HBR On Strategy: Episode Summary – "To Make Better Decisions, Think Like a Venture Capitalist"

Release Date: April 2, 2025
Host/Author: Harvard Business Review
Guest: Professor Ilya Strebulaev, Stanford Graduate Business School

Introduction

In the April 2, 2025 episode of HBR On Strategy, Harvard Business Review delves into the transformative concept of adopting a venture capitalist (VC) mindset to enhance decision-making within organizations. The conversation centers around insights shared by Stanford Graduate Business School Professor Ilya Strebulaev during his discussion with Kurt Nickish on the HBR IdeaCast in 2024. This episode explores how businesses can leverage principles from venture capital to foster innovation, embrace risk, and ultimately drive strategic growth.

Embracing Failure: The Core of the VC Mindset

A fundamental tenet of the venture capitalist approach is the willingness to fail. Professor Strebulaev compares this mindset to baseball, where "home runs matter and strikeouts don't" (02:19). VCs understand that in early-stage investments, the majority may fail, but the few successful "home runs" can significantly outweigh the losses. This perspective encourages businesses to take calculated risks, focusing on high-impact opportunities rather than avoiding failure.

Notable Quote:
"Willingness to fail is one of the many principles that we identified that constitute the venture mindset." – Ilya Strebulaev [02:19]

Portfolio Allocation vs. Individual Bets

Unlike traditional business strategies that may focus on individual projects, the VC mindset emphasizes portfolio allocation. This approach involves making a series of small, high-risk investments with the expectation that a few will yield substantial returns. Professor Strebulaev highlights that "the most important decision is not about a specific startup, but the most important decision about the portfolio allocation" (04:02). By managing a diversified portfolio, companies can balance the potential for significant gains against the inherent risks of each investment.

Agree to Disagree: Moving Beyond Consensus

In many organizations, consensus-driven decision-making can stifle innovation and slow down progress. Professor Strebulaev advocates for an "agree to disagree" philosophy, particularly in environments fraught with uncertainty and innovation. This approach allows for diverse viewpoints and prevents dominant voices from overshadowing critical dissenting opinions.

Notable Quote:
"Once we face what I call unknown unknowns... consensus is dangerous." – Ilya Strebulaev 07:45

Decision-Making Mechanisms in VC Firms

To foster a culture where disagreement thrives, venture capital firms implement several practical mechanisms:

1. Devil's Advocate: Assigning individuals or teams to actively challenge proposals. For instance, firms like Andreessen Horowitz employ a red team to argue against a deal, ensuring comprehensive evaluation.

   Quote:
   "They have a blue team that argues for the deal and they have a red team tasked with arguing against a deal." – Ilya Strebulaev 08:41

2. Consensus Minus X Rule: Allowing investments to pass even if a subset of decision-makers disagrees. For example, a consensus minus two rule would approve a deal with seven out of nine partners in favor.

   Quote:
   "Consensus minus two means that the investment will be approved even if only seven people are in favor." – Ilya Strebulaev 10:39

3. Anti Portfolio: Reviewing projects that were declined to assess their outcomes. This practice helps firms refine their selection criteria and understand potential blind spots.

Team Structure and Meeting Practices

Efficient decision-making in VC firms often hinges on maintaining small, agile teams. Practices include:

• Two-Pizza Teams: Inspired by Amazon's policy, teams are kept small enough to be fed with two pizzas, typically around eight to ten members.

  Quote:
  "If you're still getting hungry after you consume two pizzas, then the team is too large." – Ilya Strebulaev 13:51

• Pre-Meeting Feedback: Soliciting input before discussions to minimize authority bias and ensure that all voices, including junior members, are heard without being overshadowed by senior leaders.

• Sequential Expert Input: Allowing subject matter experts to present their views last to prevent their status from unduly influencing the group's decisions.

Fast Decision-Making and Ambitious Timelines

Venture capitalists excel at making swift yet effective decisions. Professor Strebulaev emphasizes the importance of setting ambitious timelines and avoiding overanalysis:

• Fast Lane vs. Slow Lane: VCs categorize deals into different lanes based on their evaluation stage. In the fast lane (100 to 10), the focus is on quickly identifying deal-breakers by asking, "Why should we not proceed with this investment?" This approach helps efficiently filter out unsuitable opportunities.

  Quote:
  "They ask why we should not proceed with this investment... if you find a red flag or a critical flaw, you decide not to proceed with this deal." – Ilya Strebulaev 19:16

• In the slow lane (10 to 1), deeper due diligence is conducted by shifting the questioning to "Why should we invest?", allowing for a more thorough assessment of promising opportunities.

Quote:
"Venture capitalists came up with ways to make fast decisions very efficiently." – Ilya Strebulaev 19:16

Implementing the VC Mindset in Large Organizations

Adopting a venture capitalist approach within larger companies presents unique challenges but also significant opportunities:

• Cultural Shift: Encouraging a culture that rewards both financial and non-financial pursuit of high-impact projects. This includes incentivizing teams to aim for "home runs" and reallocating resources when projects fail, rather than resorting to layoffs.

  Quote:
  "If you change the culture of your organization so that people are incentivized both financially and non-financially to pursue home runs in projects... your team members are going to be relocated." – Ilya Strebulaev 23:16

• Resource Allocation: Leveraging the extensive resources of large organizations to support internal startups or intrapreneurial ventures, providing budget and personnel while maintaining sufficient control to ensure strategic alignment.

• Interconnected Principles: Recognizing that principles such as embracing failure, portfolio management, and decentralizing decision-making are interrelated and must be implemented cohesively to be effective.

Quote:
"Large organizations, and this might sound counterintuitive, but that is both my observations and outcome of my research, large organizations in fact could use the venture mindset more efficiently than venture capital firms." – Ilya Strebulaev 25:47

Conclusion

The episode underscores the profound impact that a venture capitalist mindset can have on organizational decision-making and strategic growth. By embracing failure, focusing on portfolio allocation, fostering a culture of constructive disagreement, and implementing efficient decision-making mechanisms, companies can unlock new avenues for innovation and competitiveness. Professor Ilya Strebulaev's insights provide a roadmap for large organizations to adopt these principles, demonstrating that with the right cultural and structural adjustments, the venture capitalist approach can drive substantial success even beyond the realm of traditional venture capital.

Key Takeaways:

• Embrace Failure: View failures as learning opportunities and focus on high-impact successes.
• Portfolio Management: Diversify investments to balance risk and reward.
• Foster Healthy Disagreement: Encourage dissenting opinions to enhance decision quality.
• Streamline Teams: Keep decision-making teams small and agile.
• Make Decisions Quickly: Set ambitious timelines to avoid paralysis by analysis.
• Cultural Adaptation: Align organizational culture and incentives with the venture mindset for sustainable innovation.

By integrating these strategies, businesses can cultivate a dynamic and resilient approach to strategy, akin to the success observed in leading venture capital firms.

This summary encapsulates the key discussions and insights from the "To Make Better Decisions, Think Like a Venture Capitalist" episode of HBR On Strategy, providing a comprehensive overview for those who seek to enhance their business strategy through proven venture principles.