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In venture capital and investing, the desire for alignment and consensus can often come at the cost of innovation and sound decision-making. Groupthink a cognitive bias where the drive for harmony within a group overrides individual judgment poses significant risks to strategic investment decisions. Particularly in high-stakes environments, where uncertainty and competition dominate, groupthink can lead to poor evaluations, inflated valuations, and missed opportunities.
What is Groupthink in venture capital?
Groupthink occurs when individuals prioritize consensus over critical analysis, suppress dissent, and overlook alternative perspectives.
This bias thrives in environments where group cohesion is highly valued, such as within investment committees and syndicates. The need for agreement can result in a reluctance to challenge dominant narratives, leading to decisions that lack rigor or creativity.
The manifestations of Groupthink
1. Herd mentality in investment trends
Groupthink can manifest as herd mentality, where investors flock to the same sectors, technologies, or startups, driven by the perception that consensus equals validity.
Herd behavior amplifies bubbles, where valuations skyrocket based on shared optimism rather than solid fundamentals.
2. Suppression of dissent
In Groupthink scenarios, individuals may hesitate to voice concerns or critique prevailing decisions. In venture capital, this can mean that potential red flags—such as questionable leadership, weak market fit, or scalability challenges—are overlooked because team members fear disrupting the flow.
3. Over-reliance on big names
When well-known investors or firms endorse a deal, Groupthink can push others to follow suit, assuming that the endorsement validates the opportunity.
However, reliance on the "wisdom" of big names can backfire, as it often precludes independent analysis.
Case studies of Groupthink in investing
Kodak’s cryptocurrency (2018)
In January 2018, during the peak of the cryptocurrency craze, Eastman Kodak Company announced its intention to launch KodakCoin, a blockchain-based currency for photographers to license and monetize their work.
This pivot came at a time when blockchain was a buzzword driving speculative mania across industries. Kodak’s stock surged by over 300% within days of the announcement, as investors rushed to buy into what they perceived as a cutting-edge opportunity.
The frenzy was driven not by analysis of Kodak’s ability to implement the plan successfully, but by collective excitement about the broader blockchain narrative.
Author David Gerard writes: “Kodak doing an ICO, at the peak of the crypto boom, got the world’s attention in a big way.
Photographers still loved the Kodak brand name — they really, really wanted there to be a Kodak that had a healthy business and wasn’t just the brand-licensing tattered and flayed post-bankruptcy hide of what was once a company. So, the ICO attracted a lot of attention that it didn’t warrant, just on sentiment for the name.” in his article: “Attack of the 50 Foot Blockchain Attack of the 50 Foot Blockchain”
Media coverage also amplified the hype, with headlines heralding Kodak as an unlikely innovator.
Outcome: The KodakCoin project never gained traction, and the stock price plummeted. It became clear that the company’s blockchain ambitions were more about capitalizing on market trends than offering a viable solution.
Investors who bought in at the peak suffered heavy losses. Kodak’s short-lived stock surge became a cautionary tale of how speculative bubbles fueled by herd mentality can quickly unravel.
The housing bubble of 2000s
The housing bubble in the early 2000s was fueled by widespread belief that real estate prices would perpetually rise. Investors, lenders, and even ordinary homebuyers operated under this assumption, creating a feedback loop.
Mortgage-backed securities (MBS) became extremely popular as financial institutions promoted them as "safe" investments, leading to a surge in demand for subprime mortgages. This belief was not based on long-term fundamentals but on collective confidence in an endlessly bullish market.
Investment firms, regulators, and rating agencies fell into groupthink, with few dissenting voices. Skeptics who warned about potential risks—like economist Robert Shiller —were dismissed as contrarians.
The myth was perpetuated by a mix of media, industry experts, and policymakers, further reinforcing the herd mentality.
Outcome: The market reached unsustainable levels, and when interest rates began to rise, mortgage defaults surged. This triggered the collapse of major financial institutions like Lehman Brothers Holdings Inc. and led to the 2008 Global Financial Crisis. Trillions of dollars in wealth were erased, millions of homes went into foreclosure, and the ripple effects were felt globally.
