The Social Animal and Seed Investing

I recently read The Social Animal by David Brooks. In the book, Brooks seeks to summarize and draw implications for the breakthroughs that have been made in the fields of neuroscience and social psychology over the last few decades. His belief is that these fundamental scientific breakthroughs will likely influence the development of our culture just as Freud’s theories and insights did in the early 20th century. He makes the science accessible and interesting by tracking the lives of two fictional individuals. Here is a link to a TED talk that he gave on the book.

There is clearly a multi-layered philosophical conversation that could be had about the implications of the book and the volumes of research that it seeks to summarize. However, I will focus my discussion on the implications for seed-stage investing. Below is a quick summary of Brook’s conclusions followed by implications for our work.

1. The importance of the unconscious mind. We like to think of ourselves as coldly rational people when it comes to decision making. Economists have built an entire macro model on utility-maximizing denizens efficiently following incentives. Micro and macro data seem to point to a much more complex picture. Much of the day to day work is being done by the unconscious mind. For example, Brooks points out that individuals named Dennis are statistically more likely to become Dentists.
2. Emotions are central to our thinking. Emotions are the foundation of reason because they tell us what to value.
3. We are not primarily self-contained individuals. We are deeply inter-penetrated — much of our sense of happiness and fulfillment comes from our relationships with others. We literally are able to experience what others are feeling as they tell us. For example, when people watch a car-chase scene in a movie their brains under study react as if they are in a car-chase.
4. IQ doesn’t tell the whole story — focus on the group. There is a tendency for us to over-emphasize the measurable. Success in life is more often dictated by our ability to work with other people.

Implications for Kickstart:

• Motivation. Many academics have pontificated on why anyone would be an entrepreneur given the unfriendly statistics around success/ failure etc…Fundamentally; entrepreneurship is an outgrowth of the ambition and drive of a subset of highly motivated people. Given the entrepreneur (where we typically start) the challenge to be successful is to then persuade others, capital, talent, customers etc… to buy into what she is building. Brooks points out that all people have a fundamental need for what he calls “limerence” or the ability to subvert or meld themselves with some higher cause. Successful entrepreneurs have a way of persuading others to take these risks and to feel deep motivation and commitment while doing so. Many studies show that compensation, title etc… are more hygiene factors when it comes to motivation. It is important that they are there but their motivating effects are secondary. The practical implication for us that we 1) we won’t fund a company without an entrepreneur/founder capable of inspiring this type of motivation in other people. 2) founders should be preserved at all costs — founders have a way of preserving the “higher cause” nature of a startup that is so to a rewarding startup experience 3) This motivation level and its fruits (team, partners, customers, financial partners…) are largely independent of funding level and so can be seen as a pre-requisite to our involvement
• Perspective in a not entirely rational world. The importance of the emotional/ unconscious mind is no surprise to the marketing/ advertising community. Much of the opportunity for startups is to take advantage of decision-making heuristics that consumers and other buying groups use in making decisions. My favorite book on this topic is Robert Caldini’s Influence. http://en.wikipedia.org/wiki/Robert_Cialdini As it relates to the decisions that we make a Kickstart, our challenge is to be aware of our own biases and decision-making heuristics. To date the most challenging heuristic I have seen for venture groups is the concept of “escalation of commitment.” This comes to play in making following funding decisions for companies that are not hitting milestones and not performing. At Kickstart the way we are trying to navigate this difficult trap is to 1) have every deal be owned by the firm and not just by the partner on the board 2) have an open and transparent dialogue about the progress of companies from the get go with our investment committee (an outside body) 3) Set up reserves in a way that creates scarcity from the get-go — there is only a small amount reserved for each deal and beyond that everything is competitive. Our hope is that through process and structure we can at least partially mitigate these negative decision heuristics.
• Human Capital. Brooks cites that the primary predictor about how well a group will perform is not IQ but how well the group communicates. The other really important piece for groups is that 90% of communication is non-verbal and so effective groups generally need to be face to face. Implications for us: 1) No more outsourced product development/ remote CEOs. So far I am like 0 for 7 (drastic action needed…) in situations where I have a remote CEO managing a technology company or an outsourced development team working on a critical path product. 2) Invest locally. Investing in a tight geographic area allows us to be face to face with our companies more often and avoid miscommunication, manage expectations and get involved before things get out of control. 3) Make sure you have a team. There is a temptation as an investor to focus all the attention that you give a company on the CEO during due diligence and afterwards. Great teams are more than the sum of their parts and poor team are less than the sum of their parts. Communication is a great indicator as to what kind of team you have.