434. Deconstructing the Venture Mindset -- The Data and Decision-Making Driving Top Tier Investing (Ilya Strebulaev)

This episode dives into how venture capitalists (VCs) make decisions, highlighting the unique approach and principles of the "venture mindset."

1. Venture capitalists often succeed not by finding consensus but through individual conviction and a readiness to embrace non-consensus decisions.
2. The "venture mindset" is critical in navigating environments laden with uncertainty and high risks of failure.
3. Traditional financial decision-making models do not apply cleanly to venture capital, which requires a unique blend of intuition, experience, and analytical rigor.
4. Implementing a "venture mindset" can extend beyond venture capital, offering valuable lessons for personal decision-making and management in other high-risk fields.
5. A practical approach to venture investing involves a combination of detailed due diligence and a readiness to act swiftly when opportunities align with core principles.

1: Introduction to the Venture Mindset

Ilya Strebulaev discusses his transition from traditional finance to specializing in venture capital, driven by the unique challenges and opportunities in VC decision-making.
Ilya Strebulaev: "Venture capital decision-making doesn't fit the traditional financial models taught in MBA programs."

2: Core Principles of the Venture Mindset

The discussion deepens into the principles of the venture mindset, focusing on how these principles guide VCs in their investment decisions.
Ilya Strebulaev: "One key principle is 'agree to disagree,' which facilitates non-consensus decision-making."

3: Practical Applications and Stories

Real-world applications of the venture mindset are shared, including the story of an early investment in Zoom, highlighting how non-consensus bets can lead to outsized returns.
Ilya Strebulaev: "Investing in Zoom was a decision made without consensus, illustrating the effectiveness of the venture mindset."

4: Broader Implications of the Venture Mindset

The conversation explores how the venture mindset can be applied in various industries and personal decision-making to foster innovation and manage risks effectively.
Ilya Strebulaev: "The venture mindset is not just for VCs but can be adopted by entrepreneurs and executives in other fields."

1. Embrace non-consensus decision-making in high-risk situations.
2. Apply principles of the venture mindset to personal growth and career decisions.
3. Use rigorous due diligence combined with swift action to capitalize on opportunities.
4. Regularly review and adapt your decision-making frameworks based on outcomes.
5. Foster a culture of innovation by encouraging diverse perspectives and challenging traditional approaches.

Ilya Strebulaev co-author of the Venture Mindset joins Nick to discuss Deconstructing the Venture Mindset -- The Data and Decision-Making Driving Top Tier Investing. In this episode we cover:

Venture Capital Mindset and Decision-Making Principles
Venture Capital's Role in Creating Successful Companies
Sourcing and Selection in Venture Capital, Diversifying Networks and Meaningful Connections
Venture Capital Investing Strategies and Portfolio Management
Venture Capital Best Practices, Including Risk Management and Portfolio Analysis
Venture Mindset, Incentives, and Innovation in Startups and Large Companies
Investing in Venture Capital During Economic Downturns, with Insights on AI and Unicorn Valuations

People

Nick Moran, Ilya Strebulaev

Companies

Stanford Graduate School of Business, National Bureau of Economic Research

Books

"The Venture Mindset" by Ilya Strebulaev and Alex Dang

Content Warnings:

None

Nick Moran
Welcome to the podcast about venture Capital, where investors and founders alike can learn how VC's make decisions and reach conviction. Your host is Nick Moran and this is the full ratchet.

Ilgia Strebel joins us today from Palo Alto. He's the David S. Lobel professor of private equity and a professor of finance at the Stanford Graduate School of Business. He is also the founder of the Stanford GSB Venture Capital Initiative and a research associate at the National Bureau of Economic Research. Ilya's book, the Venture Mindset, co authored with Alex Dang, is set to release on May 21.

Ilya, welcome to the show. Nick, it's a great pleasure to be with you. It's a pleasure to finally meet you. I've seen you all over the socials with all your data and research and very excited to have a chance to double click and deep dive into some of this stuff. So, Ilya, maybe to start, can you talk about your path or Stanford and venture capital and how you got into studying this industry?

Ilya Strebulaev
Of course. Well, my past is I did my PhD at the London business School in the United Kingdom 20 years ago. And in five years of PhD, I don't think I used the word venture or capital venture capital even once. In those days, PhD students in finance did not study venture capital. And then I moved to Stanford and became an assistant professor of finance.

And I came to Silicon Valley, to the great graduate School of Business at Stanford. I did not know what venture capital was, and I was doing research on how managers in large organizations, how executives in large companies make financial decisions. What happened was I started teaching corporate finance to our MBA students at Stanford, and many of them, of course, wanted to pursue either startups or to become venture investors. And so that's when I first interacted with the world of VC. And very quickly I realized that it is a very different world from traditional finance.

