Investors' Principles of Silicon Valley Taught in Stanford MBA | Ilya Strebulaev

many people who don't know much about Venture Capital but kind of know about startups they think well venture capital is a gamble you gamble on some kind of very uncertain startups and some of them turn out to be great well it is not a Gamble and how do we know you know after 20 years of uh researching at stanfort about uh how Innovation Works there is one underlying theme and it is the Venture mindset which is a different way to make decisions in The Innovation driven world hello my name is Alia stof and uh I

have been a professor of venture capital at the Stanford Graduate School of Business for 20 years my hope is that everybody will be able to make much better much more efficient decisions after our conversation if you look at top companies today in the United States by market capitalization then top six or seven or eight out of 10 will venture back so those are the names that everybody knows Apple Microsoft Nvidia The Venture Capital Industries behind most of the most successful companies that changed our life in the past 50 years so the Venture Capital industry invest

in small young companies that are high growth companies think about Uber or Airbnb or Nvidia when Venture capitalists invested for the first time in those companies nobody heard about them and they those companies were not worth a lot and nowadays look at those companies they're worth billions of dollars so that's what VCH capitalist do they try to find the most interesting young companies to invest in they select them they invest in them then they nurture them they help them to succeed and if those companies become successful they reap the benefits there are many famous VCS

in Silicon Valley uh if we go back in history then those who have been around for many many years would be square that's been an amazing Venture Capital firm for you know 30 last years then uh there is venrock a venge Capital firm that restored one from the 1960s and still very active today then there are venge Capital firms that's been around maybe for 20 years uh for example Emergen Capital that's specializing in B2B SAS or andren coritz also known as a16z that is investing in a lot of stuff and of course this day is

leading I think in the field of AI the most important reason reason that successful V Capital firms last a long time is because they make these great Investments that turn into home runs again and again and again but home run effectively is we invest $1 you get $100 or more in 100x as we say you know this is really important because many people who don't know much about Venture Capital but kind of know about startups they think well venture capital is a gamble you gamble on some kind of very uncertain startups and some of them

tend out to be great well it is not a a Gamble and how do we know now you can play Lottery and if you go out and buy a lottery ticket and win a jackpot I'll say you're lucky but if next week you go out and buy another lottery ticket and again win a jackpot I'll say that's a great skill now in the world of Finance we call persistence it is very difficult to find persistence in the world of Finance but there is one corner of the investment Universe where persistence has been around for 50

years and that's VCH cap so those firms that are very successful they tend to deliver out size returns again and again and that is really the reason why they're [Music] around when I started VCH G at Stanford for many many years what I discovered is that they all share specific principles of how they make decisions and I found it so important that I had a special name for it I call it the Venture mindset The Venture mindset is a different mental model of how to make decis in an supercharged fast pacing Innovation driven world so

let me start by describing one of them principle number one is home runs matter strike outs don't Venture capitalists don't really care how often they fail how much money they're going to lose if they fail they care about what happens if they succeed they care about how much money they will make if they succeed and by the way my research shows that on average you have a home run only one out of 20 times there are a lot of failures Striker that one out of 20 can make your career can make your huge returns that

cover all the losses and the philosophy of the Venture Minds principles is that it is home r that you have to think about and this is really interesting because you know in the United States there's a museum called The Museum of failure and uh you'll see a lot of inventions there many of them backed by V capitalist that failed for example a startup called juer okay that allowed you to um squee is a fresh juice right away okay uh cool stuff and VCH capitalists uh in fact backed juicer and juicer failed what would have happened

in a let's say traditional company had a manager invested in Jero project and Jero project failed and likely you would have lost 51 $15 million well I guess that manager would be punished no because failure is not a good idea but in fact if you look at V Capital froms at back juicer they're one of the most successful films in Silicon Valley what I found out something that I think is very C intuitive for most people is that if you look at the most successful VCH Capital firms they tend to have a higher rate of

failures they have more failures than average now what is the lesson for all of us I think that in your life as you look back it's all about home runs it's all about what is the most successful thing that you've ever done and to achieve those home runs you have to experiment and yes you have to fail I think failure is a good thing as long as you achieve it fast you achieve it cheaply and you can try again so the Venture mindset principle number two is getting outside the four walls in the VCH Capital

world would be is that you can rarely meet VCH capitalists in their shiny offices they go out and meet Founders in coffee shops at Fair Etc the sequ a well-known veng capital from Silicon Valley they developed an elg grth that they called early bird and the idea behind the early bird is kind of very simple very simple really they looked at the apps on the Apple Store that increased dramatically in rankings you know they would look out for the founders of those apps they would meet them and then they would decide whether they would like

to invest in them or not and one day that early bird system started chirping particularly loud like so they looked up and there was one app that they never heard before that was just killing the ratings it was like number one everywhere nobody knew the founders and nobody heard about the name of this app before now the app's name was WhatsApp the only thing that they knew when they went into the App Store is the location of the company and the location of the company was Mountain View which is a city of around I would

say 50 70,000 people in Silicon Valley it's a large city how would you go about it here's what sequ Partners did they just decided to walk the Mountain View they decided to walk the streets of Mountain View knocking on the doors and trying to find the founders of WhatsApp and they took them several days and they did find it they did find the founders they convinced uh the founder that they will be investing in WhatsApp and the rest is history when uh very soon after that Facebook bought WhatsApp for billions and billions of dollars that

of course became a very successful s investment that is a principle of getting outside the for WS now the Venture Minds principle number three is the prepared mind the origin of this is science a very famous French scientist of the 19th century Louis past said the in the field of observation Chance favors only the prepared mind what he really meant by that is that to discover something it's not enough to be lucky it's important to be lucky and see your luck let me give you an example a student of mine was raising money from the

