The Venture Mindset: How to Make Smarter Bets and Achieve Extraordinary Growth
368
The Venture Mindset: How to Make Smarter Bets and Achieve Extraordinary Growth
368Hardcover
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Overview
Distilling wisdom gained from venture capitalism into actionable steps for individuals and businesses, this handy guide is full of insights into and around the business world. Great for readers of Masters of Scale.
"Many principles mentioned in the book helped us build Zoom, and they will help you as well." –Eric S. Yuan, Founder & CEO, Zoom
Inspired by venture capitalists’ unique way of thinking, The Venture Mindset offers a transformative playbook for delivering results in a rapidly changing world from a top Stanford professor and a technology executive.
Venture capitalists are known for their extraordinary ability to spot opportunities. They know how to identify emerging trends, how to bring new industries into being, and when to hold them and when to fold. Their unique mindset has made them the force behind world-changing companies such as Amazon, Google, Moderna, SpaceX, and Zoom.
Stanford Professor Ilya Strebulaev has devoted two decades to studying VCs’ counterintuitive approaches to decision-making and the reasons behind the successes and failures of corporate innovations. Alex Dang has witnessed up close how VCs’ thinking and mechanisms can create successful businesses at companies like Amazon and McKinsey.
Combining their insight and extensive experience, they present nine distinct principles that will help you make better decisions, transform your business, and achieve remarkable results, no matter your industry.
In The Venture Mindset, you’ll learn:
• One question VCs ask that will change the way you evaluate opportunities
• Why you should encourage dissent and be wary of consensus
• The number one killer of innovation in traditional corporate environments
• Why it’s crucial to learn when to ‘pull the plug’ on initiatives
• Why failure is not just an option, but a necessity
Packed with entertaining stories and scientific precision, The Venture Mindset is a must-read for anyone who wants to be better equipped for the era of uncertainty when industry, company, and career can be disrupted overnight. The Venture Mindset will teach you more than how to simply survive. It’ll teach you how to win big.
Product Details
| ISBN-13: | 9780593714232 |
|---|---|
| Publisher: | Penguin Publishing Group |
| Publication date: | 05/21/2024 |
| Pages: | 368 |
| Sales rank: | 16,381 |
| Product dimensions: | 6.30(w) x 9.30(h) x 1.25(d) |
About the Author
Alex Dang is a CEO, a senior technology executive, and an advisor on innovation and digital strategy. He has two decades of senior leadership as a Partner at McKinsey and Ernst & Young, and as a product leader at Amazon, where he designed and launched numerous new businesses and solutions for millions of customers across ecommerce, supply chain, and AI. He graduated from the Stanford Graduate School of Business.
Read an Excerpt
PREFACE
What is the next big thing that will transform industries, make established companies redundant, and change the world? This book is about the people who answer these questions for a living. They are venture capitalists (VCs), the masterminds behind the most innovative organizations surrounding us. Every day, VCs seek and find innovative ideas. And they do so with extraordinary success. They identify big ideas and amazing teams and help to turn them into Amazon, Apple, Google, Tesla, Netflix, Moderna, or SpaceX. VCs find and fund the future.
But this book is not about how to be a successful venture investor. It’s about how every decision maker—in any sector—can up their game and help their company reach new heights by learning from venture investors, those masters of innovation. This book teaches you to spot new opportu- nities, nurture the right talent, foster a culture of innovation, and take calculated risks in order to achieve extraordinary growth. How? By developing and using the Venture Mindset.
The Venture Mindset is a new mental model where failure is a must, due diligence is put on its head, dissent is encouraged, ideas are rejected in their myriads in search of a single winner, plugs are pulled, and time horizons are extended.
We, a Stanford professor and a technology executive, have studied the Venture Mindset for many years and have identified ways to apply it in organizations that want to leap forward and outrun the competition. Over the last decade we have developed the Nine Principles of the Venture Mindset and created a Playbook to introduce these principles to any organization.
