In this episode, venture capital decision-making processes are scrutinized with insights from Michael Mauboussin, head of Consilient Research at Counterpoint Global and author of "The Success Equation." Mauboussin discusses the nuances of luck versus randomness, the importance of aligning investment processes with a firm's edge, and the challenges of updating investment frameworks in a dynamic world. He also touches upon the episodic nature of venture returns and the impact of macroeconomic factors like interest rates on long-duration assets. The conversation delves into the value of persistence in venture capital, the significance of cognitive diversity in decision-making, and the benefits of maintaining a robust process to navigate market uncertainties. Additionally, Mauboussin reflects on personal investment mistakes, emphasizing the importance of focusing on business fundamentals rather than market volatility or macroeconomic predictions.
"Capital that our decision making process is our product."
This quote emphasizes that in venture capital, the way decisions are made is as important as the investments themselves, highlighting the need for refinement and improvement.
"Michael is head of salient research at Counterpoint Global. He's also the author of three incredible books, including my absolute favorite, the success equation."
This quote introduces Michael Mabusa and his credentials, setting the stage for his expertise in the field of research and decision-making within venture capital.
"Open helps companies of all sizes deliver better gifts and they make it super easy."
This quote highlights the significance of corporate gifting and introduces Open as a platform that simplifies the process.
"I love using the Angellist platform because it abstracts away all the complexity and operational burden of fund management."
This quote explains the benefits of using Angellist for fund management, emphasizing its role in reducing operational complexities.
"Squarespace is the all in one platform to build a beautiful online presence and run your business."
This quote introduces Squarespace as a comprehensive solution for businesses to establish and manage their online presence.
"My job is really three parts. One is to work with our team on investment process."
This quote details the three-part nature of Michael's role, emphasizing the importance of investment processes in his work.
"Randomness would be at the system level and luck would be more at the individual level."
This quote clarifies the difference between randomness and luck, with randomness affecting the entire system and luck impacting individuals within that system.
"Our minds are not particularly good at sorting out where that activity is on the luck skill continuum."
This quote points out the cognitive challenge people face in determining the role of luck and skill in various activities, leading to misattribution of outcomes.
"Venture is particularly interesting. One of the measures of skill, for instance, is this concept of persistence."
This quote discusses the unique nature of venture capital, where persistent success is often seen as an indicator of skill, unlike in other asset classes.
"The key is that there is no one size fits all for process, I think, but rather that you want to make your process congruent with your perceived source of edge."
This quote advises that investment processes should be designed to align with the investor's competitive advantage, underscoring the need for a personalized approach to decision-making.
"But mutable is, hey, the world changes, and we need to make sure that we're updating our frameworks and mental models to accommodate that."
This quote underscores the necessity of adapting decision-making frameworks to evolving circumstances.
"Three is a really good number for decision making because it's an OD number. Right."
The quote explains why three is an effective number for making decisions, as it allows for majority decisions and encourages discussion rather than heated debate.
"One is a deviation from what you say you're trying to do."
This quote highlights that straying from the intended process can lead to poor decision-making.
"The other one is just letting biases creep into what you're doing."
The quote points out that allowing biases to influence decisions is a common error in the decision-making process.
"How do you think thesis driven investors can not fall victim to confirmation bias?"
This question addresses the challenge of avoiding confirmation bias within the context of thesis-driven investing.
"The key, Harry, is to do the work up front, essentially, and think through the potential alternatives."
The quote emphasizes the importance of thorough preparation and consideration of alternatives to mitigate confirmation bias in investing.
"So it's very much good hygiene demands that leaders of teams figure out ways to surface alternative points of view."
This quote stresses the responsibility of team leaders to create an environment where different perspectives are valued and explored.
"The leader of the team puts into place these mechanisms to make sure that alternative points of view are serviced."
The quote reinforces the idea that leaders must actively implement strategies to ensure all voices are heard, fostering psychological safety.
"I send out a word doc the night before. So it's all in isolation."
The quote describes a practical technique for ensuring that team members can independently contribute their thoughts without influence from others.
"We pretend we made the investment, it's now a year from now or two years from now, and this investment's turned very sour."
This quote explains the pre-mortem technique, which involves envisioning a failed investment to identify potential risks and issues beforehand.