The way venture capitalists make decisions is not exactly like we teach in finance 101 at Stanford or really elsewhere, or how, let's say, startup founders raise money is not exactly how we teach to raise money in the MBA program, whether you are a huge hedge fund, a company doing IPO, whatever, and I became interested in this, but I also realized there was not enough research and there's a huge demand at Stanford to understand better how to raise money if you're a startup founder, how to value companies if you're an investor, how to make decisions about how to invest in startups if you're an investor, and so on and so forth. And so I became fascinated by this, and slowly but maybe inevitably, I switched from being generic finance professor interested in finance, in corporate finance, to being exclusively on how venture capitalists, and now more generically private equity guys make, make decisions. And then I also started venture capital initiative at Stanford, which is really combines every, all this. We get this amazing data about how every single one in the venture capital ecosystem is making decisions and how it affects the outcomes of those decisions. Amazing.

Nick Moran
So I love the title of your book. Whether we're hiring folks for the team at Nustack or we're investing in prospective CEO's, I always tell the team it's all about the mindset and having that right mindset to build a venture scale business. Talk about what the venture mindset is and why'd you rate the book. First of all, Nick, is that it's fascinating that you talk about the mindset, because I think that is really, really critical. And let me start with the bottom line.

Ilya Strebulaev
My purpose in writing this book is very courageous, very brave, but also very ambitious. I would love to launch, with your help, the venture mindset movement, because I think it will be important for all of us and also it will make really the world a better place. Now let me now step back. I mentioned that I realized that venture capitalists make decisions differently. And I also realized that not so many people know about this, even amazingly, venture capitalists, because they spent decades improving their decision making, because they had to succeed and survive in a very, very, I would say hostile environment.

Environment where all the time their investments fail. The environment where there are a lot of unknown unknowns. The environment where we don't really know, we disagree all the time about the future, because the future is so unpredictable. And the environment where there is no continuity, there is no stability. And so they had to develop their own methods.

Now, I also worked with a lot of traditional large companies, and most of them use what I would call the traditional mindset. And by the way, the traditional mindset works really well in most cases. But the moment you face a lot of uncertainty, the moment you face a high risk of failure, the moment you face some unknown unknowns, disruption industry, the traditional mindset no longer works. And this is when I really for the first time realized that smart VC's use truly a different mindset. And so I went all in with an attempt to understand this mindset and being a scientist, to classify and to go really, really, really deep, both in terms of data, but also in terms of stories.

And after well, 20 years, more or less of studying this, I came up with nine most important principles of the venture mindset, where each principle is about how venture capitalists make decisions. And behind each principle are a lot of what I call playbook mechanisms because we need to be practical. You know, when I teach my students at Stanford, we can talk big words about, you know, improve culture. Well, that is not even a principle. Okay, let me give you an example of one of our principles is that I'm sure Nick, you know, agree to disagree.

Now it's a great principle that in fact turns out to be very different from the traditional mindset. But behind this principle is, well, what I'm going to do with this. And we discovered a lot of specific mechanisms, how smart VC's implement that, and also how all of us, from startup founders to investors to in fact executives in large companies that are interested in innovation or really need to make decisions, can implement those. So let me give you an example about this specific principle. Again, it's one out of nine principles, and I call it agree to disagree.

Now if you think about the, let's say traditional mindset, and I'm sure that many of your viewers and our listeners experienced that, worked in large companies, let's say, participated in group decision making meetings, it's all about either the big boss making decision, have you been there? Yes. Or it's about finding consensus. And in fact, in many large companies, sometimes you go through the iteration of multiple meetings trying to find consensus. And in some companies, procrastination is all about trying to find consensus, trying to make sure that everybody in the room coalesces around a decision.

And do you know that in my research I show that whenever VC's try to find consensus, they're not very successful. For example, if you look at the metric of success as how many startups that you invest in go public, okay, that is a useful metric of success. It turns out that the VC firms that try to work using consensus so that, you know, every single person around the table says, oh wow, we really should invest in this startup. Those firms are not successful public. Yeah, they have a much lower probability of their startups that they invest in go public.

So what this principle really means is that in the venture mindset, you need to ensure that you don't need to reach consensus. In fact, consensus is not a good idea very often. Now that is the principle, that's why I call it agree to disagree, how you implement it. Okay, so let me give you a couple of examples. One of my favorite examples, and in fact, we start the book with this example is happened about ten or twelve years ago, have you ever heard about Nic startup called SaaS B?

It's SaaS as in software as a service b, as a hard working. I do not know it, no. Okay, so let's go back to imagine yourself in some point in 2011, 2012, and you meet a founder, a founder of Sars B. Okay. And this founder, in fact, developed a kind of a new technology that allows people to, you know, communicate on mobile devices on video, okay.