We wrote this book in Silicon Valley, where the heartbeat of innovation is heard loud and clear, but it is intended for people far beyond this innovation epicenter. Disruptive innovation knows no borders and should not be limited to VC funds and VC-backed companies.
Now is the time for you to use the Venture Mindset to find and fund the next breakout success, no matter your industry or geography. In a small factory or an office tower. In marketing or in supply chain. What matters the most is the right mindset. The Venture Mindset.
INTRODUCTION
What is Saasbee and why does it matter?
It was November 2012, and three venture capitalists, Sachin Deshpande, Patrick Eggen, and Nagraj Kashyap, were facing a decision: Should they invest $500K in a small startup called Saasbee?
Earlier in the year, through the prolific Silicon Valley angel investor Bill Tai, Kashyap was introduced to the founder of Saasbee, who was promising to revolutionize the way people did videoconferencing in the post-PC era. The name Saasbee came from SaaS, which stands for “software as a service,” plus the hardworking insect. Kashyap led Qualcomm Ventures, the investment arm of a large semiconductor manufacturer, charged with putting money into promising startups. At Qualcomm’s headquarters in San Diego, Kashyap and his team invested in more than 300 startups all over the world. One day the team would evaluate nano-technology in Korea; the next, they might be trying to make sense of a Brazilian software startup. Kashyap was accustomed to hearing extraordinary claims of guaranteed success from every single entrepreneur he met. Was this time different?
In 2012, the competition in video communications was already tough. WebEx, a unit of Cisco, a telecommunications giant, was a mighty incumbent with millions of registered users. Skype had been purchased by Microsoft the previous year. Google was working to improve the Hangout feature of Google Plus. The web-hosted service GoToMeeting had re- cently expanded to accommodate larger audiences. And there were recent startups such as the well-funded BlueJeans Network and Fuzebox to contend with.
Saasbee’s founder argued that his small startup would successfully outdo them all, even WebEx. But as of November 2012, Saasbee did not have a single paying customer. Besides, it was 2012 and people preferred in-person meetings or simply picking up a phone.
The founder of Saasbee, a Chinese-born engineer with imperfect English, had moved to Silicon Valley a dozen years earlier. After his arrival in the United States, WebEx recruited him, and he stayed on when Cisco acquired the company in 2007. But he left Cisco after management turned down his pitch to develop a smartphone-friendly videoconferencing tool.
Was Saasbee as good as the founder claimed it was? To learn more, Kashyap turned to his colleague Sachin Deshpande. “Could you look into this?” he said. “You’re our video guy. Have a good look.” Deshpande had cofounded a TikTok-style video startup that Qualcomm acquired in 2010, and he had devoted a lot of time and energy to understanding the burgeoning video space, which he was very passionate about.
“I was in love after the first call with the founder,” Deshpande told us in an interview. He flew to the San Francisco Bay Area to meet the founder two days after the call. With his experience in the video space, Deshpande could see how Saasbee differed from the competition. Video was the single hardest application to get working over a mobile interface, and yet as he clicked the button, the video stream was clear and without any interruption or delays. Deshpande then switched to his phone and voilà— the picture was smaller but it was of the same quality as the one on his laptop. The product worked wonderfully. Awed by the founder’s inside-out knowledge of the videoconferencing market, Deshpande flew back to San Diego. “This is beyond special,” he told Kashyap. “We have to put $5 million into Saasbee.”
Deshpande was joined in this meeting by his colleague Patrick Eggen. A liberal arts major with no knowledge of finance, Eggen underwent a baptism by fire working 100 hours a week in a large investment bank in London. Afterward, he went back to school for an MBA. Most of his job interviews were with hedge funds and classic investment management companies. Then he was invited to become a junior team member at Qualcomm Ventures, where he became, as Deshpande called him to us, “a creative seed financing whiz.”
