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

Summary

In this insightful script, Alia Stof, a Stanford professor of venture capital, dispels the myth that venture capital is a gamble, introducing the 'Venture Mindset'—a strategic approach to decision-making in the innovation-driven world. Highlighting the importance of identifying high-growth startups and nurturing them to success, Stof emphasizes the significance of 'home runs' over the fear of failures. She shares principles such as the value of outside perspectives, the prepared mind, and the art of saying 'no' to make informed decisions, ultimately aiming to foster a culture of learning from failures and championing constructive failures.

Takeaways

• 🎲 Venture Capital is not a gamble but a strategic investment in high-growth startups based on a venture mindset.
• 🏆 Successful venture capital firms are known for their consistent ability to make great investments that yield significant returns, demonstrating persistence in the industry.
• 💡 The venture mindset is a unique approach to decision-making in the fast-paced, innovation-driven world, with specific principles guiding the process.
• 🚀 Home runs matter more than strikeouts in venture capital; the focus is on the potential for massive success rather than the frequency of failures.
• 🤝 Venture capitalists often go beyond traditional settings to meet founders and discover opportunities, emphasizing the importance of being proactive and accessible.
• 🔍 The 'prepared mind' principle highlights the importance of being ready to recognize and seize opportunities when they present themselves.
• ❌ Saying 'no' is a crucial part of the venture capital process, with firms typically rejecting many more opportunities than they accept.
• 📈 The 'fast lane' and 'slow lane' strategies are used to efficiently filter potential investments, narrowing down the options from many to a select few.
• 📧 Crafting an effective blurb or pitch is essential for founders to capture the interest of venture capitalists, with a focus on brevity, clarity, and personal advantage.
• 👀 The importance of the 'unfair advantage' concept in venture capital, where the founding team's unique strengths and qualifications are a key consideration.
• 📈 Constructive failure is an opportunity for learning and improvement, with a positive attitude towards setbacks being more important than the successes.

Q & A

What is the common misconception about Venture Capital according to the script?

The common misconception is that Venture Capital is a gamble, where investors take a chance on very uncertain startups hoping some will turn out to be great.

What does the speaker, Alia Stof, believe is the underlying theme in successful venture capital?

Alia Stof believes that the underlying theme is the 'Venture mindset,' a different approach to making decisions in an innovation-driven world.

How does the speaker describe the role of Venture Capital in the success of top companies?

The speaker describes the role of Venture Capital as a key factor behind the success of most of the top companies by market capitalization in the United States, such as Apple, Microsoft, and Nvidia.

What is the primary goal of Venture Capitalists when investing in startups?

The primary goal of Venture Capitalists is to find and invest in small, high-growth young companies, nurture them, and reap the benefits if the companies become successful.

Can you name some of the famous Venture Capital firms in Silicon Valley mentioned in the script?

Some of the famous Venture Capital firms mentioned are Sequoia Capital, Venrock, Emergence Capital, and Andreessen Horowitz (also known as a16z).

What is the significance of 'home runs' in the context of Venture Capital investments?

In the context of Venture Capital, 'home runs' refer to the significant returns on investment, often 100x or more, that result from successful investments in startups.

What is the Venture mindset principle that emphasizes the importance of success over failure?

The principle is 'home runs matter, strike-outs don't,' which means Venture capitalists focus on the potential for success rather than the frequency of failure.

What is the 'early bird' strategy used by Sequoia Capital, and how did it lead to their investment in WhatsApp?

The 'early bird' strategy involves identifying apps with a dramatic increase in rankings on the Apple Store and meeting their founders. This strategy led to Sequoia Capital finding and investing in WhatsApp, which was an app with exceptional growth and unknown founders at the time.

What does the 'prepared mind' principle suggest about the approach of successful Venture Capitalists?

The 'prepared mind' principle suggests that successful Venture Capitalists are well-prepared, able to recognize patterns, and evaluate entrepreneurs quickly, enabling them to make fast and informed decisions.

What is the significance of the 'saying no' principle in Venture Capital, and how do Venture Capitalists implement it?

