Nothing great has been achieved without irrational exuberance

By October 10, 2011Venture Capital

The title to this blog post is a quote from Tom Evslin.  It was new to me this morning (and I hadn’t heard of Tom either) but I immediately loved it.

Firstly it captures the importance of faith, belief and perseverance in life generally and more specifically to startups.  We all love stories about people coming through difficult times to overcome the odds and achieve success.  That can be a plucky individual, a relative overcoming illness, or a startup that executes on a pivot.  Writing on startups is riddled with acknowledgements that successful entrepreneurs are not usual rational about their chances of success, otherwise they probably wouldn’t start their companies in the first place.  Just about all founders have a strong belief that they will succeed despite the fact that 90% of startups fail.  Usually that faith is in themselves and their ability to do whatever it takes to succeed.  Sometimes it is in an idea about how the world will change.

I came across the quote in a blog post on Health 2.0 from Dave Chase, CEO of Avado.com.  In it he also references the 3 Stages of Truth articulated by Arthur Schopenhauer – first it is ridiculed, second it is violently opposed and finally it is accepted as fact.  Getting a company through those first and second stages is nigh on impossible without an almost irrational self confidence from the founder.

All that said, the biggest reason I love the quote is not that I see it as a truism but because it goes to the heart of making good investment decisions as a VC.  Venture capital is about risk management and in an ideal world our decisions would be based on objective facts – i.e. rational.  In practice though, the most VCs get excited about the opportunities in front of them and an element of irrational exuberance creeps into many of the best decisions.  It also creeps into the worst ones too, and you won’t be surprised that I think gut feel should only ever be a compliment to thorough analysis and due diligence.  What makes this interesting is that getting the right balance between fact based and more subjective decision making is the key to a successful fund.  Allowing too little exuberance will most likely result in a safe portfolio that makes returns that are at best only ok, whilst too much exuberance can leave you with an embarrassing collection of companies where many things have gone wrong that in hindsight should have been predictable.  Getting that balance right is also very hard.  It is impossible to describe it in the abstract and it varies investment by investment.  Maybe it is the ability to get this right that separates the consistently great VCs from the rest of the pack.