Qualcomm was based in San Diego, but in 2010 Eggen moved to Silicon Valley, where he quickly became a deal junkie, sourcing startups for his colleagues’ due diligence. Eggen was impressed by the Saasbee founder’s obsession with building a superior product. After their second meeting at a Philz Coffee shop in downtown San Francisco’s SoMa district, Eggen thought the Saasbee founder was a pretty good salesman too. “What a technical virtuoso with natural sales chops,” Eggen exclaimed to us years later.
In early October 2012, Kashyap and the team flew in from San Diego to Qualcomm’s Silicon Valley office to meet with six startups in one day, Saasbee among them. According to some participants, as the demo was about to begin, the connectivity failed. The founder said, “Hey, I’m just down the road.” So they all went to Saasbee’s small office, where a seamless demo across many devices made Kashyap realize immediately that the total addressable market could be huge.
Now all three were pushing for Qualcomm Ventures to become the lead investor in Saasbee, with a sizable commitment of at least $3 million. Within a week, Deshpande and Kashyap presented the opportunity to the rest of the ventures team, its investment committee. There were no other takers. Every other team member felt uncomfortable investing in Saasbee. Kashyap, Deshpande, and Eggen were disappointed but not entirely surprised by their colleagues’ doubts. They saw too much uncertainty and too many red flags. Not only was the videoconferencing space already crowded, but Saasbee was trying to target small businesses, a tough market to break into. The technical differentiation from other players was not clear-cut. The founder’s imperfect command of English was a distraction. And the proposed valuation of $20 million seemed very high for a startup with one founder, a team of China-based engineers, and not one single customer. The skepticism was buttressed by the uncomfortable fact that at least eight other VC firms had passed on funding Saasbee. Why? They all had expensive Cisco TelePresence rooms with high-speed internet in their offices. If you have a private driver, it’s easy to underestimate the potential of Uber.
The rejection would have been the end of the story—if not for one distinctive feature of Qualcomm Ventures’ operation: there was a side path- way for unconventional deals of this kind. In 2010, an early-stage fund was created for smaller and often riskier investments. “Of course, it was not legally a real fund per se,” Kashyap recollected to us years later, “but conceptually it was.” The underlying idea was to invest small amounts of money at high velocity without much bureaucracy. Eggen was leading this early-stage fund and was therefore authorized to make investments of up to $500,000 from the preapproved capital pool, all by himself. Of course, this freedom came with greater responsibility should his selected investment fail.
Thus, the three of them had a backdoor way to pursue an unorthodox deal. They could put $500K of Qualcomm’s money into Saasbee despite the opposition from the rest of the team. But was the risk worth it?
Kashyap and Eggen ended up making the bet, supported by Deshpande. It has turned out to be by far the best investment, dollar for dollar, in the history of Qualcomm Ventures, and it helped to transform the daily routines of hundreds of millions of people worldwide. You’re probably one of those people.
Here’s Why You Haven’t Heard of Saasbee
You know this videoconferencing company, but by a different name. It was initially founded as Saasbee in 2011, but by the time Qualcomm got involved in late 2012, the company’s founder, Eric Yuan, had changed the name to Zoom Video Communications.
Yes, that Zoom. The Zoom that got millions of us through the gray days of COVID-19 lockdowns. The Zoom that—thanks to the trio of perceptive investors—Qualcomm owned 2 percent of when it went public in 2019 at a valuation of more than $9 billion, reaching a market capitaliza- tion of more than $150 billion at one point in 2020.
Zoom has since been touted as one of the greatest innovations of the modern era. Founder Eric Yuan has been glorified as an amazingly ambitious, forward-thinking, and visionary entrepreneur. How could Zoom, a young entrant with a very modest budget and workforce, achieve a series of revolutionary advances in video communications? How could it outcompete giants such as Cisco, Microsoft, and Google, with their huge budgets and hundreds and hundreds of talented engineers? How unique is Zoom’s story relative to other successful innovative companies? What makes them different? Did the Qualcomm VCs just get lucky?