The 'saying no' principle is significant because it allows Venture Capitalists to focus on a smaller number of opportunities by narrowing their deal funnel. They implement it using the 'fast lane' to quickly eliminate unsuitable deals and the 'slow lane' for more in-depth evaluation of the most promising ones.

What advice does the speaker give to founders when crafting an email blurb to Venture Capitalists?

The speaker advises founders to focus on their unique strengths and unfair advantages, keep the blurb short and to the point, and to practice and refine their message before sending it to actual investors.

What is the speaker's view on failure in the context of startups and Venture Capital?

The speaker views failure as a constructive learning experience, encouraging founders to embrace it, learn from it, and use it to improve future decisions.

Outlines

00:00

🚀 The Venture Mindset in Innovation

This paragraph introduces the concept of venture capital as a strategic investment rather than a gamble. It emphasizes the 'Venture Mindset', a decision-making approach in the innovation-driven world, as explained by Alia Stof, a professor at Stanford. The Venture Capital industry is highlighted for backing high-growth startups like Uber, Airbnb, and Nvidia, which have transformed into billion-dollar companies. The paragraph also mentions renowned VC firms like Sequoia and a16z, and the importance of persistence in successful VC investments.

05:01

🔍 Embracing Failure and Seeking Home Runs

The second paragraph delves into the philosophy of venture capital, where the focus is on the potential for significant returns ('home runs') rather than the frequency of failures. It discusses the high rate of failure in successful VC firms and the importance of learning from these failures. The narrative includes an anecdote about the Juicer startup and how its failure did not deter the VC firm from being successful. The principle of 'getting outside the four walls' is introduced, with Sequoia's 'early bird' strategy and the discovery of WhatsApp as a prime example.

10:04

🤝 The Prepared Mind and Selective Investment

This paragraph discusses the importance of being prepared in the venture capital world, drawing on the famous quote by Louis Pasteur about chance favoring the prepared mind. It illustrates how quick and informed responses can lead to successful investments, using a student's interaction with a VC as an example. The principle of saying 'no' frequently is introduced, with VCs typically rejecting a large number of opportunities to focus on the most promising ones. The 'fast lane' and 'slow lane' strategies for narrowing down investment choices are explained.

15:05

💌 Crafting the Perfect Pitch for Investors

The final paragraph provides advice for founders on how to craft an effective blurb to attract venture capitalists. It emphasizes the importance of focusing on the founding team and their unique advantages, keeping the blurb concise, and addressing the pain points that the startup aims to solve. The paragraph also discusses the high response rate to well-structured blurbs and provides tips for founders to practice and refine their pitch before approaching investors.

Keywords

💡Venture Capital

Venture Capital (VC) refers to the financing provided by venture capitalists to early-stage, high-potential, growth companies in exchange for equity. In the context of the video, VC is depicted as an essential driver behind the success of many top companies, emphasizing that it is not merely a gamble but a strategic investment in innovation. The script mentions that the top companies in the U.S. by market capitalization are often venture-backed, illustrating the significant role VC plays in fostering innovation and growth.

💡Innovation

Innovation is the process of translating an idea or invention into a good or service that creates value or for which customers will pay. The video's theme revolves around the venture mindset, which is a framework for making decisions in an innovation-driven world. The script discusses how venture capitalists identify and invest in startups that are innovative and have high growth potential, like Uber, Airbnb, and Nvidia, which were not well-known when they first received investments.

💡Venture Mindset

The term 'Venture Mindset' is introduced by the speaker as a distinct approach to decision-making in a rapidly changing, innovation-focused environment. It is a set of principles that guide venture capitalists in identifying and nurturing successful startups. The script explains that this mindset is crucial for making efficient decisions and is characterized by an emphasis on significant successes (home runs) over failures.

💡Home Runs

In the script, 'home runs' is a metaphor used to describe the highly successful investments made by venture capitalists that yield substantial returns, often 100x or more on the initial investment. The concept is central to the venture mindset, as it illustrates the focus on the potential for massive success rather than the frequency of failures. The video emphasizes that the goal is to achieve these 'home runs,' which can compensate for multiple unsuccessful investments.

