Richie Cotton: Welcome to DataFramed. This is Richie. In almost every industry, the rate of innovation is increasing. This is brilliant, since there is something exciting happening wherever you look. The downside is that it also makes it harder to predict and plan for the future. If your industry isn't being disrupted right now, there's a good chance it's about to be.

In order to deal with increased uncertainty, a new culture is needed. Today's guest had a realization that there's already one industry that's been consistently succeeding in the face of this uncertainty. That is, the venture capital industry. VCs make a habit of investing in new companies with highly uncertain futures so they can provide inspiration in how to manage changing environments.

Our guest is Ilya Strebalaev, the David S. Lowell Professor of Private Equity and Professor of Finance at the Stanford Graduate School of Business. He's also a research associate at the National Bureau of Economic Research. He's won numerous awards, both for his teaching and for his research into corporate finance and venture capital.

He's been published in the New York Times and the Wall Street Journal, and he's just written a book called The Venture Mindset, which will form the basis of our discussion now. Let's hear about Ilya's principles for how to think like a VC.

HiIlya, welcome to the show.

Ilya Strebulaev: Richie, thanks so much for having me.

Richie Cotton: Excellent. So, just to begin with, what is the venture mindset?

Ilya Strebulaev: The Venture Mindset is a new mental model, how to make better, smarter decisions. In an innovation driven world, in a world where there's a lot of uncertainty and predictability. I call it unknown unknowns, disruption and so on, where the traditional way of making decisions both quantitatively and qualitatively does not work very well.

that is the idea behind the venture mindset.

Richie Cotton: Okay, so, you talked about unknown unknowns and it seems like there's a traditional way of doing business that's worked very well for a long time. Is something changed in the world that means that it's no longer relevant and you need this new venture mindset?

Ilya Strebulaev: A lot of things have changed in the world. I'm not saying that the traditional way of making decisions is not completely irrelevant. It's still relevant, but not all the time. So when I say unknown unknowns, it's that in the past, when I think about businesses, when I think about data analysts, for example, then we can predict the future much better.

Because we knew, for example, that if we think about companies, the business models would be the same. If we think about various data trends, data trends would kind of be on the continuous path. And nowadays there's so much disruption in uh, academics, we talked about chaos theory.

So there's so much new chaos that is very difficult to predict. And it's not just generically, but with specific individual decisions. I'm teaching at Stanford. I have hundreds of students who are taking my class who become either investors or the founders of venture backed companies, and I'm helping lot of them, and I stay in touch with them after graduation.

And you know, just yesterday, talked to four of my former students, and I'm helping them raise money. So three out of four are now raising funding for generative AI startups. Okay, well, I guess not a big surprise, Rich, either for you or for our audience. But the whole point about this is that if you think about this, it's a lot of unknown unknowns.

unlike many of my students in the past, what is the business model of these generous value startups? Very often, they don't know what is going to be the technology. Very often, we don't know how large is the market. It's very difficult to predict and so on and so forth. And so that is the idea behind the venture mindset.

And the reason I call it the venture is because really for the past 50 years, venture capitalists were making bets on startups and they were facing all this unknown unknowns all the time. It's just that now, we are far away from venture capital, is facing the same, I would say, hostile environment when we make decisions.

Richie Cotton: Okay, so I think this is going to be quite terrifying for people in the audience who are data analysts or data scientists saying that actually your ability to predict things is decreasing because there is more chaos in the world and more unexpected things going on.

Ilya Strebulaev: So I agree with this, Richie, you know what, you should not get pessimistic. So that's the whole idea about the venture mindset, is that it's a different mental model so that you still can make decisions. You still can make, I think, very high quality decisions, even though it's much more difficult to predict.

And let me tell you right away, I think what is really important for, for data guys is that if you think about what is really most important for venture capitalists, okay, and identified in my research at Stanford over the last 20 years, what I call nine principles of the venture mindset. But like if you have to rank them, like by far the most important one is the following.

And I'm going to use a sports analogy. Home runs matter. Strikeouts don't. So, if you are in something that you don't expect a lot of changes, you actually do not want strikeouts. You want every single line of code to work perfectly, ideally. You would like every single data point to tell you something, and so on.

Every single mini project to succeed. The venture mindset thinks completely differently. Home runs matter, which means that it's okay to fail. It's okay if a lot of mini projects do not work. As long as you experiment, try them quickly scale fast, and then abandon them if they do not work. but some projects, some of the analysis is going to be truly impactful.

And the whole idea is to use the venture mindset to identify and scale and put all your effort forward. on those projects that will become a homerun. that is the whole idea.

Richie Cotton: so you're allowing for some failures to be built into your business model, then you think that some things are going to go wrong, but you've just got to concentrate on getting those wins as well.

Ilya Strebulaev: I think built in is a very good word, Richie. Because, failures in the venture mindset that don't happen just because, you know, they have to happen. They are built in, which means we expect a lot of failures to happen over time.

Richie Cotton: Okay, so if you think about home runs and strikeouts, how big do your home runs need to be in order to compensate for these strikeouts?

Ilya Strebulaev: That is a great question. So, Because we're talking to the audience of data geeks, right? Let me, let me tell you the numbers and the numbers based on my research. So I'm the, at Stanford I'm the founder of the venture Capital Initiative and we have perhaps the best data set of all the venture capital investments, investors, founders, startups, and so on.