Something we're so now familiar with. And the investors, your investors actually observe the. He has no clients. Zero clients. Zero.

He has kind of working prototype, but not perfectly. He has, of course, a lot of large competitors. Think about Webex by Cisco, okay. Or bluejits. Okay.

Or Skype. They already out there.

Right? And also, by the way, the founder speaks English, but his English is not perfect. Now, would you ever invest in this? So here's a story about this startup. A friend of mine, actually friends of mine, Nagrij Kashp, who was the head of Qualcomm Ventures, a venture fund.

Nick Moran
Yeah, I've had him on the show. Yeah, fantastic. He's a great guy. And another guy who was at the time, his junior partner, his name is Patrick Egan, and now he is the founder and a general partner of a venture capital fund called Counterpart Ventures. But at the time he was working for Nugrach at Qualcomm Ventures.

Ilya Strebulaev
So they found this startup. And you know what happened, Nick? They fell in love with the startup. They met him in the Bay area with the founder. They saw the prototype.

And you can seamlessly talk and see each other on various mobile devices and pc, etc, etcetera. Okay, well, Qualcomm Ventures located is in San Diego. So they went back, the two of them, and also the third guy, Sachin Deshpande. So all three in Qualcomm Ventures really loved the SaaS B. And they went and everybody turned them down, Nick, everybody else, they had the investment committee.

Everybody else. So not just consensus, but most of the investment committee said, you can't invest in a startup where these big guys dominate. Like Cisco. Cisco. Cisco will never allow you, this startup to be successful.

Okay? That would have been the end of the story. In fact, very often that is the end of the story in traditional companies. But when he became the head of Qualcomm Ventures, he designed a leeway, and his leeway is for small checks. You don't need consensus.

In fact, one guy can do it. So one guy can make a decision to invest a small check. So that is a specific leeway. And what happened was that Patrick Eggen put $500,000 of Qualcomm's money without investment committee approval, without any consensus being reached into this small startup. Actually became kind of the first institutional cheque in SArS B.

And Nick, I didn't pay attention to what you said earlier, but yes, you were right. Is that that investment that checks are not to be the single most successful investment in Qualcomm's history in setups. And that SASB became Zoom, by the way, Sasby was the real name. They just switched to zoom, okay. Soon after that.

Nick Moran
I did not know that. Well, interesting. Well, there's a lot to get to in the book and a lot to unpack before we really dive in. You've done a bunch of research on venture, talk about the macro role that VC has played and continues to play in the economy, in the public markets. Yeah, that is something that I'm very, very passionate about.

Ilya Strebulaev
And the truth is most people don't know about it. So what my former student who is now a professor at University of British Columbia, Will Grinnell, and I showed is that in the United States in the last 50 years, more or less every second company that went public, every company, okay, was venture backed. Just think about this. In fact, if you look at all the large companies that went public in the US, it went public and then became large, okay? 75%, like three out of each four will, venture backed.

Just think about this, in the last 50 years, okay? And indeed every single one, like in top ten that were in top ten companies by market cap that were founded recently, were venture packed, okay? Also we showed that out of each dollar spent on research and development, R and D by all these companies that were founded in the last 50 years, $0.92 nick, $0.92 out of each dollar is spent by these companies that used to be venture backed now. But that's what we did next, is that we compared this with all the other large developed countries in g seven, you know, Japan, France, Canada, Italy, UK, Germany. Yeah.

And it turns out that first, these countries never had until very, very recently developed venture capital industry. And these countries in the last 50 years didn't produce large companies. Have you ever heard of french Google? Have you ever heard about japanese Tesla? Have you ever heard about Canadian Airbnb?

And so on and so forth? Ok, I can continue this list. And we showed that venture capital industry in this country, in the United States, is cosily, that is the critical word, cozily responsible for the vast majority of those companies. So had there been no venture capital industry in the United States in the last 50 years, we likely would not have had Google, Apple, Amazon, Microsoft, Airbnb, Netflix and Moderna. So you can continue the list.

And obviously our life would have been very, very different as a result. It is causal. It is causal. It is causal. How do you respond to all these pundits that say that VC is just gambling?

Well, VC's in fact, amazing enough, don't gamble. In fact, do you know how I call VC's in this book? In our book, I call them risk reduction engineers. Ah, yes, that seems to be exactly the opposite from gambling. Now that's something important to mention is that what is gambling?

Like if you buy a lottery ticket, that's gambling, okay? Or if you go to Las Vegas, it's gambling. Gambling means that you can succeed. But if you succeed once, it doesn't mean that you succeed again and again in the VC space. If you succeed once, there is in fact a high chance of you being able to succeed again and again.

Nick Moran
Persistence. And so it's persistence. What it also really means that there's a method to this madness. So to say there's a method to this gambling, okay? And this is what I call the venture mindset because it is true.

