“I’ve searched all the parks in all the cities—and found no statues of committees,” proclaimed the famous British writer G. K. Chesterton. VCs are well aware of inefficiencies and biases in groups; they also know that these biases are particularly dangerous in a highly uncertain world. And they know that team members with prepared minds can make the right call if they design a process to avoid these blind spots. In our research and work with VCs, we observed many specific practices with which VCs equip themselves. The next time you huddle in a room with your team members, you’ll be more likely to make a better decision with these four mechanisms we have learned from VCs.
1. Keep the team small
If you join a VC team meeting, you will notice something remarkable: the room is tiny.
Investors review deals in small groups. Many VC partnerships have three to five partners. Even with all the junior team members added, you will see an intimate and informal exercise. The meeting is designed to ensure that everyone who can contribute is expected to be present, and everyone present is expected to contribute.
Innovative companies recognize that smaller teams outperform larger ones, as the communication quality, reaction speed, and individual motivation are far superior. Think of the famous “two-pizza team” size requirement designed at Amazon for teams working on a new product or service. The name is derived from the belief that the team should be properly nourished with two pizzas, implying an ideal size of no more than eight. Members of smaller teams also demonstrate higher accountability and reduced finger pointing later on. Many companies have followed the two-pizza principle, such as Intuit, a major provider of financial software. When the leadership at Mattel changed, one of the new principles was to permit no more than 10 people in any decision meeting.
These principles correspond to the gut feelings of decision-makers in many organizations and have extensive scientific backing. Back in the 1970s, researchers Richard Hackman and Neil Vidmar found that for many tasks, the optimal group size was four or five. They found that the greater the number of people performing a task together, the less productive they are. Next time you plan a decision-making meeting, invite only those who really need to attend and even then ensure the number is below a dozen.
2. Juniors speak first
Have you been in meetings where the boss articulates his position and then asks, “What do you think?” Once the boss has spoken, it’s hard to argue for the opposite position or provide a counterexample. This is the world dominated by HIPPO: the Highest-Paid Person’s Opinion. Yet the information and opinions of others could be just as valuable if not more so. Copying the behavior of superiors may very well be a survival tactic, but in the workplace it’s detrimental.
VCs appreciate that if the process is designed in the right way less experienced people can add considerable value. Meritocracy is key. Junior investment team members are often the people who have done most of the analysis: talking to customers, conducting reference calls, analyzing the market, preparing the investment memo. Especially in an uncertain environment, they possess lots of “soft” information that is difficult to formalize on paper. The “juniors first” rule encourages them to provide their assessment before any of the senior partners speak up. Strict enforcement of this rule creates a culture in which juniors are expected to talk first.
The junior-senior engagement dynamic is critical in many settings. In a study that should be better known, nine out of ten nurses confided they find it difficult to speak up to a physician, even if they observe that a patient’s safety is at risk. You should favor the voice of disagreement over the silence of intimidation.
President John F. Kennedy took this principle one notch further during the fateful days of the Cuban missile crisis. Not only did he insist that everybody speak as equals in his team’s deliberations, with neither rank nor chairman. He also skipped some meetings to ensure that his presence would not intimidate participants. Reading the transcripts of heated exchanges in the Oval Office regarding the Soviet threat, one cannot help but wonder whether these seemingly small but intentional actions designed to foster open debate in the Kennedy administration avoided a nuclear Armageddon. Limiting your own power may lead to better decisions. That’s a mighty lesson for any leader.
3. Assign a devil’s advocate
To ensure that the opposite view is heard, many VC partnerships make it a standard practice to assign one person or a small team the role of contrarian. Laden with religious overtones, this term indeed originates from the tradition of assigning a person in the Roman Catholic Church to argue against the canonization of someone proposed for sainthood. Representing the devil, the advocatus diaboli was a paid job within the Vatican administration with the task of finding evidence against the most deserving candidates for sainthood. Pitted against the candidate’s advocate, the devil’s advocate played an important balancing role in the canonization process. The Venture Mindset borrowed both the term and the practice from the church.