VCS what happened was that a quite well-known VCH capitalist sent him an email and we looked at your deck we actually quite interested and here's the question and my student was prepared he responded within 2 minutes 5 minutes later oh interesting here's another question and this continued this pink ping pong continued for throughout the night and the student was ready with every single question and it was ready with deep answers and next day the fund decided to invest and you know it's interesting the in Silicon Valley there is this myth that the Venture capitalists are

geniuses who meet an entrepreneur the entrepreneur is going to write something on the napkin the fell in love with the found invest in the rest of History so their reality is very different the reality is that that vure caps are really prepared they know right away the patterns that they see they know right away how to evaluate those entrepreneur so they can make very very fast decisions try to have the prepared mind I think preparation is very very important The Venture mindset principle number four is say no 100 times what I found out is that

for each deal that VCH capers make they tend to say no to more than 100 opportunities and in fact the best VCS tend to say no more often indeed it's kind of their blood they expanded their Network now they need to be to very effectively say no to many startups so that to invest only one they cannot invest in all of them and what is really important is how venture capitalist solve this issue how they say no this is what I found out they using two mechanisms they using the fast lane and the slow lane

to go from 100 to 10 they use the fast lane and from 10 to 1 they use the slow lane so the goal is for them to be able to narrow their deal funnel as quickly as possible initially and that's where the fast lane comes about here is the one point to remember about the fast lane you ask a different question you ask a question why should I not invest in this deal and once you ask a question not in fact the way you reach an answer is very different so what I observed in novice

investors they're right away go to slowly and then they are unable to process a lot of information and their Investments are not the best it's also important for our personal life whenever you trying to make a decision on anything I think the very first question you should ask do I have enough choices especially if it's about let's say uh finding a job or you know joining a startup or making an investment your personal investment do I have enough choices because sometimes I think you need to expand your choices to make a better decision once you

expanded your choices the question is how to make the decisions more effectiv remember always start with the fast lay always ask why should I not do it and the way you reach a decision is going to be different than when you ask yourself well why should I do it you say why should I not do it why should I do it sounds similar but actually very different there's a lot of psychological research that shows that just adding this not changes the decision-making process many VCS would carefully check every single email they are getting we call

it call calls in English or C email so what I tell my students and I tell Founders from all over the world if uh you don't know a venge capitalist then U you should not lose hope you should construct a very smart blurp about your your startup and the probability that the V cus will respond to is pretty high how do I know well I've done research on this you know several years ago my former student and I created 50 fake startups for each fake startup we created four fake Founders for each fake startup we

created websites profiles blurs and then we sent 180,000 C email to actual investors what I found out is that if you restructure your blur put in a appropriate way the positive response rate by investors is very large one out of six to one out of 12 investors contacted there are many tips that will help you to write uh an amazing blurp if you're a Founder um first of all you need to remember a very important principle bet on the jky not just the horse when I say bet on the JY it means that they really

care about the founder the founding team and the very first question they will ask why is it you you who would be the best feed for this product for this market for this service and so on and so when you think about a blur um the tip should be it should be about you too often I see blurs by Founders where Founders describe the business model the market the value proposition etc etc they don't describe themselves or they don't answer the question why is it you that would be the best to do it so in

every single blur make sure that you spend one paragraph about you or your team and why it is you who would be the best remember the word unfair Advantage which is what is your unfair Advantage the second tip every single blur should be very short in this day okay everybody has short attention span vure caps are not an exception so your email should be maximum two paragraphs and the first paragraph should be about you and the second paragraph should be about what you do and uh when you say what you do it could be comes

at the first paragraph as well it should be what is the pain point that you identified why this pain Point can change people's lives why this pain point is important what is the solution and final tip like a famous poem poets or famous authors they will spend a lot of time thinking crafting editing rewriting so you have to spend time on Crafting that blur practice practice and practice and my advice especially for Founders here is um when you create a blurp first practice on your friends ask them to give you critical remarks and only then

send to actual investors because I just told you the response rate is actually very high if you um succeed in Rising very interesting attractive blur but also you have only one chance to open the door if a avenge capitalist gets this blur up and is not interested that's kind of that okay and final tip is the real question that that a smart investor would be asking when they get a blur from you the question would be why should I spend 30 more minutes learning about this founder or that startup and that is the question you

have to answer before you click that button and send your email to the venture capitalist so I'm investing I'm investing a lot of my former students and yes there are some home runs and of course there are many strikeouts there are different types of failure and I like the terminology constructive failure and constructive failure is the failure that you can use to learn you can use to improve your decisions in the future I think it's really important to approach this from the psychological point of view strikeouts are strikeouts so when a student emails me back

when a startup fund emails me back and saying you know uh unfortunately we have to close the shop because the startup is not very successful I just wish good luck and I tell the students uh when you have a your next startup com back and I think that attitude towards strikeouts is much more important than your attitude towards home runs and you know the best strategy about not successful try to be not successful much more often and so my maybe important personal advice for everybody just step back and think about what when was the last

time you think you failed and what you could have learned from that become a failure champion [Music]