💡Failure

Failure, in the context of the video, is presented as an inevitable part of the venture capital process and is not viewed negatively. It is mentioned that venture capitalists do not fear failure but rather focus on the potential for success. The script provides examples of failed ventures backed by VCs, like the juicer startup, to illustrate that failure is not a setback but a learning opportunity in the pursuit of 'home runs.'

💡Persistence

Persistence in the video is described as the ability to deliver outstanding results repeatedly over time. It is highlighted as a rare quality in finance but is a characteristic of successful venture capital firms that have been around for decades. The script explains that these firms have a history of making great investments that turn into 'home runs,' demonstrating their persistent success in the field.

💡Strike Outs

Strike outs are used in the video to represent the failures or unsuccessful investments made by venture capitalists. The script points out that venture capitalists do not mind the number of times they 'strike out' or fail, as long as they achieve a 'home run' that can overshadow all the losses. It reflects the understanding that in the venture capital world, one significant success can compensate for many failures.

💡Silicon Valley

Silicon Valley is知名的全球科技创新中心，位于美国加利福尼亚州。在视频中，它被提及作为许多著名风险投资公司的所在地，这些公司在历史上对许多创新企业进行了投资。例如，视频提到了Sequoia Capital和Andreessen Horowitz（a16z），这些公司在硅谷以及整个风险投资行业中都扮演着重要角色。

💡Prepared Mind

The 'prepared mind' concept, attributed to the French scientist Louis Pasteur, suggests that chance favors those who are prepared to recognize and capitalize on opportunities. In the video, this principle is applied to venture capitalists who are always ready to identify and seize promising investment opportunities quickly. The script gives an example of a student who was prepared to respond promptly to a venture capitalist's queries, leading to a successful investment.

💡Saying No

Saying no is a critical aspect of the venture capital process, as it is essential for venture capitalists to filter through numerous opportunities to invest in only the most promising ones. The video explains that for every deal they make, venture capitalists say no to over 100 opportunities. It discusses the importance of having a mechanism to quickly narrow down the options, using the 'fast lane' and 'slow lane' approach to decision-making.

💡Blurb

A blurb in the context of the video refers to a short, compelling pitch about a startup sent to potential investors, typically via email. The script emphasizes the importance of crafting an effective blurb that can capture the interest of venture capitalists. It provides tips on how to write a successful blurb, such as focusing on the founder's unique qualifications, keeping it brief, and ensuring it addresses the pain point the startup is solving.

Highlights

Venture capital is not a gamble but a venture mindset for decision-making in an innovation-driven world.

The venture mindset is based on research from Stanford and aims to improve decision efficiency.

Top U.S. companies by market capitalization are often venture-backed, such as Apple, Microsoft, and Nvidia.

Venture capitalists invest in high-growth young companies like Uber, Airbnb, and Nvidia at early stages.

Successful venture capital firms have a history of making great investments that repeatedly turn into 'home runs'.

Persistence in successful investing is rare but evident in the venture capital industry over the past 50 years.

Venture capital firms like Sequoia and Venrock have a long history of successful investing in Silicon Valley.

Venture capitalists focus on the potential of a 'home run' rather than the frequency of failures.

The Museum of Failure showcases many inventions backed by venture capitalists that failed, yet the firms behind them can still be successful.

Successful venture capital firms have a higher rate of failures but learn from them to achieve greater success.

Venture capitalists often meet founders outside of traditional offices, fostering a culture of discovery and connection.

Sequoia's 'early bird' system is an example of proactively finding and investing in successful startups like WhatsApp.

The concept of the 'prepared mind' is crucial for venture capitalists to quickly evaluate and decide on investments.

Venture capitalists say 'no' to over 100 opportunities for every deal they make, using a fast lane and slow lane approach.

The fast lane involves asking 'why not invest' to quickly narrow down potential investments.

Crafting an effective blurb is crucial for founders to attract the attention of venture capitalists.

Bet on the jockey, not just the horse; venture capitalists value the founding team's ability to succeed.

Constructive failure is an opportunity to learn and improve future decision-making.

Approach failure with the right attitude, learning from it to become a 'failure champion'.

Transcripts

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]