Comments on: Sway and irrational VCs

By: Jeff Bussgang

Jeff Bussgang — Thu, 12 Mar 2009 12:18:58 +0000

Thanks for all the great comments! Fear and Greed are powerful forces – I still see both at work in the start-up economy, which is a good thing, I think.

Jonathan is right that VCs and entrepreneurs need to be held accountable when they allow “Sway” to compel them to make irrational decisions. LPs are doing this more and more today.

By: Don

Don — Tue, 17 Feb 2009 17:56:59 +0000

I will do everybody a favor today by posting. There is a direct relationship between me posting and market prices increasing. Survivorship bias tends to result in similarities between those still standing – the same way the best basketball teams often have tall players. VCs that are unsuccessful in making money must nonetheless be successful in obtaining and keeping money. So they have developed a pattern of behaviour that is strengthened by our economic crisis. Good for them.

By: L Marceau

L Marceau — Sat, 14 Feb 2009 00:58:56 +0000

Aren’t we really talking about being motivated by “fear”? Isn’t the market based on two main principles, Fear & Greed….It seems pretty clear that since Greed is on a holiday (or under house arrest eg. Madoff), Fear is now in the drivers seat and he ain’t lettin go any time soon… Really the struggle is in not letting Fear gain control, which is much easier said than done.

By: chao yoong

chao yoong — Fri, 13 Feb 2009 18:04:57 +0000

Yes VC’s are short sighted and they are arrogant bunch when the market is going their way. Now it would be eating humble pie for them.
My start up was seeking venture capital and the broker would charge me a fee for creating a biz plan but never want to take the time to listen to a presentation. I could never fathom how a VC could produce a biz plan when they dont even bother to understand the vision or effectiveness of the products.
After setting up a charitable foundation, we are lucky to venture with an international medical device company who would inject substantial capital.
What ired me the most was this broker said he could come out and listen on a pro bono basis! Well that person will kick himself for loosing a potential client especially when it goes for second round funding and when this company goes public in 2012.
The latest development is a well known university will research our supplement to see how effective it is on stem cells because we had 5 cases where the body modulated itself defectives genes were untraceable.
I guess he rolled the dice and it came up 00. Life is great when opportunity knocks however one has to be visionary to seize the moment.

By: Charlie Crystle

Charlie Crystle — Thu, 12 Feb 2009 18:54:13 +0000

I just finished the book (kindle version!) and really appreciated it. It’s amazing what people will do on the basis of emotional attachments to an idea, vision, or investment. I include myself in that…

well worth the read.

By: Jonathan Cole

Jonathan Cole — Tue, 10 Feb 2009 18:09:13 +0000

Aren’t these venture capitalists being paid very large amounts because they are skilled at avoiding irrational attachments and conclusions? If they fail at that haven’t they failed in their primary mission which is to always be looking at the dynamics and flow within the developing enterprise and the relationship of that development and flow to needs and trends of the outside world.

It is interesting to come up with good descriptions of how failure takes place. But it is unwise to allow that to be an excuse for failure that VCs can then point to and say, “Well, everyone does it.” If VCs and entrepreneurs are making these kinds of mistakes, maybe they are in the wrong business.

By: richard

richard — Tue, 10 Feb 2009 16:55:34 +0000

The most damaging irrational decisions, judgements, opinions and perspective come from a binding personal involvement that cannot be emotionally detached from the subject and always tends to cloud or negate objective and sound rational judgement. This inability for, or even resistance to, rational and objective thought in any circumstance is the most damaging influence on any human behavior that requires total emotional detachment for best results. That involves most of what we do in life and is the primary reason for all life mistakes, yes, including love. That’s why we make so many.

By: Pete Cann

Pete Cann — Tue, 10 Feb 2009 16:02:32 +0000

Not bad. A good general point is that a lot of the time, what leads you to do something right is knowing many ways to do it wrong.

By: Ian Kemmish

Ian Kemmish — Tue, 10 Feb 2009 14:15:00 +0000

If investors were loss averse, then we would all still invest according to Shariah principles.

If humans were loss averse, there would be no suicide bombers – indeed no wars of any kind, no adultery, no lotteries, and of course, Columbus would have been content to remain Governor of the Azores.

Indeed, where humans behave in ways which other humans describe as”irrational”, it is generally because they face the prospective losses with gay abandon, not because they are artificially inflating them! (The only recent counterexample I can think of from daily life is the MMR vaccine scare.)

How can we square this fairly basic and everyday observation this with all those trendy coffee table books? I think the answer lies in where the behavioural psychologists started out. There were using Victorian parlour tricks and cleverly designed experiments which exposed counterintuitive behaviours in order to understand how some bits of our brains worked. The problem is that, having found some rules for these bits of our brains, they then declared that these rules dictate our NORMAL behaviour, in toto, when in fact they were originally uncovered only in relation to EXCEPTIONAL behaviour.

I can think of nothing worse than a group of politicians or influential businessmen accepting these principles at face value, and it really worries me that, here in the UK at least, our probable next government looks set to use our entire nation to conduct just such a dangerous experiment.

By: Rupert Barnes

Rupert Barnes — Tue, 10 Feb 2009 13:30:43 +0000

It is not just entrepreneurs and VC firms that follow loss aversion with poor performing employees. Working for a major bluechip it is amazing how many poorly performing employees are embedded right the way through the organization.

They are readily reviewed as poor performing or as “needing improvement” but the level of coaching/mentoring required far outweighs any ouput from the individual for the team. However in these instances, it is the Manager that is averse to admitting that their team needs a structural change and that with less people their team will be more productive (even taking into accounts the cost of pay-outs).

Given my organization, I can only assume the cost to the firm is millions of dollars annually.