Ilya Strebulaev
And I think that is really important to understand. That's really, if you really want to understand the venture minds and VC's, that that is maybe the single most important thing. If you invest in one startup, however good you are, okay, there is luck involved, always. So there's a high probability of failure and there's always a luck component. So you might think when you invest in one startup, it's kind of gimbling, okay?

But VC and the venture mindset is not about investing in a single startup. It's about a portfolio approach. It's about designing a process that takes luck out of many, many, many startups. So if you don't have this process, many angel investors, by the way, may invest in hundred startups and they don't experience this one home run. So the venture mindset and this risk reduction engineering is about building a process so that as you invest in a lot of startups, you take the luck out of the equation, even though in each startup, in every single startup you invest in, there is a lot of luck.

And I think that all of us, not just in the VC world, but outside the VC world, I think should really benefit from appreciating this 100%. Couldn't agree more. And we can't get to everything that's in the book. I've got my copy in front of me right here. It's a fascinating read, I admit, but maybe we can break this up into segments.

Nick Moran
Specific findings from your book, from the various chapters. Maybe we start with sourcing. What was the key takeaway to share with listeners with regards to sourcing investments? Yeah, great. Well, first of all, what is sourcing is an ability to find a lot of opportunities.

Ilya Strebulaev
And what is critical to understand is that smart VC's that live according to the venture mindset. Their aim is to make sure that they have a lot of different opportunities. Okay? And I call this principle get outside your four walls. So it is very unlikely you will find a venture capitalist in their office five days a week.

Maybe they are there one day a week, maybe on Monday, okay? But most of the time they are in a coffee shop, they are at an industry fair, they are in the plane. Their attempt is to cast their networks wide to catch as many new opportunities as possible. And also their goal is to find unusual opportunities, because it is unusual startups, unusual ideas that typically have a high chance of success. So here is some interesting piece of research.

Okay. And then a story piece of research is that I looked at the LinkedIn profiles of many, many, many venture capitalists. If any venture capitalist is listening to us right now, likely. My team and I looked at their LinkedIn profile and we studied their connections. Interesting how many connections they have.

Who are their connections? Okay. And then what we did is we looked also at the link to profiles of corporate venture capitalists. So those VC's who work in large companies. And then also we started LinkedIn profiles of corporate innovators.

For example, the head of corporal corporate development, the head of innovation, the head of R and D Labs, and so on and so forth. Okay. In a large company. So the first finding is that if you're a venture capitalist, you have a much larger LinkedIn profile in terms of number of connections, like double that of corporate VC's, triple that of corporate innovators. So that is perhaps not that surprising.

The second finding is much more interesting is that the connections of a venture capitalist are much more diverse across industries, across ages, across geographies, across different backgrounds. If you look at even corporate VC, okay, then not only they have a smaller network, but also it's much less diversified. Maybe it is people with the same background, let's say those I went to university with, or those are in my company, or maybe in my prior company. As a result of that, even if you're a corporate innovator, you typically don't cast your network wide. You're kind of shutting yourself off.

Nick Moran
You're in the four walls. Yeah. From all those amazing serendipitous opportunities. Interesting, right? And so as a result of that, I think this is the power of sourcing that is the smartest VC's make sure that their network is diversified in a meaningful way and they go out of their way to find out this unusual, unusual opportunities.

Did you find correlation in returns with diversity and scale of network? Absolutely. So if you look at for every single principle, by the way, in the book, we looked at what I call the procedures that venture capitalists use with the venture mindset and how it has an impact on returns. So I already mentioned about consensus, and it's the same about network, which is if venture capitalists work hard on their networks and increase their networks in a meaningful way, that does have an impact on the outcomes. So I already mentioned one, the IPO rate.

Ilya Strebulaev
We can talk about other metrics of success, for example, multiples of their funds, or the ability to raise a larger fund, or the ability to raise another fund. And I think that, you know, as my, my friend and my co teacher in the Stanford VC class, Brian Jacobs, who is a co founder of emergence Capital, a large, successful venture capital firm in Silicon Valley, he likes telling our students at Stanford, the right time to expand your network was yesterday. Okay. But it is never too late, of course, right? It is never, never too late.

And I think it's also important to ensure that you don't just increase your LinkedIn connections, but also, and try to find serendipitous encounters, but do it in a meaningful way. Okay, two examples. I promised you a story, actually, two stories. One story is about myself. Another story is about one of our venture capitalists with the venture mindset who we mention in the book.

Let me start with the venture capitalist. Cami Samuels is a partner at Venrock, a storied famous venture capital firm. She works in biotech, invest in biotech companies. And what is I think is interesting to observe with Cami is that she sets up a lot of meaningful connections with people. So one example is a founder called Nat David.

