The Capital
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The Capital

VC investors could probably convince each other these are ‘unicorns’

How Groupthink Spectacularly Undermines Venture Capital

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Avoiding negative information won’t make shit disappear. Likewise, railroading people — particularly subordinates — into going against their good sense and better judgement, will not make a shitty idea, any less of a shitty idea.

Take Enron, for example. Someone had to have known that ‘cooking the books’ was a terrible idea. But, oh… that’s right, if they voiced their objection, they wouldn’t be considered a “team player.” Can’t have that.

Or take JFK’s Bay of Pigs. You mean to tell me that no one in the room voiced concern over the fact that the mission was already compromised because it was leaked to the Soviets; so that carrying out the invasion as planned would end in total death and disaster?

We’ve all been there at one time or another…haven’t we? Whether on the giving or the receiving end, we have all been participants in groupthink. The simple urge to avoid the boss’ wrath and be perceived as a team player has a powerful pull, leading many to ignore common sense and defer to the consensus. In fact, neglecting to even consider price fluctuations was a major point of failure across the US banking industry and widely contributed to the 2008 financial collapse. In that instance, homogeneous thinking was powerful enough to convince banks — who are in the business of preserving and growing wealth — to ignore basic derivative models, and you know, reality.

Homogeneity is a fast track to mediocrity

At first glance, homogenous teams seem to make sense. Similar cultural backgrounds, education, and appearances should make communication and general understanding smoother. Right? Not quite. Data collected and observed by Harvard researchers highlights the perils of similarity among venture capitalists:

  • Graduating from the same undergrad school increased the likelihood of collaboration between VCs by 34.4%, compared to VCs from other schools
  • Investors who attended the same undergrad school plunged success by 19%
  • Ethnic similarity increases the probability of partnership between VCs by 39.2%
  • Working at the same company — even at different times — means investors can expect a probable drop in success by 17%

This data confirms that consensus of thought drastically undermines both effective decision-making and profitability, and groupthink is rampant in the venture capital network. The overwhelming majority of startup founders and VC investors are generally interchangeable with regards to their education, upbringing and whiteness. So it makes sense that their thoughts are equally homogenous and very often, out of touch.

The inherent laziness to conformity

Failing to challenge your own bias, assumptions and perspectives when you’re expected to invest other people’s money is negligent at worst, and lazy at best. It’s disappointing that the supposed innovative thinkers across VC institutions can’t match the fearlessness of the entrepreneurs they encounter. Instead, VC partners are terrified of taking a chance and possibly being signaled out by their fund. If a lead investor does happen to emerge, suddenly the lemmings clamor to follow them juuuust in case they happen to be onto something. Does that sound like the behavior or mindset of visionary disruptors on the hunt for the next big revolutionary idea, or interested in forging ahead into new markets? Nope, not to me either.

It takes courage to break from the groupthink consensus and have your portfolio reflect it — that’s where the true gains are anyways. The real winners don’t rush to fund the next version of Facebook or Uber, they seek investments that other firms are not following.

Hubris is short-sighted

Over the years, venture capital has morphed from plucky entrepreneurial mavericks to know-it-all gods. This increasingly led to VC investors wrongly centering themselves as target customers and rendering their experiences as the status quo. Groupthink flourishes in this egotistical environment, as opposing viewpoints are ignored and poor decisions are advanced and acted upon. No wonder there’s been an endless parade of embarrassing unicorn flameouts and billions upon billions of dollars of wasted money. Too smart to fail has been a prevailing assumption in the industry, but the data screams otherwise. VC’s inability and unwillingness to stretch beyond themselves and consider other perspectives has resulted in a lumbering, out of touch industry that has produced way more duds than smash hits.

John Maynard Keynes had the correct idea when he famously said, “When the facts change, I change my mind.” Conformity ruins effective decision-making and diversity of thought should be welcomed, examined and considered, because failure to do so invites calamity. You’re the beneficiary of challenging your own assumptions.

If your friends jump off a bridge…

…Would you too? A venture capital investor certainly would — and does — with alarming regularity.

Groupthink is so prevalent in the industry, it’s like the air they breathe. This paradox has shifted the VC model away from chasing unicorns and robbed the industry of the pioneering and radical spirit from which it emerged. Now, investors seek only to minimize risk, maximize product-market fit and find a company that will act as a winning lottery ticket to make up for their mounting losses. Good decisions aren’t safe from groupthink, but diversity of thought and experience can act as insurance against mediocrity and ground teams in reality.

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AJENE WATSON LLC

AJENE WATSON LLC

Business Management & Financial Services Consultant Focused on Development Stage Companies & Microcap Markets

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