Zoom was indeed a smashing success, but it hasn’t been the only one. Rather, it’s one of a slew of revolutionary young companies that have reached stratospheric heights and substantially transformed the world over the past fifty years. Think of Apple, Cisco, Facebook, Google, Netflix, Amazon, Uber, Tesla, SpaceX—or think of three of Qualcomm’s other investments, Noom, Cruise, and Ring. What Zoom has done to the way people interact and communicate online, these and many other companies have done in other fields, disrupting and revolutionizing industries and traditions around the globe. Many more remarkable companies are no doubt on the way—companies that nobody has heard of yet, but that have already been started in someone’s garage or bedroom.
All these now famous success stories have something in common. All are private entities created by small entrepreneurial teams. All are quite recent. Apple, the oldest of the companies mentioned thus far, was founded in 1976. And many of them were located in or connected to California’s Silicon Valley during the most sensitive part of their early growth cycle.
The most important feature of these companies’ trajectories, however, is how they were funded. Generally, entrepreneurs have great ideas and nowhere near enough money to implement them. Eric Yuan is a good illustration. When Yuan founded what would become Zoom, he was by no means a poor man. But to build a product that would have any chance of surviving in a crowded marketplace, much less one that could outcompete the likes of Cisco’s WebEx, he needed to raise far more funding than his personal wealth. That’s easier said than done.
The financial system offers many options for companies seeking capital. Some companies raise equity in public markets, but the stock market prefers more mature companies with existing cash flows and reasonable expectations of future profit. Zoom had none of this when Deshpande and Eggen first met Eric Yuan. In fact, Zoom didn’t get its first paying customer, Stanford Continuing Studies, a department within Stanford University, until December 2012—and that contract was worth just $2,000. With that kind of revenue (or lack thereof), it’s hard to pass the smell test of many investors. Companies do routinely raise debt from banks and debt markets, of course—and if you, as a bank loan officer, had been ready to sign off on a loan to Zoom, your supervisor would have fired you on the spot. And your supervisor would have been making a wise move. Not only did Zoom have no revenues at the time, but it also had no collateral should it go bankrupt. Banks just can’t lend to such companies without tangible physical assets, revenues, or guarantees. Other companies get grants, and many access initial capital from family, friends, and individual investors (they’re known as “angel investors” for a good reason), as Zoom did in 2011. That capital, though, is insufficient to fund companies through their scaling-up phase.
In short, very few people would have had both the available capital and the guts to bet on Zoom in 2012. But one type of investor did.
Enter Venture Capital
After Eggen negotiated a deal to put in $500,000 on behalf of Qualcomm Ventures, in 2014 another Silicon Valley–based firm, Emergence Capital, invested $20 million in Zoom. Two years later, when Zoom was promi- nent but not yet profitable, Sequoia Capital and others invested another $115 million.
Qualcomm Ventures, Emergence Capital, and Sequoia Capital are venture capital, or VC, funds. Until recently, VCs operated largely under the radar. Relatively small in dollar value compared to the gigantic size of the overall financial system, they are overwhelmingly located in California, primarily Silicon Valley. They specialize in investing in small, young, entrepreneurial companies. They are not household names.
To provide some perspective, in 2014, the year when it invested in Zoom, Emergence managed less than $600 million of capital. Sequoia, one of the largest VCs out there, invested in Zoom from a fund of around $2 billion. By comparison, Vanguard, a mutual fund family, managed more than $2 trillion in assets in 2012, or about 800 times as much as the value of the Emergence and Sequoia funds combined. Until a decade or so ago, many professionals and investors had barely even heard of VC funds, a niche sector hidden far away from the world’s financial centers.
Yet VC investors make companies such as Zoom, Uber, and SpaceX possible. They invest early money in seemingly crazy ideas, and sometimes these ideas succeed spectacularly, as did the VCs who backed Google, Cisco, Facebook, Netflix, Amazon, Tesla, and most of the other splashiest new American success stories of the past several decades. Moreover, VC is now a global phenomenon. It has made possible companies such as Canva and Atlassian from Australia, Alibaba and Tencent from China, Shopee from Singapore, Mercado Libre from Argentina, and Gojek from Indonesia. VCs find and fund startup companies that are completely unknown and often consist of just a small management team and a business plan scribbled on a paper napkin.