Okay, so here's statistics for you. If you take on average typical 20 early stage. venture capital investments. Okay. So 20 typical startups, about 15 of them, we expect to fail. Think about this. Okay. So 75%, 15 out of 20, we expect to fail. Investors expect to lose money on them. Then there's going to be a couple of startups, maybe three, maybe four, that will be kind of successful or semi successful.

As VCs used to say we'll get two X, three X, four X of our money, meaning that. You invest 1 and you'll get back, you know, 2, 3, 4. If you're a banker, like investment commercial banker, okay. You'll be extremely happy with this result. VCs are unhappy. Why? Because if they get 3x, it will not allow them to return the money on their losses, to cover their losses.

so those outcomes are considered to be mediocre. And then there is one and perhaps two investments that will return you 100x. So that is a home run. So home run really starts at, people say 10x, it starts at much higher than 10x. So I just talked to a friend of mine the venture capitalist and he's an early stage investor.

His typical check size is between 1 million and 3 million. And just one of his startups that he invested in about three years ago was sold. And so he put in 1. 5 million, it's actually a data startup, 1. 5 million, and it just got sold, and he got 120 million. So that's about a little bit less than 100x, so that was a successful investment.

Here's the way to think about this, by the way. about a home run. The venture capitalists think, and I always tell the founders about this, because that's critical. The way venture capitalists think is if I reach here, consider whether to invest in you, in your startup. Okay. I will ask myself the following question.

If everything goes according to the plan, in fact, if everything goes better than the plan. Then will my investment in you allow me to return my entire fund, which is the entire pool of money. Okay. That I'm really managing. And and that it would be an amazing investment. So a fund returner is a true home run because effectively if I have one fund return, everything else is a cherry on top.

So that's how they think about the venture, the home runs. And I really think that In today's unpredictable, disruptive scenario, when you think about your data projects, like, like when you prioritize what you do, you should really use the same home run approach.

Richie Cotton: Okay. So, that's sort of investing one and a half million, getting 120 million back. That seems like a dream scenario. And I'm sure like everyone would love that sort of 80 times, a hundred times sort of, win. But there are also sort of methodologies for thinking about decisions. So things like the Toyota way, Six Sigma, which are all about incremental improvements to what you have already.

So when might you want incremental improvements and when might you want to go for this venture mindset situation where it's like, you just want a few big wins.

Ilya Strebulaev: First of all I think that is a great comparison. There is a Toyota way movement. There is a Six Sigma movement, and I hope that we're going to launch the, with your help, the Venture Mindset Movement. Okay? Now, those are not really contradictory. They're very different, but they're not contradictory approaches because I believe the Six Sigma, the Toyota Way approaches are very useful.

And they're very useful when you don't expect big changes, when your improvements are incremental. Let me give you a an example. So, every single year, Gillette produces, releases a new razor blade. Now that is an innovation. Okay. they, of course, then try to push so that, we reach a, you and I use all those new fantastic blades.

It

Richie Cotton: not doing very well on that.

Ilya Strebulaev: they lost you as a customer. Okay. So they have not yet lost me, but, first it's an innovation. And I think that. likely using Toyota way approach there makes sense. By the way, it is an innovation. Do you know that Procter Gamble is the parent of Gillette? Do you know that Procter Gamble employs more PhDs than Stanford, MIT, and Caltech combined?

it's a big R& D heavy organization. Okay. Now that is an incremental approach. But let's consider a situation where suddenly competitor appears that offers a completely different business model. Okay. So for example you actually don't need Gillette blades, but you order a blade and every single week blade comes to you and It's like a subscription model.

So that's very different, okay? And in fact, venture cap is back to start up like this. And that is a completely different setup. And that will require the venture mindset. So The moment there is a disruption in the way how technology works in the way how business model works or the disruption, how really you do business, by the way, professionally or personally, then Toyota way is not only helpful, it's hampering you because it doesn't allow you to go outside your cage that you built for yourself.

And this is this is exactly where the venture mindset should be used.

Richie Cotton: so if you want to make incremental improvements it needs to be something like a continuous business case where you've got this discontinuities. That's where you need the venture minds. so principle one, that was the home runs matter, strikeouts don't. What's the second principle?

Ilya Strebulaev: So another principle that I really think is important. And in particular, maybe appreciate for our audience today. is the one that I call Get Outside the Four Walls. What I mean by that is that, again, I'm doing this research on venture capitalists, okay? I met thousands of them. And one thing I noticed about them is that you cannot find them in their office.

Now, they typically are in their office once a week, To meet with their partners, their colleagues. The rest of the time, they're traveling, or you can find them in a coffee shop, talking to some other people trying to find out new stuff. Again, the moment you are incremental in the incremental life, You don't mean the serendipity, you don't mean to meet people that, will tell you something unusual.

But once you are in the disruption, in this unpredictable stage, you really do not know what's going to, what's going to be important tomorrow. So you would like to open up to new ideas and new people. And it's interesting because so I've done research. And I showed that Venture capitalists have dramatically bigger LinkedIn networks than the LinkedIn networks of corporate innovators.

Think about chief innovation officer, for example, okay, chief R and D officer and so on. But more importantly, I think Their LinkedIn network are much more diverse, different industries, different backgrounds, different education, different geographies, while if you're, let's say, a corporate innovator you tend to, well, like 20 LinkedIn connections are going to be from your present company, 15 percent are going to be from your previous employer, and then the rest will be from your high school and your college, And that is not true. a great idea whenever you would like to achieve something unusual. So get this, get outside the four walls, meaning that try to get outside the cage, try to open yourself up. And I think especially when we think about about new data opportunities, new unusual patterns new connections.