She told us that very often she was driving back and forth to San Francisco and from her, from her office, and she would have like an hour long conversation with Nat. As a result of that, she ended up investing in many of her, in many of his companies, some of whom became quite successful. So that is an example of a meaningful connection. Story about myself is after I became venture minded, I now whenever I travel, I try to go and try to meet and try to talk to people whom otherwise I would have never ever met. Like last week.

So whenever I travel, my goal is now always talk to a person sitting next to me or standing next to me in line. Okay, so last week I was traveling, I was coming from Dubai home, and I started chatting with a person standing next to us. And turns out to be, he's a journalist and he's an expert in horse racing. And he just came from Dubai, Dubai World cup, where he was covering horse races. Well, one of our chapters in the book is, do you bet on the jockey or do you bet on the horse?

Of course not in terms of horse races. But we started chatting and now he is, I think, going to write an article about, about horse races and venture capital. Love the takeaways on sourcing. How about selection? If you had to distill down sort of the most meaningful takeaways on your research with regards to selection, what was that?

Let me mention just one to be mindful of time. And we have at least ten or twelve mechanisms in our selection chapter. So have a look at the book. But one example is that if you source many deals, like thousands of deals, how on earth can you select them? Because you need to invest, make maybe only one investment or couple.

Okay, so here's what I discovered, is that smart venture capitalists start with a fast lane and then move to a slow lane. What do I mean by that? In the ideal funnel, at the top of the funnel, there are thousands of potential opportunities. You just can't manage all of them. Okay?

So therefore you pursue a fast lane. And here is a trick they use. They ask a very specific question, which is why we should not invest in this deal. They ask the founder, right? Why we should not pursue this, why we should not pursue this founder?

Why we should not pursue this opportunity. No, it is the critical word, Nick, not. And they ask that to the founder, or they ask that of themselves. Oh, that's all themselves. I see.

So, you know, so I meet unique. You're one of my thousands opportunities. Why I should not invest in Nick? And that is called a red flag approach, or it is called a critical flow approach. So once I ask this question, if I see something that is a red flag, well, maybe I don't trust you, or maybe the market is really too small, or maybe I don't see product to market fit right away.

I will move on. And amazingly enough, over time, smart VC's even don't think about this. They ask this question subconsciously, and this allows them very quickly and very efficiently to pass this opportunity. So when I work with my Stanford students, most of whom would like to become founders, I tell them, when you first meet a venture capitalist, be it a senior partner or junior partner at a venture capital firm, the first approach will be, why should I spend even a moment with you? Why should I not invest in you?

So therefore, you have to address this red flags, potential red flags in you right away. And then once they cut this, what I call 100 to ten, like tenfold, then suddenly venture capitalists switch to the slow lane and then they start all asking all those due diligence questions and then suddenly they can spend hours and hours and days. In fact, on average, according to my research, VC's spend almost 120 hours of due diligence time to make one investment. Got it? Let's talk a bit about portfolio management.

Nick Moran
Everyone's favorite topic when it comes to working with existing portfolio companies. When is the right time to pull the plugin? I enjoyed this part of the book. Yeah, that is a great question. And this is the principle we call it is time to double down and it is time to quit.

Ilya Strebulaev
Because sometimes you have to make a decision whether to double down on your investment and sometimes it is time to pull the plug. And I think pulling the plug is very, very tough for everybody, not just for VC's, but for VC's specifically because they're very close to the founder, they're very often on the board. And I think if you again look at my research, Nic, you'll see that those VC's that are more likely to pull the plug, in fact turn out to be more successful. So it's not just about making an investment, but also it's about deciding when it is time to end your investment. Now it is tough, as I already mentioned.

In fact, the single psychological difficulty that VC's face most often is called by psychologists, the escalation of commitment. Which means that I invest in you, okay, I like you, and then maybe you're not doing that well, but I feel kind of obliged, feel committed to escalate, to invest more. So what are the specific methods? What are the specific mechanisms that smart VC's use? Okay, several examples.

One is that they ask their partners, in fact, in many VC partnerships, it is tougher to decide to agree on the follow on investment because you have to convince your partners they need to put more money in the same startup. So I talked about consensus. In the most successful partnerships, you don't need consensus for the first investment, but very often you do need consensus for the second check in the same deal. Okay. Another one is that many VC partnerships require that you find another investor, an arms length investor, meaning the one who never put money before either to join you or in fact to lead the round.

And those are very, very specific mechanisms. Another one, which is smart VC's know that it is inevitable that most of the investments will not be successful. When I say most, maybe 50%, maybe 70%, but it can't be that, you know, every single investment is successful. So indeed, when I work with venture capital firms, and these days I work a lot, because they come to me and ask and tell me, Ilya, you've studied these hundreds and hundreds of venture capital firms. Can you come to us and talk to us about best practices?