And yet even as awareness of VC and its importance, particularly in the tech industry, has grown, most people outside Silicon Valley—and many inside it as well—do not understand how VC firms actually function. Selecting what they consider the most promising startups out of the hundreds or even thousands vying for their money is only the first step. When VCs invest in a company, unlike Fidelity and many other investment firms, they become actively engaged in their investments and work to help the fledgling companies succeed. When Qualcomm Ventures invested in Zoom, Sachin Deshpande joined the Zoom board. In December 2014, Santi Subotovsky of Emergence Capital followed Deshpande onto the board after Emergence invested. In fact, the VCs making the largest investments in a company almost always demand a board seat as a condition of investing. They proceed to play a very active role in the life of those companies. Many attract other investors with even more capital to fuel growth.
Despite a few idiosyncrasies, Zoom’s story is not unique. In fact, it’s typical of startups that succeed. Think of Airbnb, Uber, Salesforce, or Tesla, all of which took on big, successful incumbents even though they initially had less funding, fewer resources, less support, and less experience than their mature, successful, cash-rich competitors.
So how important has VC been since it first emerged a little more than fifty years ago? Back in 2015, Ilya and one of his PhD students at Stanford, Will Gornall, explored the funding history of every single company that had been founded since the mid-1970s and was publicly traded in the United States at the time of their research. They wanted to find out where each company got its money before its initial public offering (IPO) on the stock market.
As it turned out, out of every 100 publicly traded firms founded since the 1970s, 50 were backed by VC funds. And using the market capitalization of each firm as our measuring stick, we found that VC-backed companies accounted for three-quarters of the total market value of all these businesses. In this regard, on July 29, 2016, a seismic (though relatively unnoticed) event took place in the business world. On that date, as Face- book surpassed Berkshire Hathaway in total market value, the top five US companies by market capitalization were all VC-backed: Apple, Microsoft, Alphabet/Google, Amazon, and Facebook. Amid all the market gyrations in the years since 2016, these companies (more recently joined by two more VC-backed businesses, Nvidia and Tesla) were always close to the top.
Ilya and Will also made cross-national comparisons. Have you ever wondered why there are so many new, huge technology companies in the United States? Have you ever heard of a German Google, French Tesla, Japanese Amazon, Italian Facebook, British Apple, or Canadian Microsoft? No. The reason why not: venture capital. Even as the US VC industry has rapidly expanded since the late 1970s, other G7 countries did not have viable VC sectors until recently (and some arguably still don’t have them). After the rise of the US VC sector in the 1970s, the US produced twice as many new companies as all the other G7 countries combined. Ilya and Will’s research indicates that venture capitalists are causally responsible for the launch of one-fifth of the 300 largest US public companies in existence today. Moreover, they estimate that three-quarters of the largest US VC-backed companies would not have existed or achieved their current scale without VC support. This is one reason why the recent rise of global VC is so important to the future of global economies.
To us, the data suggest persuasively that the VC industry is the leading business growth engine in the United States (and we wish more people in Washington, DC, and Sacramento would take notice!). But this book is not about patting venture capitalists on the back. This book is about how today’s decision makers—including you—can understand and apply the skills that VCs have honed and applied with such world-changing results.
The world is changing. Before now, the protagonists at the heart of familiar stories—stories about the development of the personal computer, the commercial internet, the smartphone, social networks, plant-based meat, or privately built space rockets—have always been founders. Although we are fascinated by those unique individuals whose entrepreneurial spirit drove them to make their vision of the future a reality, they couldn’t have done it without the investors who funded their vision. VCs did more than fuel the rise of these world-changing companies with their money; they brought with them a unique approach to success and failure that has been baked into the DNA of every company they back. We call this unique way of thinking and working the Venture Mindset.