That is particularly important principle. Let me give you my personal example. First, one thing is being a professor who is studying stuff. Another one is being somebody who says, you know what, that actually has an impact on me personally. So I've been studying venture capital for 20 years, okay.

And I've discovered this principles and I tested them, etc. And then I realized that for many of the principles, I'm actually going to use them in my life. So here's my own example that I'm pretty sure data geeks will appreciate. So I've been at Stanford for 20 years and I've been traveling a lot, you for academic conferences, to speak, whatever.

So what do I do when I travel? Well, I come to the airport. and I have my earbuds on because I'm listening to something. because I kind of don't like noise very much. And then when I wait for the plane, what do I do? Well, I open my academic article, or maybe my laptop, and work on my data very intently.

What do I do in the plane? Well, the same. when I don't drink, I open my laptop or I read something. Okay, now that is not getting outside your four walls. Because in fact, amazingly enough, when you travel that is a good opportunity to meet somebody whom you don't know, who is definitely outside your network.

You never know what's going to happen. So after I decided to apply this principle to myself, every time I travel, and nowadays I travel even more, I have a goal. Every single plane ride I take, I must speak to at least five people whom I don't know. It could be a person sitting next to me in the plane.

It could be a person standing in front of, behind me in the passport queue, et cetera. And you know what? It's like homeruns matter, strikeouts don't. It is true that a lot of conversations, hello, hello, where are you from, what do you do, etc, etc, there's no connection. And suddenly, wow, let me tell you a story.

I was just returning from New York recently, from Newark airport. And my flight was delayed, big surprise. So I was waiting there and waiting and And I started talking to the guy. Again, I would have never ever talked to him had I not had this badger minded principle in me, okay? And by the way, you have to force yourself sometimes.

Because, you know, there's a person standing next to you, he does not know you, I don't know you, he's actually kind of reading something. But there's always a way to start a conversation. It turned out that he's a journalist. He was coming from Dubai, from the Dubai World Cup horse racing, because he was covering horse races for the major U.

S. publication. And with that conversation, I told him, do you know that I study venture capitalists and venture capitalists are all about. What is important? Jockey, meaning the founder of the team, and the horse, meaning everything else. Product, market, business model, etc. And we spent like 40 minutes in the debates about, about jockey versus horse and startups versus horse races.

And I think he's now going to write an article for his publication about, you know, horse races and the, and the venture capital and startups and the venture mindset. And I've learned a lot from this conversation as well. So you never know. So my suggestion, Richard, to you and to all the listeners, get outside your four walls.

Richie Cotton: As you can imagine from my job, I'm very enthusiastic about talking to strangers, so I'm fully on board with you on that point. Okay, so we've got Home Runs Matter, Get Outside Your Four Walls, what's point number three?

Ilya Strebulaev: point number three is I think very important and it is called say no 100 times. What do I mean by that? first of all, coming from my research, I'm a data guy, okay? For every single deal that venture capitalists Consummate like they give you a check and you accept the check. Okay, they consider hundreds.

In fact, even more than a hundred opportunities. Just think about this. Okay. Now if you're a founder, that has huge implication for you because if actually, you know what the odds are against you. Statistically. Okay, so you have to do something to increase them. But I think that goes way beyond. You need to learn to say no to many deals, to many opportunities in life, to many projects.

And here is the trick how to do it. what I found out is that venture capitalists ask a very different question when they start considering their potential investments initially. And I call this fast lane. There's a fast lane and there's a slow lane. Fast lane. They ask the following question.

Why should I not want to pursue this opportunity? Not as very, it's critically important. Instead of asking yourself a question that, you know, I observe, for example, in a corporate setting, it's a typical question, so why do you want to approve a budget for this project? better question might have been, why would we not want to approve a budget for this project?

And I think that when we ask ourselves about whether we would like to pursue A or B, like whether we would like to accept a job offer, whether we would like to actually seek that job offer so our audience is doing a lot of data projects. I'm doing a lot of research projects. And before I discovered this myself, I was asking, do I want to pursue this research project?

Like, is it promising enough? I have changed to the fast lane. And I, to, oh, why do I not want to pursue this research project? And I found this so efficient, so amazingly different. And I call this, so that it's, you can remember this better. I call this the red flag approach. So you'll try to identify red flags that.

will make the project is not interesting enough. Note, by the way, that the venture mindset, venture capitalists, they don't make final decision at this point. So the idea is to put a filter on. If the project, the startup, the idea doesn't meet the red flag. Okay, then they will not consider it. And then they will put all the effort, all their time, a lot of time, on doing much more detailed due diligence on the project that passed the first filter.

Then they switch to slow lane and will ask the question, well, okay, why are we anxious to pursue? And so the challenge is, I think, that in the traditional mindset, we're too often asking ourselves an inefficient question for every single project, why do we want to do it? And again, if it's incremental.

That's okay. But the moment there are potential for home runs, you do not want to, for every single project to ask why do you want to do it, you will not be able to consider a lot of opportunities then. So therefore, remember this principle, say no 100 times.

Richie Cotton: Okay, so this actually reminds me a lot of like a project manager mindset where you get hundreds and hundreds of tickets being filed with ideas for things to do with the project and you just have to reject most of them because you've not got enough time.

