Top Insights From Ilya Strebulaev's Research & New Book

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 University 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).

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