The Venture Mindset
Our experience has taught us how different this way of thinking is from the thinking found at large corporations all over the world. The differences run the gamut of almost every decision a business faces, from hiring processes and selection of investment projects to attitudes toward incubating ideas and decision making. The Venture Mindset approaches decision making in a distinct way from traditional business managers, government leaders, regulators, and nonprofits.
The Venture Mindset didn’t originate overnight; it evolved over several decades through trial and error by generations of decision makers, many of whom were based in Silicon Valley. VCs developed this mindset because they needed a different approach to adapt, survive, and thrive in an environment that requires extreme selectivity combined with extreme flexibility. In this book, we demonstrate the many subtle yet effective ways that VCs’ unique behaviors have flourished in an ecosystem of thousands of startups, some of which went on to disrupt or create entirely new industries. We observe the companies who have successfully adopted the Venture Mindset to find astronomical success and show you how your company can achieve extraordinary results by following in their path. We explain why the traditional mindset does not, and cannot, work in environments with the high levels of uncertainty we are now facing.
Historically, all around the world, from New York to London to Mumbai to Sydney, success has been built on continuity, conservatism, and tradition. Stable growth has been a corporate and political mantra for decades. In the world of small, incremental, step-by-step innovation, sta- bility and continuity are great things. If that describes your business, you don’t need the Venture Mindset—or at least you don’t need it for those parts of your business where stability and continuity are the goals. But these can no longer be a business’s only goals. The rapid progress of technology (in large part coming from VC-backed companies) means that no industry can truly be stable any longer. No one is immune from the possibility of disruption.
Corporate leaders know this, of course. In fact, they now overwhelmingly expect disruption to occur in their industries. Their responses have, for the most part, been driven equally by fear and opportunity. Fear because the onslaught of disruption will make many business models and companies redundant; opportunity because people see an excellent chance to get ahead of the competition and cement their industry leadership. However, too often we encounter innovative ideas that have been pursued and built in the same way as any other business unit of a company. That is a recipe for failure. What today’s leaders too often fail to understand is that disruptive innovation must start with a different mindset.
Nine Principles of the Venture Mindset
In this book, we show modern decision makers how to apply the Venture Mindset effectively in any organization. In nine chapters, we present nine distinct ways in which the Venture Mindset succeeds where most people fail—or don’t even try. In each chapter, we identify specific takeaways and practical actions that you can implement in a traditional environment with immediate impact (see the Appendix for the list of thirty mechanisms in the Venture Mindset Playbook). We also identify more fundamental approaches that may require rethinking how your organization’s pathways are structured. We’ll even point out ways in which the Venture Mindset is applicable to many of our individual life decisions.
Looking back at Zoom’s story, we can see these principles at work. For Zoom investors, the main concern was how big the company would become. The people betting on Eric Yuan’s company envisioned—and eventually enjoyed—enormous returns. VC investors know that, in their world, (1) home runs matter, strikeouts don’t. Most VC investments fail. It is the wildly successful ones you found (or missed!) that determine whether you are a successful venture investor. In many corporate settings, one failure can ruin a career. In direct contrast, venture investors insist forcefully that failure is an option. In fact, many VCs tell us they are worried if they don’t fail often enough. For them, failure is not just an option— it’s a must. We will discover how VCs put this striking principle into practice, and how you too can fail successfully so that you might innovate more.
Eggen and his fellow VC investors don’t spend much time in their offices. Eggen met Zoom’s cofounder in a coffee shop and then visited Yuan’s office half an hour away. Indeed, you are more likely to find a VC in a coffee shop than in their fancy offices. This illustrates another key principle, as powerful as it is simple, yet not easy to implement in a traditional corporate environment: VCs (2) get outside the four walls. We will see how the VC approach to sourcing ideas and meeting founders can be profitably transplanted into your environment.
