Are you chasing unicorns with green eyes? How Envy Bias can skew your venture capital decisions

Picture this: you’re at a venture capital conference, and the buzz around a competitor’s portfolio company is impossible to ignore. The startup just announced a $200 million Series B and is being touted as the next unicorn. The founder is charismatic, the headlines are glowing, and you can’t help but wonder: “Did I miss the deal of the decade?”?

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Welcome to the world of Envy Bias, a subtle but powerful force shaping decisions in venture capital. This cognitive bias, driven by social comparison, pushes investors to chase deals, mimic competitors, and inflate valuations in a bid to keep up with the high-stakes world of venture capital. The problem? What starts as FOMO can quickly spiral into irrational decision-making.??

The Anatomy of Envy Bias in Venture Capital?

Envy Bias thrives in environments where success is visible, and competition is fierce. Making it an unwelcome natural fit in the venture capital ecosystem. ?

Investors are constantly exposed to their peers’ wins: high-profile exits, headline-grabbing deals, and viral success stories. This relentless comparison fosters a desire to match or surpass their achievements, often at the expense of rational judgment.?

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1. Chasing The Next Big Thing At Any Cost?

When competitors announce blockbuster deals, the pressure to follow suit can be overwhelming. Envy Bias often manifests as a rush to invest in overhyped startups, regardless of the underlying fundamentals. ?

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2. Overhyping "It" Sectors?

Certain industries can generate so much excitement that investors flock to them without adequately assessing risks. Whether it’s blockchain, generative AI, or clean tech, envy can lead to inflated valuations and crowded markets. ?

Investors driven by envy often prioritize trends over fundamentals, betting on buzz instead of solid business models.?

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3. Copycat Portfolios: The Trap of Imitation? ?

Envy doesn’t just drive investment; it skews portfolio management. VCs may shift focus to emulate competitors’ strategies, dedicating resources to sectors or startups that mirror rival portfolios. Instead of building a unique edge, they dilute their thesis in an attempt to "keep up."? ?

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4. Unicorn Obsession: Betting big, Losing bigger?

The pursuit of billion-dollar valuations can lead investors to overextend themselves, gambling on unicorns despite warning signs. While the potential upside is enticing, envy often clouds judgment, leading to outsized risks. ?

The desire to have a stake in the next unicorn is a hallmark of Envy Bias. While backing breakout companies can yield massive returns, the envy-fueled pursuit of unicorns often leads to disproportionate risk-taking and reliance on aggressive growth projections.?

Unicorns represent less than 1.5% of startups, yet they consume a disproportionate share of venture capital funding. Envy Bias can push investors to prioritize "big wins" over a balanced approach, ultimately straining portfolios.?

6 Common Cognitive Distortions and how they relate to envy bias in venture capital:?

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1. Selective Abstraction: ?

Investors may focus solely on a competitor’s high-profile success (e.g., landing a unicorn) while ignoring their own wins or the competitor’s failures, creating an unbalanced perspective.?

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2. Minimization: ?

Downplaying their own portfolio achievements or strategic moves, investors might view their successes as insignificant compared to others, fueling envy.?

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3. Personalization: ?

An investor might unfairly blame themselves for missing a high-value deal, believing it was entirely within their control, even if market timing or external factors played a significant role.?

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4. Arbitrary Inference: ?

Drawing unfounded conclusions, such as assuming a competitor’s investment strategy is superior without sufficient evidence, leading to reactive decision-making.?

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5. Magnification: ?

Blowing the perceived gap between their portfolio and a competitor’s out of proportion, leading to undue stress and envy-fueled decisions.?

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6. Overgeneralization: ?

Believing that missing one unicorn investment indicates a pattern of failure, which can create a negative feedback loop of self-doubt and risk-averse behavior.?

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Breaking Free From The Envy Bias Trap?

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Envy Bias is a natural response to a competitive environment, but it doesn’t have to dictate your decisions. Here’s how to counteract its influence:? ?

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1. Stick to Your Investment Thesis? ?

Develop and adhere to a clear, data-driven investment thesis. When tempted to chase trends, revisit your core strategy and assess whether the opportunity aligns.? ?

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2. Benchmark Internally, Not Externally? ?

Focus on meeting your fund’s goals rather than outperforming competitors. This reduces the emotional pressure to "keep up."? ?

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3. Diversify Thoughtfully ?

Balance riskier bets with stable, lower-profile investments. A diverse portfolio helps mitigate the downsides of envy-driven decisions.? ?

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4. Foster Independent Analysis? ?

Invest in thorough due diligence to ensure decisions are based on metrics, not emotions.? ?

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Key Insights:?

Envy Bias is both a motivator and a pitfall. While it can push VCs to innovate and compete, it also fuels herd mentality, overinvestment in trendy sectors, and irrational risk-taking. By recognizing and mitigating this bias, venture capitalists can reclaim focus, build stronger portfolios, and make more strategic decisions.?

A 2023 study by PitchBook revealed that 78% of startups in hyped sectors underperformed their initial projections, with over 40% failing within three years.?

Only 1.28% of startups reach a $1 billion valuation. Envy-driven decisions often result in missed opportunities to back more viable ventures with modest but reliable returns.?

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Outsmarting Envy Bias for better outcomes?

Success in venture capital isn’t about matching others’ wins—it’s about creating your own. By prioritizing independent analysis and long-term thinking over fleeting emotions, investors can sidestep the green-eyed trap of envy and emerge stronger for it.?

While ambition is a cornerstone of venture capital, unchecked envy can derail even the most experienced investors. Recognizing the subtle ways envy influences decisions, VCs can avoid common pitfalls and foster more sustainable growth within their portfolios.?

By consciously addressing cognitive biases like Envy Bias, venture capitalists can make more thoughtful, data-driven decisions, ensuring their investments align with both their strategic goals and market realities.?

About ACE Alternatives

ACE Alternatives (“ACE”) is a leader in managed services in the Alternative Assets sector like venture capital, private equity, fund of funds, real estate, and more. Leveraging a proprietary tech platform and extensive industry experience, ACE offers 360-degree tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs.

The fintech was founded in Berlin in 2021 and has since established itself as one of the fastest growing alternative investment fund service providers in Europe. ACE is currently used by over 45 funds. In 2024, ACE received seven-figure funding from Bob Kneip to expand into new markets. ACE’s vision is to redefine fund management by demystifying complexities and promoting transparency.

Media Contact: Rhea Colaso

For more information visit us at https://www.ace-alternatives.com/

Sources: ?

Rolf Dobelli, “The Art of Thinking Clearly” (2013)??

Jan Crusius @ University of Greifswald?

Lange, Weidman, & Crusius?

ResearchGate?

Zen Tools?

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