And do you know, Nick, what I observe most often? I worked with five venture firms recently, and in every single one of them, interestingly enough, they're not taking enough risks.

They are, startups, in fact, are not failing often enough, which means, of course, they're also unlikely to hit home runs. They have low loss ratios. They're not taking enough. They have low loss ratios due to. Consensus decision making during a number of.

Things, consensus escalation of commitment, incentives problems, and at least two cases I told the managing partner, is that, you know what, you look to me like a private equity firm, not like a venture capital firm anymore. And I think for them it was a revelation. But there are specific, once you realize this, there are specific mechanism that you deal with this. And actually, I think every single firm that I talk to already implementing all those mechanisms, they're relatively straightforward once you realize them. Okay?

So therefore, when you read the book, think about if you happen to be an investor or working in any partnership, as you're reading the book, think right away, how can I implement this practical mechanisms in my everyday life? Is it possible to give a quick overview of those practical mechanisms, or is it too deep that you, you know, you gotta. I already mentioned several, of course, right? I already mentioned that very often. So I already mentioned some.

Let me mention the ones that I didn't mention, the one that I didn't mention yet. And this is another principle in the book, another chapter is home runs matter, strike outs don't. So you mentioned, Nick, loss ratios. If you spend too much time about thinking about your loss ratios, your failures, that is not a good idea. Think about those startups that can become home runs.

In fact, one of the specific mechanisms is to look at your timetable and the timetable of your partners and colleagues, how much time they spend on successful startups. That they invest in versus failing startups. The moment you spend more time on your failing startups or not startups that are not doing that well, that probably, that is, that is definitely problematic. So you have to like audit your. Calendar to see, you have to, you have to audit your calendar, you have to audit your portfolio, you have to audit your meetings in your meeting.

You spend a lot of time on the startup that are not doing that well. And there's always a startup that is not doing that well, then it's, then it's problematic. Another very practical mechanism that I recommend every single, not just venture capital firm, but every single organization to do is to carefully observe your anti portfolio, which means that investments that you kind of had a chance to make, but you did not make. And you know what, I just recently worked with one venture capital firm quite successful in the past, and it turns out that their anti portfolio was more successful than their portfolio. And then you start thinking about, well, how did this happen?

Well, and here's the approach how you should do it. You should look at your funnel, which means that you've lost that your entre portfolio, companies that became successful at some point in your funnel, and you need to understand, to make it practical and to change something specific, you have to understand where you lost those companies. I mean, at the end of the day, does one just need to ask themselves, do I maybe just not have the venture mindset? Is this something that's implicit and learned by others? It's not about having or not having Nick, it's about whether you are willing to acquire it.

So my goal is in launching the venture mindset movement is that I think that all of us who would like to have the venture mindset have an opportunity to acquire it. And indeed, I observed many of my Stanford students acquire it. I observed many of startup founders I worked with acquired the venture mindset, and I observed many venture capital and private equity investors acquire the venture mindset. And perhaps most surprisingly, I observed many CEO's, C suite executives, heads of innovation, in very, very large companies, very traditional companies acquire the venture mindset. So I think it is possible, and moreover, in today's unstable, unpredictable environment, it's not necessary, just it's not as possible, but I think it's necessary.

Nick Moran
Ilya, you had some interesting perspectives on incentives. My question for you is, what is wrong about incentives that VC's get right? Well, that's a great question. Again, it's another principle, another chapter in our book about sharing the pie. And I think VC's what they get right about incentives is everybody who can contribute to success has a chance to benefit if at the end of the day there's successful outcome.

Ilya Strebulaev
But if the outcome is not successful, then maybe nobody is going to benefit.

In the VC world, in the startup world, we all know about now this vesting options. Do you know that venture capitalist invented that back in the 1970s? Yeah, you see prior to the 1970s, the word vesting was not really used in, in this specific way. And it's in Silicon Valley that it was invented, and it was invented in fact by those VC's that themselves worked and large companies and startups, and they got burnt because they didn't have those, that shareholder participating. Okay, that's a fascinating story that we tell in our book, but as a result of that, you spread the benefits around and you spread the benefits and you give those benefits to those people who can meaningfully contribute.

And amazingly enough, I work with a lot of large companies and many people approach this by saying, well, you can do it in a startup, but you really cannot do it in a large company. Because Nick, if you're an engineer, let's say in a very large company, how can you meaningfully contribute to success? It turns out that there are specific ways that you can do it, as long as you get the venture mindset. And by the way, many large companies in Silicon Valley and beyond, and also beyond the world of tech, successfully implementing those VC type venture mindset type incentives, love it. So it's possible in big corporations too.

Nick Moran
They're not the innovators dilemma will not get the best of every corporation. Some will be able to adopt the venture mindset and be as innovative as their startup counterparts. What do you think? Absolutely. In fact, I think that corporations can be more innovative than startups in many ways because they have the resources and the people that startups typically don't have.

