– Jeff Bussgang is a General Partner at Flybridge Capital Partners, an early-stage venture capital firm in Boston. This post originally appeared in the Vox Populi section of www.peHUB.com. The views expressed are his own. –
I recently read Malcolm Gladwell’s new book, “Outliers”, with great interest and delight. Gladwell is a fantastic author: always thought-provoking on human behavior and a quick, entertaining read. But I confess this book did not resonate with me or strike me as relevant for the VC-entrepreneur dance in the same way his previous book, “Blink”, did (see: VCs Blink). It was intellectually interesting, but not professionally illuminating.
Instead, I have been even more taken by another book, which also analyzes human behavior in a thought-provoking way called “Sway”. Written by Ori and Rom Brafman, “Sway” was recommended to me by my friend and co-investor Howard Morgan at First Round Capital. It is a fascinating analysis of why human beings naturally fall into irrational behavior. The book has very relevant implications for venture capitalists and entrepreneurs, particularly in today’s environment, as VCs are likely to allow irrational behavior to seep into their portfolio management decisions in the coming years.
“Sway” points to three central psychological tendencies that cause human beings to behave irrationally, despite the preponderance of facts pointing in another direction. The first is loss aversion, defined as our tendency to go to great lengths to avoid possible loss – even when it means taking outsized risks relative to the actual loss impact. The second is value attribution, where we imbue a person with certain qualities based on our initial impressions (or desired impressions!). And the third is the diagnosis bias, where we allow our initial assessment of a person or situation cloud any further judgment and, in effect, cause us to filter out any contradictory data.
As I look back on the good and bad investment decisions that we have made as a partnership, I see each of these three tendencies factoring into our discussions. It is not uncommon for a polished, confident entrepreneur to benefit from value attribution, when in fact a deeper analysis of their skills and previous experiences as a result of exhaustive reference checking will reveal a very different prognosis. We have tried to be more cognizant of identifying these tendencies in the partnership as we contemplate our future investment decisions with our (relatively) new fund.