Ilya Strebulaev: Exactly. And again, point is to find a very efficient way to do it. And I think the venture mindset will tell you, do it by asking a different type of question. And what I found out in my research is that when you change the nature of the question, your approach dramatically changes.

Richie Cotton: And so it seems there's an implicit assumption here. So, the first stage is, Saying no to lots of things very rapidly and then you can spend a lot more time concentrating on the few that remain. assumption is that you've got lots of different things to choose from. Like how many different projects you have to choose between in order for this to start making sense as an approach.

Ilya Strebulaev: Well, that of course depends, you know, for early stage venture capitalists, it's at least a hundred. Okay. In fact, it's interesting that for software VCs, so those who invest in IT projects, it's impact more. It's like 130, 140 on average, per each deal. Done. If you're in healthcare, we see it's, it's a little bit, it's fewer, it's still a lot, but that's, and I think the reason behind this is that typically software startups are much more uncertain, much more unpredictable than healthcare ones.

So in healthcare ones, let's say very often we know the market, the market is there there's technology and farmer risk that let's say the drug will not work or the medical device will not work, but if it works, we know the market is there. For IT projects, for a lot of data projects, we don't know what the market is there.

And so therefore, you actually consider even more opportunities.

Richie Cotton: Okay, so we're looking at at least a hundred different opportunities and that's the point where you really do need to filter on reducing that number.

Ilya Strebulaev: That's right, Richie, and for this, you of course need to increase the number of opportunities. And this is where, going back to the previous principle, getting outside the four walls is really important.

Richie Cotton: So, the example you mentioned before about this conversation with the person from Dubai was about should you bet on the horse or the jockey? Do you want to tell me a bit more about that? Like, where did you land on this?

Ilya Strebulaev: Well, that's another principle, the venture mindset. And the principle is very simple, bet on the jockey, not just the horse. And that is First, a critical principle for venture, the venture mindset. So venture capitalists will not invest in a startup if they do not think that the team behind this idea can execute the idea.

And the truth is, and I've seen this again and again, the world of ideas is overrated. There are too many ideas. And I know we talked about intellectual property and copyright, but the truth is that there are so many ideas that especially when we don't know how good they are the ideas are less important than the people behind them.

I can come up with a great idea, but I'm unable to implement it. And for each great idea, there will be so many teams who would like to try it out. let me give you Richie an example. So, I hope that Not everybody in our audience is so young that nobody remembers the day when the first iPhone was released back in 2007, okay?

But if I take you for a second back to that period at the time, there was no possibility to share files. Or rather, you would use a, do you remember, USB sticks? Well, you remember, maybe some of you don't, but, but, but USB sticks, and even if you're a little bit older, I still remember the the diskettes.

Okay, kind of the, the disks, the floppy disks. Okay, so that was the way to share files. But the idea that the future of file sharing is going to be disrupted was out there. And of course, iPhone, obviously, supercharged that, So 2007, in fact, there was a popular tech blog called Mashable, and it posted the list of, I think, more than a ha eighty.

Startups that were pursuing this kind of file sharing, file hosting stuff. Now many VCs looked at that and one VC in particular, his name is Samir Gandhi. He was a partner at Sequoia, a venture capital firm. And he thought file sharing is really cool. It's going to be big. By the way, again, the market did not exist at all.

The technology was not there yet. But he thought it's actually coming up. It's coming out. It's a huge vertical. I would love to make an investment. How have you approached that? Well, he went out and met with dozens of these startups. There's that Mashable listed that he met, he learned all about this technology.

He did not invest in any of them. And then one day. Serendipitously, he was introduced to these two guys who didn't have any money. In fact, I think he needed to take a Greyhound bus from Boston to the Bay Area because they didn't have money to fly. And they didn't have a prototype because obviously they couldn't do anything.

Okay. And they were kind of outside this community. But in like several minutes he invited them for pizza. And I think very quickly he said, I would love to invest in them. Why? And that is because the jockey, remember the horse was the same for all those teams. The file sharing idea was exactly the same.

The market was the same. Nobody really knew about how technology is going to evolve. What he realized in that really first five minutes, I think, is that, these two guys, and their names were Drew Houston and Arthur Ducey, they they knew much more than everybody else he talked to. They in fact thought deeper about many issues that he thought.

And by the way, venture capitalists love investing in founders who know more than them about the stuff that they think they're experts. And so he realized those guys can execute. If anybody can, they will execute. And so he, of course, proposed and Sequoia invested. And I think that investment turned out to be one of the, the best investments, dollar per dollar.

That company was renamed and became known as Dropbox. And maybe some are still using Dropbox every day, but that is the point. So the point is that there were like 80 startups perhaps doing exactly the same, but really only two plus survived. There's a Dropbox, there's a Box, and of course there's a Google Drive, a startup inside Google.

And I'm not really sure whether you can name any other successful file sharing companies. So that's about the jockey. So I think venture capitalists will not invest unless they believe in the jockey. And I think that also holds a lesson for everybody, for all of us. I'm often asked being a professor, I'm often asked, so what is the purpose of education?

So one of the purposes is to ensure that you improve your jockey skills. Now, I don't mean horse racing skills. I mean that, when I talk to you, okay. And I think of myself as an expert in your field. Okay. I'm still impressed by what you do. so I think that is a skill.

But I don't think there's too much luck involved. So my suggestion is to think about your jockey skills as a result of that.