Ilya Strebulaev
They can afford to fail much more frequently than startups. And as a result of that, it's mostly about the mindset and the procedures that large companies set up for themselves as opposed to their opportunities. At the end of the day, whether you're a startup founder or if you're a venture capitalist, you know what your options are limited, you have limited resources, you have a limited number of people you need to survive. Most large companies, they're not in the survival mode at any point in time. They can afford many, many things that a venture capital firm or a startup founder cannot afford.

It's about their willingness to do it. Interesting. Ilya, I speak with many peers in the industry that have slowed down or pulled back on investing amidst the down market for VC, Pitchbook reported that 38% of VC's disappeared from deal making last year is now a time to be slowing down.

First of all, I can confirm the statistics because obviously at the venture capital initiative we're keeping track of all the vc activity. I think that those who are pulling out now are making a mistake. And by the way, many large corporations are doing this right now. That is a mistake. And by the way, if you look historically, when I did look at the most successful venture backed company of the last 40 years, do you know that the most successful ones were founded and funded in recessions or in slow times?

So, in fact, your probability of hitting a home run is higher when everybody else is pulling out. So when everybody else is pulling out, I think you should be pulling in. And yes, right now is, I think, a great time to consider investing for a number of reasons. One, everybody's pulling out. So you have more time, you have more due diligence.

In fact, one of my biggest complaints about the venture industry a couple of years ago when it was very hot was that the competition was so tough, even smart VC's had to choose a trade off or face to very tough trade off between doing enough due diligence or just losing a deal because of the time pressure. Now you can improve your decision making, improve the outcomes by spending more time. On the deal and likely see more good opportunities. Seeing more good. By the way, there are more good opportunities because again, what happens in recession is that in fact, there are more amazing startups being founded because some people leave large companies all laid off and start something right, something new.

So there are more opportunities. Absolutely. And also valuations are better, relations are lower. So conditional success, your multiple is going to be much, much higher. So all this combined, plus of course, we're right now in this amazing environment of disruption happening across the space, everybody talks about AI and generative AI, but the reality is I see amazing startups coming out almost in any single industry.

I have hundreds of former students whom I'm helping advising, who are starting companies, and they come from across the spectrum, and this disruption happening everywhere. So I think that is really the right time to pull in and start investing seriously. Maybe a quick question about AI here, Ilya. So in one of your publications, you mentioned that many unicorns are overvalued. Is this still the case with the AI mania?

Nick Moran
Is AI hit or hype? Yeah, unicorns are typically overvalued. And when I say overvalued, they're overvalued relative to their fair valuation, which means that if you hear that a generative AI company is now worth $25 billion, that really means that if that company were now being traded on Nasdaq, let's say it's very, very likely would have been much lower than $25 billion. And that's what my research shows again and again. Now, we did not do it for Genii because of a young industry, but I'm pretty sure it's going to be the same.

Ilya Strebulaev
However, it does mean that it's a hype. So many industries in the past were real disruptive industries, a lot of disruptive opportunities, and yet companies there were overvalued relative to their fair value. So if you are either a startup founder or a startup employee, or invest in venture funds, venture capitalists themselves do understand this. Be very careful whenever you hear the word valuation in the industry, okay? And Nick, you know it better than most, but you know the word valuation actually in the venture capital industry means something else.

It means, in our technical jargon, post money valuation, which is not valuation. So post money valuation is typically overvalued and more so for unicorns. But everything I see about, about AI, from my anecdotal experience with working with so many of my former students and Genii startups, to the way it is truly disrupting the business models of various industries, and perhaps some of them are being disrupted slower than other industries, but they all going to be, at the end of the day, modified, changed. I think generically is a real game changer long term. Ilya, what was the biggest surprise that you learned in your research for the book specifically, was there anything very counterintuitive where maybe your hypothesis going in was proven wrong?

Well, I had many hypotheses proven wrong. That's why I like being a researcher. I love when I have a conjecture and it turns out to be incorrect. So. But truly one of my biggest surprises is at a very personal level, when I started studying this venture capital industry, I was told by everybody, you know, ily, you will not learn anything because it's a very secretive industry.

People don't like sharing their secret sauce and so on and so forth. Okay. And it turned out to be not the case. That was one of the biggest surprises. Like, just for this book, I interviewed like dozens and dozens of people.

But in the last 20 years, I did go and started like hundreds and hundreds of venture capital firms, and everybody really would love to share how they do it and of course, would love to learn from others as well. I have to say that was one of the big surprises. It's a secretive industry, but I think it's secretive just because, yes, there's not much data, there is not much quantitative stuff to study, even though we're trying to change that. But that's not because people really hiding in the bushes and trying to, trying to keep whatever they do close to themselves. That was big surprise.

