Success in venture capital requires being very good at making qualitative assessments while being good enough at making quantitative assessments. The reason is that startups tend to have limited operating history and hence limited financials, so being able to envision a startup’s future is a more important predictor of investment success. The reverse is true for private equity, where one can accurately assess the extensive and more stable financial performance of a company and thereby project its future with relatively more certainty.
As a result of the more qualitative nature of venture capital investments, successful venture firms tend to have a culture that facilitates the surfacing of these accurate qualitative assessments. This, in turn, requires being able to see a business’ strengths and weaknesses, as well as the likely future paths that it may take, from different perspectives. This is difficult for an individual to do because of human attributes like confirmation bias, where one naturally looks for evidence to support a given perspective while discarding evidence that goes against it.
It’s easier to see different perspectives when you have multiple people around the table sharing their ideas with each other. This requires a conversational culture where people are comfortable sharing their views, respect the views of their teammates, and are willing to change their views when necessary to arrive at the most accurate qualitative assessment of the future. In other words, it requires seeing conversations as a means of arriving at the truth rather than an opportunity to show that you’re right.
For these reasons, successful venture firms tend to have a conversational culture.
Also published on Medium.