For example, the a16z venture firm often designates a “red team” of people tasked with arguing against a deal. When Warren Buffett contemplates his biggest acquisitions, similar to a16z he hires two advisors: one to support a case for the investment and the other to make the case against it. Some VCs apply the rule with more fervor than the Catholic Church, assigning every investment team member except the deal leader to a devil’s advocate role. A room full of devils! Quite a challenge to overcome.
One organization that uses the devil’s advocate concept effectively is AMAN, the Israeli armed forces’ directorate of military intelligence. After Israeli intelligence failed to predict the 1973 Yom Kippur War, a key idea that emerged from a postwar inquiry was to create a devil’s advocate position named “the tenth man.” That person’s role is to disagree, raise red flags, and point out flaws in the group’s deliberations and decisions.
An important conceptual and practical point is the difference between a devil’s advocate and what is known as “authentic dissent.” The idea of authentic dissent, popularized by Adam Grant in his book Originals, says that there are always devils among us and we just should let them speak freely. The leader is responsible for drawing out this authentic dissent. The idea does sound attractive, since assigning a devil’s advocate often seems less authentic, with people arguing for positions they do not necessarily hold themselves. But however nice the intention of authentic dissent sounds, intentions don’t matter—mechanisms do. If the organization has a culture in which people can freely speak their mind, the leader does not need to cultivate dissent. But if you start with an organization in which groups seek conformity and consensus, efforts to encourage authentic dissent may fail. Assigning a devil’s advocate removes the social stigma associated with going against the grain.
Moreover, in cohesive and highly productive small groups, people may tend to think similarly on a number of issues, especially if they have self-selected to be in the group. The hope of authenticity may fail here. In contrast to encouraging authentic dissent, make everybody a devil. As examples of debate societies amply demonstrate, forcing people to take a position will lead them to pursue questions they otherwise would not have asked. Ask everyone in the group to come up with a reason not to invest. And ensure that you rotate your devils. If one person is constantly playing the negative role, the mechanism could backfire, as colleagues may get accustomed and ignore any criticism from this person.
4. Provide feedback in advance
In many VC firms, every team member shares their opinion on the investment opportunity after reading the investment memo, but in advance of the meeting. Importantly, these thoughts are collected independently: you don’t know anyone else’s input yet as you are typing your own. This arrangement provides ample opportunity to submit negative information or a minority opinion. When the trove of collective reactions is finally revealed, the differences among group members are often substantial. The recognition of such varying opinions liberates the discussion.
Increasingly, companies use this mechanism in their hiring process. For example, Google’s policy asks members of an interview committee to record their individual comments on each candidate before the meeting. Establishing such a process for other company decisions, especially large investment projects and strategic decisions, is not easy, but embedding it is an integral part of the design, and creating a productive culture of disagreement is a must in an era of disruptive changes. To de-bias group thinking even further, many VC firms make the advance feedback blind. As a result, you don’t know, prior to the discussion, what the HIPPO thinks.
Pay attention at the next meeting you attend. If nobody around you opposes a decision or raises critical issues, then perhaps people in your organization are not motivated to ask tough questions. If people spend more time reading attitudes in the room than reading about the proposed idea and critically evaluating it, don’t expect new creative solutions to emerge. VC partnerships of this disposition can rarely survive beyond the first fund. Silence in the room does not mean consent; rather, it is a strong sign of potential disaster.
Excerpted with permission from The Venture Mindset (Portfolio; May 21, 2024) by Ilya Strebulaev and Alex Dang.
Ilya Strebulaev is the co-author of the new book, The Venture Mindset, and the foremost academic expert on venture capital. He is the founder of the Venture Capital Initiative and David S. Lobel Professor of Private Equity and Professor of Finance at Stanford University’s Graduate School of Business, where he teaches a popular class on venture capital.
Alex Dang is the coauthor of the new book, The Venture Mindset. Dang is a senior technology executive and an advisor on technology and innovation with two decades of professional experience. Alex experienced the venture mindset firsthand at Amazon and AWS and more recently, he brought his perspective to global executives as a partner at McKinsey & Company in its Silicon Valley office.
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