Equally disturbing to many non-VC executives is the critical principle of (3) preparing your mind. Deshpande decided to push for investment in Zoom immediately after meeting Yuan in his shabby office due to his background in the video space. Another early investor in Zoom wrote a check even before Yuan had a chance to show the pitch deck.
Eggen got excited about Zoom early on, but he met dozens of founders of other promising startups (he was a deal junkie, after all) without getting excited. And as we saw, some of his colleagues also showed no excitement about Zoom! The VC business is all about saying no again and again. Venture investors walk away from seemingly good opportunities more often than one may expect and they (4) say no 100 times before they finally say yes to someone. Of course, they can become successful at say- ing no only because they have a particular method by which they decide to say yes. We will uncover that method for you.
From Zoom to SpaceX to Facebook, VC investors prefer to (5) bet on the jockey rather than the horse. Deshpande was taken by Yuan’s obsessive client focus and his knowledge of the videoconferencing space. As one legendary VC investor puts it, he would rather invest in an A team pursuing a B idea than back a B team pursuing an A idea. We will see how this approach can work in many other environments and how to imple- ment it successfully.
In organizations driven by consensus, Zooms don’t happen. Qualcomm Ventures’ investment committee turned down Zoom’s investment. VC investors instead use many tricky mechanisms to help them (6) agree to disagree. You too can apply this principle in most of your decision- making group meetings.
Zoom prospered and its investors eagerly piled on more money. Similar to gardeners thinning the plants so that only the best and strongest ones are left, investors have to kill many of their darlings to reserve capital for promising ones like Zoom. This decision (7) to double down or quit is central to the Venture Mindset, and we will also see the successful application of this principle in a traditional setting.
One of the first decisions Eric Yuan made after Zoom became a large, successful company was to launch Zoom’s very own $100 million VC fund to invest in startups. In this way, Yuan began applying venture principles just as his own investors had done when deciding to invest in Zoom, and as he himself had applied them as Zoom’s leader. One might find Yuan, now a multibillionaire, pulling up a temporary desk and sitting right next to his team of engineers as they dive into a new project. Each one of them is not just an employee but a shareholder determined to make Zoom an even bigger and more valuable company. After all, (8) making the pie bigger is another invaluable part of the Venture Mindset.
As Eggen made the $500,000 investment in Zoom, he could not know how successful the company would eventually be, but he did know that any success would not be waiting just around the corner. The Venture Mindset understands that (9) great things take time. To force long-term thinking, VCs have developed various innovative mechanisms that you too can put to good use.
Some of the lessons offered by the Venture Mindset are easy to implement, with immediate results; others are less so. But each lesson offers a powerful opportunity to change how you think and act within your own organization.
Our Path to the Venture Mindset
The idea for this book originated with our common hobby and passion: not VCs, but wine. Ilya’s wine cellar holds quite a few bottles of precious wine and one day he called upon Alex, his former student and friend, to help him organize and categorize his wine in his chilly cellar. Discussions about different terroirs, famous winemakers, and excellent vintage years gave way to discussions about venture capital decision making and stories of launching innovation businesses from corporate trenches.
What started as a discussion about VCs soon expanded to other decision makers: angel investors, entrepreneurs, corporate innovators, executives in large technology companies, and even regulators. We both saw clear patterns. What particularly struck us was the many commonalties between successful venture investors and successful corporate innovators. Many of these corporate innovators came from companies that were themselves VC-backed. All of them broadly followed a very similar playbook. We also realized that in many other cases we could perceive which decisions deviated from that playbook—the disastrous outcomes often made it obvious. Successful VCs, we realized, follow a specific mindset. We call this mindset the Venture Mindset (or VC mindset). Successful corporate innovators use it too. Less successful ones generally don’t.
As a Stanford academic, founder of the Venture Capital Initiative at the Stanford Graduate School of Business, and adviser to many companies, Ilya speaks to executives around the world on a regular basis. Alex is an innovation practitioner. He’s been there and done that as an Amazon product leader, a partner at McKinsey & Company, and a CEO of a technology startup.