Richie Cotton: So that is fascinating. Of course, Dropbox was incredibly successful in the face of, like you said, about 80 other different startups trying to compete for this space. So you said one of the things that the venture capitalists appreciated about The founders was that they knew more than they did. So beyond domain knowledge, are there any personality traits that make for a good leader or a good founder?

Ilya Strebulaev: A great question. And the answer is yes. And you can see it both quantitatively and qualitatively, And there's no one single personality trait. But there are many. One is difficult to define, but easy to see when you encounter it, is charisma. let me give you another example, And again, I've been very lucky at Stanford. I met so many students of mine who have this charisma. And again, all of them are different. And so if you ask me, can I define charisma? Not really, but I can give you an example. Let me give a specific example. And in fact, we'll give this example in, in my, in my book, The Venture Mindset.

So I had this student, his name is Rene Akassi. He is originally a doctor, a surgeon from Canada. He came to Stanford to study business. And the idea was because he really wanted to find an, he didn't have really an idea. He wants to find an idea that would merge, you know, business, data, technology, and medicine.

Because he really cared about healthcare. And he came up with the idea. the exact idea kind of is irrelevant here. Actually, the idea is amazing. It's a platform. To match the patients who have rare diseases, those that maybe a few hundreds of patients have in, in, in the country with the hospitals and the providers.

So that's actually not the point. The point is that, I have like hundreds of students come to my office and talk to me about their aspirations, and a lot of them are amazing, but when some of them come and I'm a professor, I'm sitting in my comfortable chair, okay and I'm 10 years, I don't need to go anywhere.

And I talk to some of them and my heart starts beating faster because I say, gosh, I actually would love to join this guy. And so that's what happened with Rene. He came and talked to me and the way he talks and the way he looks at you, et cetera. That's what I call charisma. And he convinced when he didn't have money, when he didn't have prototype, when he didn't have any success of any kind.

he succeeded in getting some students join him full time. He succeeded some top person who worked in a well known large company, drop everything and join him. And so when, as a founder, You succeed in making people follow you when you don't have success, when you don't have, you know, millions of dollars to show, I think that is very, very, very impressive.

So charisma is one. Two is passion. And that is because the reality of the venture mindset is that the real home runs are likely to be long term endeavors. Venture capitalist joke, however, so they laugh every single time I tell them that one of my kind of research insights, which I would say may be one of the least important, but the most cool research insights is that if you look at the average period of time that startup spends before it becomes public, if it's successful startup, And it's now 12 years, depending on exactly how you count.

It's actually longer, along some metrics, than the median marriage in the United States. Okay? So you have to be very patient. And for this, you need to be passionate. And for example, if the founder tells a venture capitalist, you know, I'm here for a quick buck. I have this great idea. I'm great. I'll be in a couple of years, I'll sell it like for a hundred million bucks.

Venture capitalist immediately, it will be immediate red flag, immediate turn off, the end of the conversation. And the final feature, which I think is really important is Resilience. And resilience means, you know, in my experience, every single startup, even the ones that became amazingly successful, amazing home runs, they're like on the verge of going bust so many times.

And it's tough. And you have to make, as the founder, as a team member, you have to make a lot of tough decisions. And I think resilience is something that venture capitalists a very, very curious about when they evaluate founders and also builds to work in a team. So I'm getting calls all the time from venture capitalists who are doing reference calls on my former students who would like to raise money from them.

Okay. And you know what? I had maybe 500 calls this year's and you know what? Not a single time they asked me about the great, like nobody cares about the great in my class. They asked me about. do remember this person, did that person stand out? They asked me about, so, was that person a captain of the team?

Because we have a lot of case study teams. How did that person interact with other group members? How was the resilience if there was some disagreements among the groups and so on? So those sort of type of questions that I think the venture mindset really, really cares about.

Richie Cotton: Okay. So we've got charisma, patience, and resilience. These all seem like good qualities in people to have regardless of whether you want to be a founder or not. So yeah, certainly a useful thing to know. So you mentioned just then like what happens when you have disagreements and it feels like you're going to get a lot of cases where it's like, well, I won't do this one project when I'll say I won't do something else, but do you have any advice on how to resolve these sorts of disputes?

Ilya Strebulaev: Yeah, that's really fascinating. Because it's amazing because, you know, I often work with the leaders of large organizations, like large level companies. And I go with them through every single principle of the venture mindset. And they're surprised by a lot. They're taken aback by a lot.

But I think this stuff about disagreements is the one that they're really kind of shocked. And that's why, also the reason why we, in fact, in this talk, The Venture Minds book that I mentioned, we call a chapter Agree to Disagree. And this is the chapter where, like, I just met the CEO of a large organization, and he said, Oh, wow.

And also it's a wow, because in fact, you can make changes right away. Like some stuff, it's very difficult, it's very difficult to make myself charismatic if I am not. But some stuff you can actually implement right away, right there. Okay, so what does agree to disagree mean? And why you should use it in the venture mindset situations, not in the traditional mindset situations.

So, typical decision making in groups work like this. Like, think about meetings you had where you had to make a decision. So there could be a lot of debates. But at the end of the day, people try to come to consensus. And many organizations, in fact, either require consensus, or they require unanimity.

So everybody says, yes, let's go forward. And this could be done for culture, for politics. The truth is, it's human psychology. And there's a lot of research, including mine, shows that if we don't design the system, then trying to reach consensus is something that is innate to us. Thank you very much.

to human beings. Amazingly enough, and I, I don't have time to go into the detail, but one of the most amazing examples is not from my research, because I'm doing research on human, humans. I'm not doing research on monkeys, but one of the most amazing stuff about monkeys and consensus is from professor Erica Deval, who's professor at the University of Lausanne, and she's been studying vervet monkeys.