How Groupthink impacts VCs & investors
1. Erosion of individual accountability
When decisions are made collectively, individual accountability diminishes. Groupthink allows investors to diffuse responsibility, creating a culture where poor outcomes are attributed to the group rather than individual misjudgments.
2. Missed contrarian opportunities
Groupthink discourages independent thinking, causing investors to overlook contrarian opportunities that may yield significant returns. Some of the most successful investments
such as early-stage bets on Airbnb or Tesla—were initially dismissed by the broader investment community.
3. Exacerbation of bubbles
Consensus-driven investments contribute to the formation and bursting of bubbles. By concentrating capital in a few overhyped sectors or startups, groupthink amplifies systemic risk and volatility.
4. Stifling innovation
A bias toward consensus often favors “safe” investments, sidelining bold or unconventional ideas. This conservatism can hinder the discovery of disruptive innovations that drive long-term growth.
The psychology behind Groupthink
Groupthink is rooted in our need for social belonging and the discomfort of conflict. Psychologists have identified several factors that fuel this bias in group settings:
Illusion of Invulnerability: Groups often overestimate their decision-making capabilities, ignoring potential risks.
Collective Rationalization: Members rationalize warnings or negative feedback, reinforcing flawed decisions.
Pressure to Conform: Individuals fear being socially ostracized if they dissent.
Self-Censorship: Dissenting views are suppressed to maintain group harmony.
In venture capital, these dynamics are magnified by high-pressure environments, hierarchical structures, and the competitive nature of the industry.
Avoiding Groupthink in venture capital
1. Foster a culture of constructive dissent
Encourage team members to voice concerns and challenge assumptions. Establishing “devil’s advocate” roles within investment committees can help surface alternative viewpoints and mitigate blind spots.
2. Prioritize independent analysis
Each team member should independently evaluate opportunities before group discussions begin. This reduces the influence of dominant voices and ensures a diversity of perspectives.
3. Diversify the decision-making team
Bringing together individuals with varied expertise, backgrounds, and cognitive styles can counteract homogeneity, reducing the likelihood of groupthink.
4. Implement decision frameworks
Structured frameworks -such as pre-mortem analyses, scenario planning, or decision trees- help ensure that investments are assessed systematically rather than emotionally or collectively.
5. Encourage anonymous feedback
Anonymous surveys or voting systems can allow team members to share honest opinions without fear of backlash, fostering a more candid exchange of ideas.
6. Regularly review past decisions
Conducting post-mortems on both successes and failures helps identify instances where groupthink influenced outcomes, providing opportunities for learning and improvement.
Conclusion
Groupthink is a pervasive cognitive bias that undermines the quality of investment decisions by prioritizing consensus over critical analysis.
In venture capital, where innovation and risk-taking are essential, the consequences of groupthink can be severe, leading to missed opportunities, inflated valuations, and collective misjudgments.
By fostering a culture of dissent, encouraging independent analysis, and implementing robust decision-making frameworks, investors can counteract groupthink and make more informed, strategic decisions.
The most successful investments often emerge not from consensus, but from the courage to think for oneself. Recognizing and addressing groupthink is vital for sustainable success in the dynamic and competitive world of venture capital.
About ACE Alternatives
ACE Alternatives (“ACE”) is a leader in managed services in the Alternative Assets sector like venture capital, private equity, fund of funds, real estate, and more. Leveraging a proprietary tech platform and extensive industry experience, ACE offers 360-degree tailored solutions for fund administration, compliance and regulatory, tax and accounting, investor onboarding and ESG needs.
The fintech was founded in Berlin in 2021 and has since established itself as one of the fastest growing alternative investment fund service providers in Europe. ACE is currently used by over 45 funds. In 2024, ACE received seven-figure funding from Bob Kneip to expand into new markets. ACE’s vision is to redefine fund management by demystifying complexities and promoting transparency.
Media Contact: Rhea Colaso
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