Don't make permanent decisions with temporary feelings.
— banksy (@thereaIbanksy) July 2, 2015
When I saw Banksy’s tweet this morning I thought ‘great advice for life’. Then I thought it’s great advice for investment decisions too.
Most obviously investment decisions should be rational rather than emotional, based in analysis of likely long term outcomes.
It’s important for us that we’re excited about the startups we invest in, but that excitement should be rooted in data rather than emotion. E.g. X market is exciting because it’s growing at y% and the company in question is z% better than the competition. Y and Z will be estimates based on a combination of research and educated guesswork but they should be defendable.
It’s also important that we feel a strong connection with the entrepreneur, but it’s the presence of that connection which allows an investment to be made rather than the strength of the feeling driving the investment decision.
So far so obvious.
Where it gets trickier is in competitive situations, particularly in hot markets when it’s easy for smart people to unknowingly have feelings drive their decisions. Fear of missing out regularly pushes people to make investment decisions they otherwise might duck. That might be rational – if our hot startup has a 10% chance of being the next Uber then it’s worth me investing even if it has a very high chance of failure – but more often it is rooted in temporary feelings related to loss aversion, embarrassment and greed.
Fear of partnership reprisals for simply not getting enough deals done has similar effects.
Where clever people often go wrong is deciding they want to do make an investment because of temporary feelings and then using their intelligence to build rational arguments that support the ‘10% chance of being the next Uber’ thesis. If you find yourself getting emotional when you defend your analysis then ask yourself if you’ve made this mistake. I’m not saying I’m smart, but this is a mistake I’ve made before and will probably make again.
This same logic applies to many important startups decisions everywhere that are emotionally charged, e.g.:
- should I take this big round of financing that scares and excites me?
- is my founding team the right team for the next stage of growth?
- which features should I take out of our increasingly bloated product?
- which of these strategic options should I ditch so I have time to properly focus on the other two?
- how long should I hang on for this big deal?
- and many more….