And in Africa, and she showed that conformity, desire for consensus, monkey unanimity kind of, okay, is really so widespread. So maybe not surprising that we're also human beings are also similar. And by the way, it makes sense. Again, if we live in the world of incremental innovation or incremental changes, it actually makes sense.

Because we make a small step, and we kind of would like to ensure, because there's not that much uncertainty, that we take everybody's view into the account, and everybody's okay with that. But the moment you are trying to catch an outlier to secure a home run, the whole point of the future is unpredictable.

And you know what? Most of the amazing ideas will seem stupid, at least to somebody. Let me give you an example that I give in the book, which I find fascinating. But let me preface it by saying which is important. I give a lot of examples here. They're all typical. I try to give examples so people know the names, but it's a typical example.

Okay, so here's a typical example. In 2000, eight, I believe a venture capitalist. His name is Reed Hoffman. And he's in fact known as a one of the co founders of LinkedIn. But then, but, but by then he was a partner at a venture capital firm called Greylock. He met those kind of two scrappy guys who created this kind of weird startup.

We are strangers. could sleep on a mattress in your living room. And he came to his partnership and he said, this is actually a really cool idea. You know, I met this founders, they're really into something. They're charismatic, passionate, resilient, and et cetera, et cetera. And by the way, I think that's potentially a huge market.

Of course the market didn't exist at all. And Greylock Partnership said, how stupid idea. In fact, one of his partners said, you know, Reed, every single venture capitalist has a right to make deals that fail and let this deal called Airbnb be your failure. But here is a very important point, Richie.

And this is something that makes the venture mindset different from the traditional mindset. In the traditional mindset organization, that would have been the end of the conversation. So, I have an idea, I bring it, you know, Richie, you say, what stupid idea, Ilya, you brought to me today? And I try to convince you, and you say no, and that would be the end of it.

Especially if maybe somebody else says, Yeah, I agree with Richard, that's stupid. And so therefore we would not make an investment. And yet, despite the fact that his partners disagreed, Reed Hoffman proceeded to make an investment. And I'm sure that that became one of the most successful off grid local investments.

and here is the point that's critical, and I really would love everybody to pause and listen to me carefully, because I think that is something that shocks people, is that disagreements and dissent is very important in these situations where there's uncertainty. Unpredictability and so on.

You have to design it. It will not happen by itself. And what I found out by studying venture capital firms, by studying the venture mindset, that there are many ways to design it. And venture capital firms designed in a different way, but they are thoughtful. They're purposeful about that. So if you don't do anything that will not happen.

In one example the venture capital firm called Venrock, every single partner comes in and brings a deal. And then everybody debates, they write investment memos, due diligence, and so on. And then after the meeting, that partner who brought the deal. Leaves the room and has to make their own decision.

they don't have an investment committee. They, they, they don't vote. Very unusual, It will not work in many organizations that pursue an incremental approach. That should not work. But the moment you trust an individual make an outlier decision, that's the way to proceed. Or another example, in another venture capital firm called Founders Fund.

For a smaller deal, it's enough for a partner to convince just one another partner. So if we, Richie and I, we're partners, it's my deal. I'm excited about this. It's enough for me to convince you, Richie.

Ilya Strebulaev: Even if everybody else kind of thinks like it's bizarre, we'll proceed. so there are many, many, I won't discuss, describe all those methods.

So that is at the decision making stage. There's also something that is really important at the what I call information exchange stage. So, you know, you and I get together and we discuss. A couple of points for those of our audience who actually make decisions in groups, or discuss stuff in groups. Let me give you actions to implement.

One I think is very intuitive for most people. One I find amazingly unintuitive. let's start with an intuitive one. In every single meeting my recommendation is juniors should speak first. in our recruiting meetings at Stanford, when we try to hire, best professors to come to, to us we always have junior professors speak first.

And there are great reasons for this. in fact, very often they know younger faculty members who are trying to join us better. And they know the most recent trends better. But more importantly, when, you know, a very, very senior professor speaks up and you think that that's I disagree with that.

It's much more difficult to go against it. So my suggestion is that, and again, be purposeful about it. Like, this is a rule. A rule is, you know, if I'm joining to you, Richie, in terms of the number of years or whatever title, I should, I always speak first. It's kind of intuitive. Well, at least I find intuitive.

One is counterintuitive, so make sure that the entire audience must sit down at this point because that's what generates a lot of debates. Experts should speak last. Now, in the situation where there's an incremental change, I don't think experts should speak last. Like, if we know a lot of stuff and experts, I should speak, and then is there to discuss?

But if we're trying to catch out liars, the whole idea of an outlier is perhaps there are no experts. In fact, maybe experts are in their own golden cages. And I think the idea is that when experts speak last, is that you do not try to remove the freshness from the information exchange.

So whenever you are thinking about, well, we're trying to find this home run let those who are far away from the field speak first. Because once the expert spoke, or the perceived expert, rather, you disagree, it kind of would be difficult for you to speak up and for everybody else to listen to you attentively.

So this is my specific recommendations for how to change the decision making process within groups.

Richie Cotton: This seems incredibly important for, for example, running meetings. I think that's when a lot, in most organizations, that's where a lot of decisions get made. And just that simple change of getting the most junior person to speak first seems like it could be an incredible That sort of changed innovation across the company.

