How can VCs evaluate startups without groupthink?

The majority of venture capital funds are structured as a Limited Partnership from a legal perspective and are managed by a General Partnership which is comprised of the key decision makers on the team. The reason this structure is important is many of the longest standing and most successful venture funds have built enduring partnerships which encourage diverse perspectives and allow for dissent. This dynamic helps to avoid groupthink and a scenario where one decision maker runs the show and all other opinions are disregarded (or even worse, dissent is discouraged). There are individual angels and a number of solo GPs with great early returns, but the durability and longevity of these firms is unknown relative to traditional VC firms.

Getting perspectives from outside of your fund is vital. At Antler Australia we invite partners from other Antler global funds and external Australian VCs to vote on our Investment Advisory Committee. This is win-win-win - External VCs get proprietary deal flow - Founders get to build relationships ahead of their next raise - Antler gets the benefit of expert investors on investments in their mandate

At Coralus, we purposefully design diverse perspectives into our selection process by having capital decisions made by our community in a democratic manner. Everyone who contributes capital has the same power - one vote. It constantly reminds us that collective decision making outperforms “experts”.

Operationalise inclusion by from the top of the pyramid, including a variety of voices and lived experiences, examine existing processes and see where the gates get lifted and then address those areas, and build relationships with organisations that work with founders from all different backgrounds, be it gender, racial, disability, etc, and actively engage with those communities. But ultimately, dont make it a tick box exercise. Live the work that needs to be done.

Cognitive bias plays a role in any decision making, certainly when the information is imperfect. Not only confirmation bias, but also framing effect, neglect of probability and self serving or attentional bias. To be aware of biases and their psychological background, recognize when they kick in and help the investment team to overcome these, is part of professionalism. Base line assessment can be done by tests.

An important process point is developing blind voting systems to reduce groupthink opportunity. At Antler we have a 'pre-discussion vote' and a 'post-discussion vote' - the pre-discussion vote is based purely off the pitch and the Q&A

A simple way which I have found very effective: during pipeline calls, one team member is tasked with defending the deal while another one is tasked with "attacking" it, irrespectively of their true opinions on the deal. This forces everyone to try and remain objective, and it often raises key points that otherwise would have been overlooked, thanks to a healthy competitive tension during the call. As a side benefit, this also makes pipeline calls more engaging.

It helps to bring the old McKinsey value to mind: Obligation to dissent - irrespective of hierarchy. Even foster dissent by actively seeking it: Give people permission and encouragement to speak up.

Whereas blind voting system could sound like a great idea to reduce groupthink, I have found it had a massive drawback : it prevents voters from properly explaining their vote and also - partly as a consequence - annihilate the good sides of groupthink. During my ten years of chairing investment committees, I have gradually tried to do three things : 1. First identify your own biases as chair. Use Kahneman if you have any doubts about which they could be ! 2. Then identify the voting members’ biases, both on an individual and collective basis ! 3. When voting time comes, think carefully your order of voting so that influences are positive - they enrich the debate and decision - rather than negative - politics, seniority etc.

Culture and process are equally important parts of the solution. I run investment teams in 3 geos and am cognizant to foster a culture of open and critical debate. Process wise, we form deal teams that execute diligence independent of the wider investment committee. Deal teams are expected to defend their decisions to the wider IC when they reach conviction. We also require a 2/3 super majority to move forward (some groups require 75%).

Testing hypotheses is critical throughout the investment life cycle. From the initial due diligence, where you seek to confirm positive or negative views, through portfolio management, where you seek to support original the investment hypothesis. Having a network of experienced managers coupled with data is also critical. I’ve found that grounding yourself with regular tests of the hurdle of “what do you have to believe” for a hypothesis to be true is critical. For example, looking at burn divided by gross margin % to understand a rough view of the incremental revenue required to achieve breakeven and then matching that up with the financial plan, resources, growth and/or market share expectations.

One advantage of having domain expertise is you have a wide network of industry executives, CEOs and leaders who can provide real life input from the "factory floor". This is beneficial to the startup in building a stronger network but also helps you assess your own hypothesis. What is better than a customer telling you if this is valuable and how much? Lots of customers!!

Embracing intellectual honesty begins with confronting our propensity to overvalue our decision-making accuracy. Overlooking vital information can result in missed opportunities and suboptimal investments. To counter this, embracing a data-centric approach is essential. This involves rigorously scrutinizing our assumptions and conjectures, diligently pursuing data that might challenge our existing beliefs, meticulously tracking critical metrics, and implementing experiments to substantiate our investment theories. Remaining open to fresh insights and a variety of perspectives is crucial for achieving top-tier returns and building a successful career in this field.

Well, that’s very well in theory, but hardly possible in practice when we talk e.g. about which startup should receive a funding. One can check the extent to which a target entity has tested its own hypotheses or is prepared to put money into testing them, but you cannot test, whether it’s gonna be better to fund traget x or target y or z?

Testing of investment thesis and hypotheses is generally good practice in ensuring everyone remains on the same page. Teams should socialize these key metrics, use them to track performance, perform scenario analyses and update at regular intervals.

