The Power Law: Venture Capital and the Making of the New Future

by Sebastian Mallaby

The first step toward overcoming cognitive bias is to recognize it. Botha arranged for outside psychologists to present to the partnership. He led his colleagues through painful postmortems of past decisions, homing in on times when they had weighed evidence irrationally. Previously, the partners had tried to extract lessons from portfolio companies that had failed. Now Botha was equally focused on the times when Sequoia had declined to invest in a startup that subsequently succeeded. To enable scientific postmortems, the partners kept a record of all votes at investment meetings. “It’s not about scapegoating,” Botha explained. “It’s just ‘What did we learn as a team?’ If we can get better at decisions, that is a source of advantage.”[21] As well as running postmortems, Botha began to build new habits into real-time decision making. To overcome the risk-aversion identified by decision science, the partners included a “pre-parade” section in each investment memo—a description of how the company would turn out assuming everything went perfectly. By building this exercise into their process, the partners gave themselves permission to voice their excitement about a deal, and to do so with a fullness that would otherwise have been uncomfortable. “We all suffer from the desire not to be embarrassed,” Jim Goetz reflected. “But we’re in the business of being embarrassed, and we need to be comfortable enough to say out loud what might be possible.”[22]