without a technical founder on board, minimum team sizes, and the list goes on. While some of these rules may sometimes correlate with success , they are applied as unthinking dogma without solid data on their overall predictive validity. The nuances of each specific opportunity are underemphasized relative to broad generalization.

Hero Worship and Lack of Replication

The pseudoscientific VC sphere engages in excessive "hero worship" of top investors and firms, crediting their success much more to purported analytical prowess rather than luck and timing. Too little emphasis gets placed on rigorously replicating past successes. If VC were truly a science, we'd expect to see consistent and predictable results from those employing proven strategies and processes across many bets. Instead, we see what looks much more like a series of fortunate gambles by even the best investors. Little emphasis is placed on systematic, quantifiable analysis and more on the VC hero's personal intuition and "pattern recognition" skills.

Magic Metrics

Pseudosciences love to create an illusion of rigor and quantification through use of meaningless metrics, calculations, and fancy terminology. VC firms are fond of touting abstract scoring models, founder evaluation rubrics, projecting fantastical revenue growth curves etc. However, such metrics are often little more than subjective guesswork dressed up with mathematical trappings. While data should absolutely play a role, much of what is passed off as analytical in VC circles are studies lacking statistical validity or reproducibility.

Survivorship Bias

One major pseudoscientific flaw in VC thinking is the prominence of survivorship bias, which involves focusing solely on the successes while overlooking or rationalizing away the much more numerous failures. VC firms love to promote their handful of runaway "unicorn" winners, while conveniently glossing over the dozens or hundreds of portfolio companies that fizzled out. Too much emphasis gets placed on reverse-engineering the characteristics of companies like Airbnb or Uber while ignoring that similar traits were shared by far more startups now gathering dust in the entrepreneurial graveyard. This creates a dangerously distorted picture of what really drives success versus failure.

Anecdotal Thinking

Relatedly, VC culture places way too much weight on particular entrepreneurial "war stories" and inspirational anecdotes from famous founders or investors. These individual tales take on an almost mythological significance, despite being mere isolated anecdotes unrepresentative of broader realities. You'll hear VCs rapturously recounting stories about Founders X and Y working tirelessly out of their garage or going all-in on a crazy idea that face-planted at first. But they'll fail to contextualize these as exceptional outliers, leading to overgeneralization that every wantrepreneur should emulate such behaviors and experiences. Anecdotal thinking replaces sound data and statistical awareness.

Herd Mentality and Irrational Trends

The VC world is certainly not immune to the pseudoscientific plague of irrational herd behavior and unfounded trend-following. Catalyzed by a few high-profile VC firms, the industry will often get caught up in "mania" phases where valuations and interest in specific sectors like crypto or cannabis become irrationally overheated. Firms convince themselves to invest based more on a fear of missing out rather than solid analysis. Later, with whiplash-inducing speed, that same sector will become mercilessly beaten down and essentially un-fundable based just as much on psychological herd dynamics.

Dismissal of Contradictory Evidence

Finally, like other pseudosciences, the VC world can exhibit a tenacious resistance to evidence contradicting its core dogmas and beliefs . High-profile startup failures or cases that defy prevailing VC wisdom are often dismissed as flukes or exceptions rather than catalyzing a re-examination of decision-making frameworks. At the end of the day, the dismal rate of return and abject failure of most VC investments is itself a damning indictment of an industry claiming analytical rigor. While there have been unequivocal VC success stories, the overall outcomes suggest an unhealthy over-reliance on hunches, truisms, and individual gurus, rather than consistently applied, evidence-based practices. Of course, predicting which nascent companies will become world-conquering giants is an inherently difficult task. But the VC industry should strive to move away from pseudoscientific tendencies and instill more genuine analytical and data-driven decision making. Otherwise, the overwhelming failure rates that plague the industry will persist.