Thinking fast and slow at a VC fund

For the second time this week I’ve been thinking about my early career as a VC. This time I was remembering how I would find interesting deals only to have them shot down in seconds by the partners I was working with. Usually because they didn’t fit with some pattern he was working with, or were in an area where the fund had had bad experiences.

For those of you that have read Thinking Fast and Slow, That’s Kahneman’s Type 1, or fast thinking in action. The partner was subconsciously using his (and they were always men…) experience to pattern match and make a quick decision – to go by gut instinct.

It was frustrating for me because my thinking was Kahneman’s Type 2, i.e. of the slow, considered variety. I had spent time thinking about the prospect and had logical reasons for believing we should at least consider investing. The partner’s Type 1 thinking didn’t want to engage in a Type 2 debate though, so my arguments were quickly dismissed.

What I realise now is that the partners were right, or at least mostly right.

Nine times out of ten when you ask a VC how they are doing they say they are busy. That’s because if they have got any presence in the market they are constantly overwhelmed by entrepreneurs looking for investment. I’m fond of saying that any VC who knows what she’s doing should be permanently busy.

It’s this busyness that explains why Type 1 thinking is appropriate when evaluating deals. Good pipeline management is all about quickly working through the prospects that aren’t going to turn into investments and only spending time on the ones that are going to close. That means crude filters and quick decisions at the top of the funnel.

The challenge for people new to analysing startup investment opportunities is that it takes time to build up the experience to be an effective Type 1 thinker, but it takes too long to analyse every opportunity deeply in a Type 2 style. My solution to this challenge was to work really hard and try to learn from investors with more experience. John Taysom and Simon Cook taught me a lot.

The challenge for partners is to build strong instincts and be an effective Type 1 thinker. The most difficult piece of that is to keep improving. Type 1 thinking doesn’t listen to reason and it takes conscious effort to know when to slow down, analyse a question more deeply and make the switch to Type 2 thinking. That switch comes with a cost because it means taking time from something else that now won’t get done, or not done so well. I make a big effort to take notice of opinions contrary to my own from credible sources, it takes time, and much of it is wasted, but it keeps me moving forward – and that’s essential in this fast changing world of ours.

The other challenge for partners is to help their associates develop good instincts. That means understanding the underlying analysis or pattern matching that drives instinctual or Type 1 decision making and then taking the time to explain it.

This is a post about analysing tech startups for investment purposes, but I think the point holds true for many other domains as well. Product management, design, and software sales spring to mind.

  • http://www.innovationnest.co/ Marcin Szelag

    Nic, thanks for this great insight. I’ve been in startups/vc 10 years now. Half the time at a startup, half as a VC. Operating in a niche VC market like Poland has taught me many hard lessons. Now entering the European VC market I get to experience a whole new set of challenges.

    Your thinking fast and slow approach resorted with me as it is a topic we discuss frequently among the partners. It is very hard to agree on one golden rule. It is always very subjective to the nature of a given partner. What I found very useful is that once you lock in a very narrow investment thesis you judgement becomes much sharper. You say NO with much more easy, and you feel much stronger saying YES.

    Taking these investment decisions at different stages – seed, Series A, and growth rounds might mean different things. At seed (true seed) where I invest and focusing exclusively on SaaS there is definitely pattern matching and a great dose of instinct.

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