Now you mentioned the idea of Airbnb and Greylock almost sort of didn't invest so making mistakes seems like it's going to happen Like if you invest in something or if you start a project at some point you're going to hit that roadblocks, things are going to go horribly wrong. Do you have any advice for what to do when things go a bit south?

Ilya Strebulaev: Thank you, Richie. You are bringing up another venture minded principle that I call Double down or quit. Let me first of all step back. In the venture capital world, startups fundraise again and again and again. which is if you're growing fast, you would like to raise money.

The challenge is, is that if you're about to fail, you also need money if you would like to continue. And as an investor, the last thing you want is to throw good money after bad money. And of course, the same with all of us. So just ask yourself a question. How often do you continue incurring a lot of effort, putting a lot of time into the project that in fact you kind of already know is not working out?

And by the way, you can always find justification why you would like to continue this. And It's called, academically, in the world of psychology, it's called escalation of commitment. And what my research finds out is that venture capitalists who succeed in managing this, who succeed in being kind of more ruthless and concentrating on their best startups with the highest potential, are those that are more successful.

Now how to do it, So, here are specific tricks. One, is that Doing this decision, making this decision yourself is very difficult if you're engaged in this. Richie, you've spent six months on a project, it's maybe not going anywhere, okay? But you can think, well, let me spend another six months. then maybe it will, go somewhere.

So, the first that venture cappers do, and what I recommend you, is ask somebody else who has not been engaged in the project, but you kind of, Trust to consider that, you know, they are experts or they can advise you. So come to them. And I think it's in the world of venture capital. That means they're partners.

Partners of the venture capital firm. You can go even further. You can say, you know what I would like to get commitment from somebody else. if I cannot find somebody who is excited enough to join me, then maybe I should not continue. By the way, this happens very often to my students.

They've been working on some startup, and then at some point I tell them, look guys it seems like you are unable to attract another person to join you. Now, if you cannot attract a team, you are unlikely to succeed alone. and by the way, here's a deadline for you. Eight weeks. So you have eight weeks to convince at least two people to join you, part time.

If you cannot do it, I think you should do something else with your life. And venture capitalists do it. In fact, many venture capitalists will invest in the same startup again, only if they find another venture capital firm, a reputable one, that will also put in the money. and I think that this is something that all of us can do.

Let me give you my own example. So when I'm doing research, and you know, I started so many research projects in my life that failed. Luckily, I also caught home runs that succeeded. But the, the trick is that had I spent more time on projects that failed, likely I would not have been able to catch those home runs.

And so early on in my career, I think I spent too much time on projects that really were not going anywhere because I felt, you know, the question I was asking myself, like, look, I'm a young assistant professor at Stanford. I'm doing this project that I kind of know is like deep inside of me, I kind of know this is like not going anywhere, but maybe I'm working with the PhD students and I actually even feel commitment and I feel like maybe I, I'm going to spend more time on this.

Maybe something will come out of it. And I think that was a mistake and there was a disservice not only to myself, but also to that PhD student. so now. What I do is I very often seek outside feedback much early on. So I go to somebody for my trust and say, look, here's the idea. Here's what I've done.

Do you think it makes sense? And then we debate. And then I try to, put the head of that person on me. these days, very often, I stop the project much earlier. And had I done this, I think, 15 years ago, maybe I would have been even more successful. So I advise everybody to avoid the escalation of commitment.

And this is why I call the principle double done or quit. Because you have to make purposeful timeline, like a milestone, where you say either I quit or I double down, double down meaning really my effort, or my resources, my time, whatever. But you can't double down on everything you do in your life.

Okay, there's only 24 hours a day. And therefore you have to quit some projects as well. Now a typical, typical venture capital statistics is that in every single round of fundraising, VCs drop about 50 percent of their startup. So every second project, and again, that kind of depends on, I found out in my research, yeah I drop every second project at various stages.

and I think it works. So again, think about this, especially if you pursue many projects at the same time.

Richie Cotton: Okay. Yeah, certainly. I can see how psychologically it can be very different for a lot of people to just completely abandon things that they've started, you know, they want to get to the end, but in terms of, yeah, you've only got so many hours in the day, you're going to have to drop some of the losers.

Alright, so I'd like to talk a little bit about productivity and how you can incentivize employees, like, are there any ways that you can change employee compensation or what they're doing in order to make them work harder or more productively?

Ilya Strebulaev: Thank you, Richie. And I think incentives drive behavior. That's kind of very simple. and principle that I keep in mind that all the time that venture capitalists use, and the principle is very simple to state, difficult to implement, is called make the pie bigger. make the pie bigger.

So, you're making the pie bigger by ensuring that everybody's incentivized. Now, by the way, when I say the word incentives, it doesn't mean you just pay them more money because different people are incentivized by different things. So finding out what really drives people is important, but these incentives drive behavior.

You would like the people with whom you work well, you would like yourself to be driven, okay, by incentives. A bit of history is going to help here. So if any of our audience works in maybe tech companies or in startups, et cetera they might have shares. They might own shares of those startups.

They might have options. They might have RSUs, restrictive stock units, that are vesting over time, okay? And amazingly enough, it's a new development. Well, relatively new development. And it was kind of invented. Or maybe rediscovered, really, by venture capitalists back in the 1970s. Okay, so prior to that, that was something that nobody was doing.