I use the same scorecard for every investment opportunity: I've now got hundreds of datapoints around views at investment to check against their trajectory I would highly recommend a standardised approach like this

Investment Memos might sound like busy work, but honestly, one of the best things an investment team can do is chronicle their decisions in a written document. Too often we let new information color the way we thought about a past decision. You may have been gung ho in the moment... only to retroactively reflect on a failing company and go "I always knew it was a bad idea" That document is a time capsule that helps you as an investor refer back and refine your thinking over time. Only by locking in your thinking can you look back and catch biases, overlooked risks, and evaluate mistakes with dispassionate objectivity.

A few tactics to consider: 1) First principles: what constitute the right deal for your firm? Come up with rules and make sure you consider your capabilities and ability to help. Reviewing decisions without 'first principles' can lead to counterproductive discussions. 2) Review alternatives. Decisions that don't have multiple options tend to lead to suboptimal results. Broaden your option set. Consider your options and understand the company's options. In some cases, you might not be the best fit. 3) Make the process democratic. Use a form to let the investment team vote. Everyone can discuss but votes are anonymous and hidden from each participant. This gives the investment lead the information they need while minimizing bias.

I like to make sure we do not involve all partners in each deal we do. We need to make sure to have always few pairs of eyes that are „fresh and objective” without the syndrome of „spent too much time already to walk away”

This at times could bode with analysis/paralysis, but it is good ring fencing mechanism to create an internal feedback loop. The purpose should not be to delay capital deployment, but to increase the efficiency of capital utilization. A reviewing mechanism would be an ongoing exercise for most fund managers, and for first time VCs it would come in handy to work with a template.

VC firms can promote continuous learning through regular training and industry updates, by establishing knowledge sharing platforms, and encouraging collaboration. Implementing mentorship programs and performance management systems that focus on development goals can guide learning paths. Investment in employee training, fostering a culture of innovation, and maintaining diversity and inclusion are key. Utilizing technology and tools for learning enhancement also plays a crucial role in organizational development.

Our team is so diverse and we have a open discussion policy where we respect each other and accept everyone’s viewpoint. We never take lone wolf decisions and although as CEO I have the last word and decision power we often poll

VC firms need to look beyond the traditional training mindset. In my experience, companies (from startups to mature companies) spend valuable resources training everyone except the Founder/CEO. Continued professional AND personal growth are key to everyone's success. One often overlooked growth avenue for Founders, Owners and CEOs is to join a peer group. Find a Vistage, YPO, EO, C12 or one of a number of other peer group organizations that cater to delivering a peer group experience. Being part of a group of executive peers who have no agenda other than each other's success could be invaluable!

The best VCs I know, think from first principles. One of the best ways to think from first principles, is to publish long-form content on your views. Publishing long-form content has benefits because: 1) It makes you put some skin in the game (in this case reputation). If you're wrong, it's public for people to see. 2) It forces you to activate system 1 thinking and truly break down your thought patterns, revealing any gaps. 3) It's a great place to seek active feedback. The same way a startup founder puts out products, VCs should constantly be publishing their theses and engaging in the arena of ideas.

Ter um núcleo compartilhado de decisões, informações e aprendizados coletivos e importante para descentralizar o conhecimento do repertório de um ou outro sócio. Claro que sempre há o tempo de experiência prática, mas ter esse banco de dados permite que se tenha track record de aprendizados para os VCs mais juniores terem mais material para estudo

Gut feel is actually supported by data. It’s not either or. VC’s need to invest in potential. That comes from reviewing current strengths and identifying missed opportunities. Then identifying the skills and gees of the exec team in there ability to create magic with the right investment and input.

AI-Enhanced Decision Support! At Uncap, we have integrated AI algorithms to provide decision support to eliminate bias and groupthink. Our systems cab analyze a broad range of data and suggest alternative viewpoints, helping my team to consider diverse perspectives and potential outcomes.

There is the groupthink among internal team members and the external one among VC funds. The former is well discussed here, the latter is not yet. The effect of groupthink among VCs is herd mentality, and we’ve seen plenty in the last few years where funds are chasing a sector, some hot idea, or a certain profile of entrepreneurs. In an up market such as 2010 -2021, groupthink , or trend chasing, could work out well. For example, when SAAS valuation multiple is carried from 10x to 30 or 40 during the period. Groupthink is a killer for a VC fund.

Spend time with the founders. You’ll get the best insights possible about the company by spending adequate time with the founding team. Help them with product, introduce them to a potential customer, bring in a designer to brainstorm their brand. In other words, sit side by side with the team and get to know them, the market they’re in and their vision. This is a perfect example of something that doesn’t scale, but it works.

AI can be used in startup investing to reduce groupthink by offering data-driven insights and unbiased analysis. Machine learning algorithms can analyze vast amounts of market data, identifying trends and patterns that might be overlooked by human investors. This objective analysis can challenge prevailing opinions and introduce new perspectives. Additionally, AI can assist in simulating various investment scenarios, providing a broader range of outcomes and mitigating the risk of decisions based purely on collective opinion. By integrating AI into the decision-making process, VC firms can ensure a more balanced approach, combining human expertise with data-centric AI analysis.