Another big surprise was truly is how this venture mindset could be useful, not just to our professional life. You know, the idea was, of course, to make sure that other venture capitalists, startup founders and large organizations can learn from the venture mindset. But how can all of us in our personal life use the venture mindset? I already mentioned how I changed my travel behavior when now I, on average, meet, I guess, with four or five people when I travel, that I started conversation with that in the past I would have never, ever talked to, and sometimes it leads to serendipitous outcomes. But people who read the book told me, oh, gosh, I changed my approach to education.

I changed my approach to finding work. In fact, Alex, Michael and I just wrote a very interesting piece about how to use the venture mindset when you are laid off, which unfortunately is happening more and more, but you should use this as an opportunity to restart yourself. That was one of the biggest unexpected surprises for me. My friends and I can use the venture mindset in so many different life circumstances. Perfect.

Nick Moran
Love it. Ilya, if we could feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about? Well, I think you really should interview every single protagonist whom I mentioned in the book. You really mentioned that you interviewed Nagrij Kashup. He's amazing.

Ilya Strebulaev
If you didn't yet interview his, his former colleagues at Qualcomm, Sachin Dishpand and Patrick Eggen. Sachin, in fact, is still at Qualcomm Patrick is counterpart ventures. You should absolutely have them. But you know what? Every single person who we mentioned in the book, every single venture capitalist as well as every single founder, I think really should be, should be on your show.

Nick Moran
Amazing. Ilya, what book, article or video would you recommend to listeners besides your book? Of course. That was my first thought. You know, my wife laughs at me because I sent her a WhatsApp message recently, saying, gosh, I'm reading this book.

Ilya Strebulaev
Finally, I found the book I really, really love. And she responded to me saying, well, what's the book? What's the book? I want to read it. And I said, well, it's my book.

But in terms of the books that I really love, you know, I will be very counterintuitive is that I do love non fiction books that are not about business. I think that many investors and founders and also executives in large organizations can learn a great deal about fascinatingly written books that are about decision making. That is, about decision making that is not about business. And sometimes we can learn more from those books than about the business books. Here is an example.

One of my favorite books is titled the Guns of August, and it is written back in the 1960s, I believe, about the decision making that led to the first World War. It was written by Barbara Tuchman. And if you've never read the book, and if you would like to learn a lot about decision making that is applicable today, about all the pitfalls, about all the problems of miscommunication and how to resolve those problems as well, I think that would be one of the books that I would recommend. Guns of August by Barbara Tuchman. Perfect.

Nick Moran
Ilya, do you have any habits, tactics or techniques that are a secret weapon? Spent a lot of time in my wine cellar. In fact, that's how we ended up started writing the book, the COVID hit. And I decided, okay, now it's time for me to clear the mess in my wine cellar. I'm into fine wine.

Ilya Strebulaev
I have a lot of bottles, and I never had time, you know, to classify, catalog, etcetera. And Alex, who is my former student and is my close friend, we formed a bubble. Do you remember bubbles in COVID times? And so we dressed up because my wine cellar is a constant 54 degrees. So we wear hats and scarves and sweaters and coats, and we spend hours there imbibing as well as cataloging, classifying and discussing stuff.

And at some point Alex said, you have so much stuff, Ilya, I think you know what, you need to write a book. And I said, yeah, let's do it. And so my secret weapon is to go down to the wine cellar, spend time there to cool, and also to talk to my friends when they come here over to my place. I love it. It's like outside the four walls.

Nick Moran
It's collecting knowledge, and it's having a little fun at the same time. And then finally here, Ilya, what's the best way for listeners to connect with you and follow along with the book, the venture mindset? Well, the book is out, so make sure to get a copy. And if you have any questions, just email, email my Stanford email or teamminder.com. And also my team and I are very active on LinkedIn.

Ilya Strebulaev
I'm posting the new recession sites on my LinkedIn about several times a week, about unicorns, about factors of success and failure, about the counterintuitive principles of the venture mindset. So I think the best way to connect is to follow me on LinkedIn and actively participate there by commenting and suggesting. Well, I give you a huge endorsement for the follow on LinkedIn. I've been a fan for a long time. He is Ilya Strebu.

Nick Moran
The book is the venture mindset, out on May 2124. Sir, thank you so much for the time and the insights today. It was a pleasure. Thanks so much. Nick.

Ilya Strebulaev
Thank you.

Nick Moran
Alright, that'll wrap up today's interview. If you enjoyed the episode or a previous one, let the guests know about it, share your thoughts on social or shoot him an email. Let him know what particularly resonated with you. I can't tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same.

A compliment goes a long way. Okay, that's a wrap for today. Until next time, remember to over prepare, choose carefully, and invest confidently. Thanks so much for listening.