We have been presenting the Venture Mindset Playbook to our clients and students in lectures, workshops, meetings, and corporate off-site events. Our message immediately resonated with these audiences. Corporate executives’ faces would light up when we spoke about this idea. The more we talked with global executives, the more we found that they were surprised by the idiosyncratic and often counterintuitive nature of the way VCs think and make decisions. As one of our workshop participants summed it up well, “VCs do it differently. Whatever you have learned before, do not look back!”
We knew we were onto something and wanted to help more leaders step up their innovation game by applying the Venture Mindset. That’s what led us to writing this book, which we hope will become a movement within business. However, as Sherlock Holmes famously noted, theorizing without data is meaningless. Getting data is where many researchers and practitioners alike bump into an insurmountable challenge. The VC world is extremely secretive, with very little data available publicly. Venture investors prefer not to disclose the investment contracts they sign. They rarely discuss how they find and evaluate innovative ideas, some of which end up worth billions. The same holds true for corporate innovation initiatives within large companies, hidden behind closed company doors.
Despite this secretive VC culture, Ilya and his Stanford research team have pried these doors open after more than a decade of studying all aspects of the venture world—from startups to VC funds, from corporate venture capital investors to the impact of VC-backed companies on the economy. Combine this with Alex’s firsthand experience of designing and launching ideas in a corporate setting and you get a super collaboration that leads to unexpected insights and novel practical takeaways.
This book also draws from Ilya’s research about “unicorns”— successful VC-backed innovative companies with at least one private round of funding with a post-money valuation of $1 billion and above. Companies like Zoom, SpaceX, Instacart, Canva, OpenAI, DoorDash, and Moderna.
Since 2015, Ilya and a team of research assistants, PhD students, lawyers, and others have been keeping up with the herculean task of collecting information about every such US startup. The team left no stone unturned. For each unicorn, they investigated the founders’ background and age, as well as the time frame from birth to becoming a unicorn or a publicly traded company, and much more. We soon realized that recognizing characteristics of unicorns makes it easier to identify early on revolutionary ideas and companies destined for spectacular success.
Our research on unicorns attracted lots of attention not only from VCs and founders interested in reaching the Mount Olympus of the venture world, but also from leaders of traditional businesses and regulators who were intrigued at how innovative ideas worth of billions of dollars could be hatched and cultivated in just a few years.
Among corporations, the hunt for internal corporate unicorns also took off. It’s not easy to put a value tag on the unicorns that companies breed internally, but many new large-scale projects could easily have been on the list of unicorns if they were stand-alone businesses. Think of Zelle, an instant payment service founded by a consortium of large banks. Or the new South American business founded by the Asian e-commerce player Shopee. Or Azure, the cloud computing platform of Microsoft.
Alphabet, Amazon, and Apple are more than a search engine, an online bookseller, and a manufacturer of a PC alternative. They’re innovation factories. One does not need to start the company’s name with A to achieve this. Take Z. Zoom envisions itself not just as a videoconferencing tool but also as an innovative platform experimenting with hardware, AI-powered translation, and even call centers. And don’t forget Zoom Ventures, which has invested in a few dozen startups from chatbots to virtual working space solutions. It was clear to us that companies looking for big growth needed to harness the Venture Mindset.
To demystify the internal workings of VCs, Ilya and his colleagues surveyed more than a thousand of them and interviewed hundreds of them, looking under the hood to understand what happens in their offices (or, more often, outside their offices) and how they make decisions. As a result, we learned that there is a method to their seeming madness.
In this book, we share what we have learned, and we offer advice that is practical, accessible, and relevant. The farther you are away from the world of VC and Silicon Valley, and the less you think your industry is vulnerable to being affected by what is happening in the VC realm, the more you need this book. Because you’re probably wrong. Knowledge is power, and that has never been truer than today.