Quick Study: How Venture Capitalists Make Decisions

Summary

Ilya Strebulaev, a Stanford professor and Venture Capital Initiative Director, explains the significant role of venture capitalists (VCs) in shaping our lives through their investments in high-growth startups like Google and Microsoft. His research reveals that VCs are responsible for a third of all large U.S. public companies since the 1970s. Strebulaev's work demystifies the VC mindset, emphasizing deal selection and the importance of the founding team, or 'jockey,' over the business idea, or 'horse.' He suggests adopting a VC-like approach to risk and research can benefit both business and personal life.

Takeaways

• 🎓 Ilya Strebulaev is a professor at Stanford Graduate School of Business and the Founder and Director of the Venture Capital Initiative.
• 💡 Venture capitalists (VCs) invest in small, high-growth startups that aim to change the world, often impacting our daily lives.
• 🚀 VCs have been instrumental in funding tech giants like Google, Microsoft, Facebook, and Zoom, when they were just startups.
• 💉 About half of the successful COVID-19 vaccines were delivered by companies supported by venture capital, highlighting their societal impact.
• 📊 Strebulaev's research shows that since the 1970s, VCs have been behind about a third of all large, publicly traded companies in the U.S.
• 🔍 The key to VCs' success is their rigorous deal selection process, which is highly selective and involves a 'deal funnel'.
• 📈 The deal funnel process starts with evaluating the business model and idea, followed by assessing the founding team, and then partner due diligence.
• 🤔 The median venture capital firm considers about 400 deals a year and invests in only 4, demonstrating the selectivity of the process.
• 🏇 VCs prioritize the 'jockey' (founders and early management team) over the 'horse' (product, business model, market, technology) when making investment decisions.
• 🧐 VCs differ from other financial investors in their approach, considering a wider range of opportunities and being more willing to take risks and co-invest.
• 🛠️ Standard financial models are not applicable to early-stage companies, prompting VCs to develop their own financial strategies.
• 💭 The VC mindset encourages taking risks, being willing to fail, staying flexible, and conducting extensive research before making decisions.

Q & A

Who is Ilya Strebulaev and what are his roles at Stanford University?

Ilya Strebulaev is a professor at the Stanford Graduate School of Business and also the Founder and Director of the Venture Capital Initiative.

What is the main activity of venture capitalists (VCs)?

Venture capitalists invest in small, risky, high-growth startups, often in companies that aim to bring significant changes to the world.

How have VCs impacted the development of major tech companies?

Many tech giants such as Google, Microsoft, Facebook, and Zoom were funded by VCs during their early stages, which helped them grow into the companies they are today.

What role did venture capital play in the development of COVID vaccines?

About half of the successful COVID vaccines were delivered by companies that were supported by venture capital.

How significant has the VC industry been in creating large publicly traded companies in the United States since the 1970s?

The VC industry has been behind about a third of all large, publicly traded companies created in the United States since the 1970s.

What is the term used to describe the process VCs use to choose what ideas to fund?

The process is referred to as 'deal selection,' which occurs after identifying a startup to consider but before deciding whether to invest.

What is the 'deal funnel' and how does it work in the context of VCs?

The deal funnel is a process where VCs evaluate potential investments. On average, a hundred startups enter the funnel, but only one is chosen for investment.

What are the typical stages involved in the deal selection process?

The stages include evaluating the business model and setup idea, meeting with the founding team, bringing the startup to partners for further due diligence, and finally deciding on investment.

What is the average number of deals a venture capital firm considers and invests in per year?

The median venture capital firm considers about 400 deals a year and invests in only 4 of them.

Why do VCs focus more on the 'jockey' rather than the 'horse' when making investment decisions?

VCs concentrate on the founders and early management team (the 'jockey') because they believe that even the best idea (the 'horse') will not succeed without a capable team to execute it.

How does the VC mindset differ from other financial investors?

Venture capitalists consider more opportunities, are more willing to take on risks, and are more likely to co-invest with others, making them part of a larger ecosystem.

Why are traditional financial models not applicable to early-stage companies?

Traditional financial models like net present value or discounted cash flow techniques are not applicable because reliable data for future cash flows or revenue forecasts does not exist for early-stage companies.

What can individuals learn from the VC mindset in terms of risk-taking and decision-making?

Individuals can learn to do plenty of research before making decisions, to be willing to fail, and to stay flexible, which are key aspects of the VC mindset.