"The fancy term is to be an appropriate Bayesian, which is I have a prior view of the world. As new information tumbles in, I revise my view in the proper direction and the proper magnitude."
This quote introduces the Bayesian approach to updating beliefs and processes based on new evidence.
"I need to update my views. I need to update my process to accommodate the nature of the new investment."
The speaker acknowledges the necessity of adapting processes to keep pace with evolving investment landscapes, such as the shift towards intangible assets.
"The value of any financial asset is the present value of the cash flows."
This quote distills the essence of financial valuation to the present value of expected cash flows, regardless of the asset type.
"It all boils down to the same thing at the end of the day."
The speaker concludes that despite the complexities and uncertainties of venture investing, the fundamental principle of valuation remains cash flow-based.
"Is there a point in actually doing these models or even thinking in this way when it could actually lead you to say no to some of the biggest companies?"
This quote challenges the practicality of traditional financial models in the context of early-stage venture investing, where uncertainty is the norm.
"The majority of investments lose money, right? But a handful of investments make so much money that they more than make up for everything else, right?"
This quote highlights the high-risk, high-reward nature of venture capital investments, where the majority fail but a few succeed significantly, justifying the investment strategy.
"It's not how often you make money that matters, it's how much money you make when you're right."
This quote emphasizes the importance of the magnitude of successful investments over the frequency of successful outcomes in venture capital.
"Anytime you see capital flowing into something, you should worry about returns."
The speaker warns that an influx of capital into venture capital could lead to diminished returns, similar to public market trends.
"So that's the argument for latching onto the winners and holding on to them forever."
The speaker discusses the strategy of holding onto winning investments for the long term, given their disproportionate impact on returns.
"The key is, are you sticking to your process and trying to think about things the right way?"
This quote advises young investors to remain committed to their investment strategy and process, rather than being swayed by market fluctuations.
"But on some level, we've seen versions of all these things in the past."
The speaker provides reassurance by reminding that the world has faced and survived various crises before, suggesting resilience in the face of current global instability.
"Go back and look at volatility and you see that the volatility we've seen in the last ten or 15 years, even including the financial crisis, doesn't hold a candle to the volatility we saw in the 1920s."
This quote emphasizes the importance of historical perspective when evaluating financial market volatility, indicating that recent market swings are not unique when compared to past periods like the 1920s.
"Everyone's like, I can't believe it. This company is four and a half x ARR. What is going on?"
The quote reflects confusion or surprise in the investment community regarding current company valuations, particularly when compared to past market conditions.
"Covid was a huge challenge for a lot of companies. Right? In other words, there was. For many young companies, there was demand pull forward."
This quote highlights the impact of Covid-19 on business operations, specifically the challenge of managing unexpected demand shifts.
"When you have long duration equities, there's no place to hide."
This quote explains that companies with cash flows expected in the distant future are particularly exposed to interest rate changes, affecting their equity valuations.
"Are they delivering a good or service that creates consumer surplus?"
The quote suggests that a key factor in a company's ability to withstand economic shifts is its ability to create value for consumers beyond the cost of its goods or services.
"Historically, both real rates, even nominal rates, but real rates are way below where they've been historically and probably where they should be."
This quote discusses the relationship between historical interest rate levels and current rates, indicating that current rates may be returning to a historical norm.
"Consilience is about the unification of knowledge."
This quote explains the significance of integrating knowledge from different fields as a means to address complex problems, as discussed in E. O. Wilson's book.
"Curiosity probably is my answer to that."
The quote identifies curiosity as a key personal attribute that contributes to ongoing learning and intellectual engagement.
"This, too shall pass is the best investment advice."
This quote conveys the wisdom of maintaining perspective during both good and bad times in the investment world.
"I'm very religious about 8 hours and try to really stay on that program."
The quote underlines the speaker's commitment to getting sufficient sleep as part of a healthy lifestyle that supports cognitive performance.
"I love what I get to do, and I'm very know Dennis lynch is the guy that runs our team at counterpoint Global."
This quote reveals a sense of fulfillment derived from professional activities and the opportunity to work with respected colleagues.
"Angelist handles all your company's incorporation, banking, cap table and fundraising process all in a single place."
The quote highlights the convenience offered by Angellist for entrepreneurs in managing various aspects of their business.