During the “noughties” I had the good fortune of being a VC for around 3 years. This was a Seed and Round A fund that was managed for a Family Office who wanted to differentiate its core portfolio. It assigned some £30 million to be invested in its own private venture funds over a 4- 5 year period. The role itself was fascinating and interesting, as well, as it allowed me to fly to the West Coast 4-5 times a year as the family which was based in the UK and Europe specifically wanted to invest in West Coast startups.
One of the reasons that I was picked for this role was due to my initial training as a psychologist with a specialisation in organisational psychology. Part of the investment thesis was that the ability to understand the psychology of the Founders would give a distinct edge over picking the right companies to invest in.
As nearly every VC would agree, in order to invest, as well as having product market fit, solving a real problem that people are prepared to pay for, and having a large enough addressable market, the other, if not central criteria, is do you believe the CEO and Founders have what it takes to be successful.
As far as I am aware no one as of yet has completed empirically validated work on the definitive qualities that a successful CEO needs in order to be successful. It is true everyone will have their own ideas, and there will be a general consensus, however, there is as of yet no proven data on this issue.
The essential question is of course can psychological knowledge and training help pick and then perhaps help mentor CEO’s to function better? Or is it that 10, 20, 30 years of working in companies, hiring C – level staff, gives one an intuitive sense of what probably is or is not the main one criteria one needs for investing.
As a general rule a CEO that wants to grow a VC backed company will be extremely passionate about their vision of the company, will dedicate extremely long hours to making this vision a reality and will normally have excellent area specific information about their particular area of their product or service. They will normally be intelligent (although not on an Einstein like level) and will certainly have in many areas a high degree of emotional intelligence. However, what is considered to be the magic dust that transforms a CEO into a super successful CEO is hard to define if not impossible.
However, it is fair to say that the less cognitive bias they have, the better their ability to recruit and retain the best talent, and the more charismatic and capable they are at selling and fundraising, the more likely it is for them to succeed.
It is accepted that most job interviews are determined within the first minute. This is of course assuming that the candidates have already been screened for a basic level of skills and expertise. The reason for this is quite simple: we will be spending an inordinate amount of time with our work colleagues, often more than with our partners and family and we want people that we can get on with. This has been empirically validated that assuming the skill set is roughly the same and experience is roughly the same, people will always choose the interviewee that they feel that they will get along with best.
This is very similar when it comes to early stage investing i.e. Round A and before, where the amount of empirical data is by definition patchy or non existent and most of the time people are at least in part making intuitive decisions. This intuitive decision making will certainly be impacted by whatever cognitive bias we have.
Thus it is completely fair and logical to hypothesise that the smaller the amount of cognitive bias we have the better our decision making will be. As a tiny example, if we love American football we are much more likely to be interested in investing in a company that has developed some new sports tech for American football. If for some reason we just like people that speak very loudly and come across as quite bombastic (perhaps because one of our parents was like this) we would be less likely to pick this CEO. All human beings have significant amounts of cognitive bias and obviously one of the main ways of counteracting this is to have multiple people on the investment committee where we hope the different cognitive bias will cancel each other out. To a certain extent this is correct.
However, over a period of time all teams create their own cognitive bias in ways that are often as distorting as individuals e.g. one team member hates educational investment and thus other team members often either deliberately do not bring such deals to the table or fight even harder to bring such deals to the table. It thus seems that all VC’s will benefit to some degree to psychological insight and awareness about their own individual and group cognitive biases.
There is a second area where it seems incredibly useful to have had my background which is the ability to spot individuals with significant psychological disturbance. Although these are not anything but a small minority, with my experience at least 1 in 10 CEO’s have had some major psychological issue, whether or not that is suicidal idealisation, depression or a personality disorder. This seems to me a little bit of a no brainer to be able to spot these issues, however, there are very few VC’s with psychological training and many if not most VC’s would feel very uncomfortable by giving potential applicants a psychological evaluation.
Lastly it seems that being able to determine the psychosocial profile and the emotional skills that CEO and Founders have and thus create an appropriate mentoring and coaching programme for those individuals would be a really constructive and positive process.
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