And financially, I think, it makes sense, especially if you are in this unusual, unproductive environment where the outcome is unclear, to incentivize people by giving them even a small fraction of the pie, rather than paying them a fixed salary. So if I pay you, Richie, even a lot of money, like a million bucks a year, okay, but it does not depend on how you perform what you do.

You have to appear at your work from nine to five or whatever. you have to appear as you work, but if it's a fixed salary, However excited you are initially, this excitement will over time disappear. But if you are, if my goal, let's say I'm the owner of this project, and your goals are the same, which means that you in fact benefit from this project being, successful, then our incentives will be aligned for longer.

That is also why I think in many large companies they create what is known as shadow stocks. Shadow meaning for stocks like for a specific project, like say Google is doing that, Let's say you work in a Google group that is not involved in search engine. Then, you know, whatever you do really doesn't impact the Google stock, the Alphabet stock price, okay?

But whatever you do really impacts your group. And so, if your group is like a separate startup within a company, you can get a shadow stock, where the stock, the shadow stock price will really depend not on the entire company's value or success, but on your group's success. Another point about making the pie bigger is try to make the pie also very specific if you, if you can.

And I think that my advice to our audience first is whenever they join a company or negotiate a deal try to think about long term incentives. Try to negotiate for yourself long term incentives. If somebody wants just to pay you money, but you will not participate in the success, that's okay, but you will not be able to catch a home run.

and likely you will not participate in the big success if it comes. And by the way, more likely the success will not come. And then on the reverse, if you're hiring somebody or you're trying to convince somebody to join you try to find out those who, care about incentives, who care about the success, the success of the whole enterprise.

And by the way, you know, there is an important word in science called self selection, which means that if I, Richie, let's say, offer you a thousand bucks a day if you're going to work for me. Or, I'm going to offer you only five hundred bucks a day. Still seems a lot, okay? But, but half of that.

But also one percent of the profits in the future. It turns out to be that some people will say, oh, no, I would like a thousand bucks a day. And some people will say, yeah, I would love, I would love a smaller compensation now, but I believe in the success. And sometimes you actually want those people who, do not want all the compensation now.

And so you would like to people self select. And I think that's very important. By the way, that is, I think, one of the major reasons. And that's why VCs really care about this. They know that by structuring incentives right to ensure that there's a long term incentives, people who are going to join the startups.

Who are going to base, who you know, who are going to leave apples of the world and join them are those who becoming less risk averse, who are more adventurous perhaps, who are ready to become more effort, who are ready to become more t. And I think that is very important, especially if you initiate a project.

Richie Cotton: Absolutely. So I think that idea of shadow stocks in particular was especially interesting. So there are a lot of parts of business, particularly as the business gets bigger, where you aren't tied directly to revenue or like major business impact. So having that sort of startup like feel is going to be incredibly important there.

Okay. So, before we wrap up, it'd be nice to know how you get started with this. Like, do you have any advice for like, what's the first step you need to take in order to adopt this venture mindset?

Ilya Strebulaev: Well, first of all we had time to cover only some principles. So obviously this principles are interconnected work together. so of course my first advice would be To read the entire thing and to understand all the principles. But I have specific advice for this. And what I find out is that by teaching, you learn.

Now, I'm a teacher, I'm a professional teacher, okay? I'm very proud that I had more than 5, 000 Stanford students graduate from my classes talks, sessions, etc. you know what, every single time I come into the classroom, I Well, by virtue of being a professor, I know more. The truth is, I learn.

Every single time. And so, what I suggest is for everybody in our audience, encourage them to learn more about the venture mindset, but then to talk about all these principles, and all this, provide all these examples, and encourage debate and dissent and disagreements with their friends, their colleagues, their families, during dinner time, during lunch time.

I actually think a lot of examples, like we're given a book, for example, I think a lot of examples are cool enough that you can, you know, discuss at a party. And that generates, I do this all the time whenever I attend a party, and that generates a lot of debates. And I love debates when post statistical debates, so people decide.

data facts, but also a lot of anecdotal debates where people say, well, let's think about this, let's think about that. So here's my encouragement to you is just do not learn yourself. And finally, Richie, I mentioned some examples where I myself changed my behavior. So I truly believe in, um, any mindset working only if you try to change your behavior.

Don't be too ambitious. Right away, which is, oh, this is great. I'm going to change everything. Do it step by step. And try to evaluate yourself. and it's interesting that every single principle that I talked about, and more principles I didn't have time to talk about, every single one of them I changed.

As a result of this, I changed my own behavior. As a result. So I believe in specific actions that people take. And those actions could be different. It depends on, are you a data geek working all the time alone? Are you working in a group? Are you the leader of the group? Are you the boss of a large organization?

So those actions are going to be different. And you will find something that, in fact, you would like to implement yourself. And then, when you do it, Talk about that to everybody. If you're present on social media, say, here's what I've done, and whether it worked or it didn't work, and why.

Richie Cotton: That's brilliant. I love the idea of just communicating more, talking about what you're doing and sharing these ideas. Maybe a bit hesitant on the idea of talking about this at parties. You got to be very careful about like the kind of party you'd start discussing this sort of thing. But yeah, that's brilliant advice.

So, all right. Yeah. Thank you so much for your time, Elliot. Like so many great tips there. I think.

Ilya Strebulaev: Richie, it's great having you, great having you, and I hope that everybody in our audience became just a little bit more venture minded as a result of our conversation today.

Richie Cotton: Absolutely. Super. Thank you.