Dimension I: The “Way of Thinking”
People’s perception of the “way one thinks” as related to analytical capabilities is driven by making observations about two questions: “How logical is the thought process?” and “What is the quality of reasoning behind the thought process?” People arrive at answers through inferences. They observe three key elements to help them separate the logical from the illogical and/or compelling reasoning from less compelling reasoning.
1.“Deep” versus “Shallow”—Deep thinkers build conclusions from the bottom up or conversely start at the top and drill down all the way to the bottom. Deep thinkers can take individual factors and see how they may be logically linked and combined to yield conclusions, and demonstrate how various conclusions can be combined to yield broader conclusions, and so on, until final conclusions are reached.
Shallow thinkers are top-of-the-wave thinkers, in that they have a solution to offer that is based on shallow, incomplete logic and poor reasoning.
2.“Thorough” versus “Scattered”—Thorough thinkers give considerable thought to many factors that are relevant to the challenge at hand, and they will also reflect on the less relevant factors that may have a bearing on the analyses. They are able to differentiate the importance of the various factors, apply proper priorities to them, and draw the right conclusions. Their logic properly supports the conclusions and recommendations.
Scattered thinkers rarely think of all the factors and draw conclusions based on partial logic and analyses. Often, they combine multiple separate observations to arrive at a single conclusion, but the observations used are only loosely coupled and not truly logical, nor directly supportive of the conclusion.
3.“Broad perspectives” versus “Narrow perspectives”—Broader thinkers can see and understand how one issue may affect other, seemingly unrelated issues. Narrow thinkers only see the one issue under consideration and draw conclusions based only on how that specific issue is impacted, without concern to how it might affect other issues.
Needless to say, perspectives that are deeper, more thoroughly logical, and broader are the most appreciated and will earn the highest score for analytical thinking. As I said, the way of thinking is an innate capability, but there are two quick ways to help improve it. One is a disciplined approach to asking yourself a number of questions before you reach final conclusions. The other involves what I will refer to as a “trick.” It uses a combination of two factors: first, a unique perspective/understanding that will truly sharpen your analytical ability, and second, more of an articulation “trick,” which will ensure that you receive the maximum credit for your analytical thinking. Following is a discussion of each.
The Disciplined Approach to Increasing Analytical Thinking
This approach utilizes a number of questions that will force you to proactively think in a way that yields better analytical results. Every time you articulate logic or draw conclusions, ask yourself:
1.Have I considered all the factors, relevant as well as less relevant, that affect the issue?
2.Is my statement supported by a bottom-up or top-down comprehensive logic? Are there any gaps in my logic? What are the counterarguments that might prove my logic wrong or weak?
3.Are there other seemingly unrelated areas that could be impacted? If so, how would that change my conclusions and recommendations?
Keep in mind that to do service to these questions, you will need to devote time to reflect on your logic and analyses, with a single focus of trying to find gaps and exceptions, and locating where your original analyses may not be complete or compelling. The good news is that when you ask these questions and take time to concentrate on them, the better your analyses will be. The best news is that with time you’ll get better and better at it, and in the end it will happen automatically on your first iteration.
The “Trick” to Receiving Credit for Superior Analytical Thinking
I refer to it as a trick, but as you will see, it is not a real trick, per se. It is based on sound and insightful logic that works wonders on how people infer and draw conclusions regarding your analytical way of thinking. The “trick” emanates from a common mistake or logical flaw that people make, no matter how smart or analytical they are. By recognizing this flaw and pointing it out when appropriate, you will most likely stand out and be perceived as an insightful and analytical thinker, not just in an interview but in the workplace as well. The concept is a bit difficult to explain, but once you get the principle, it is relatively easy to put into practice.
The concept is based on the same principle as finding fallacy in common wisdom, but here it is somewhat different, and I call it a “mini common wisdom.” It is not quite a common wisdom in magnitude and outcome, but it is also based on a logical fallacy that most don’t pay attention to because it may appear to be flawless logic and/or has been passed on from one person to the next, and so people accept it as something true. I’ll start with a conceptual graphical example of a logical decision-tree, and then follow with an actual example.
Fact (A) leads to three different scenarios: (A1), (A2), and (A3). Each of these scenarios leads to two different scenarios: (A1) to (X1), (X2); (A2) to (Y1), (Y2); and (A3) to (Z1), (Z2). (X1) and (Y1) lead to scenario (B), and the rest lead to other scenarios. The numbers on the branches of the decision-tree represent the probabilities of those branches to occurring.
Now, the probability that (A) will lead to (B) goes through two paths. (A) to (A1) to (X1) to (B), or (A) to (A2) to (Y1) to (B). Add up all the probabilities, and the probability of starting with (A) and ending up with (B) is over 90 percent, while the other scenarios have low probabilities as outcomes. Thus, in business, for the purpose of analyses, one will assume that (A) will lead to (B) and the conclusion would be perfectly acceptable, since this would be the preferred alternative. Obviously, as the decision-tree shows, there could be exceptions, but they are not very likely. Nevertheless, exceptions are possible, and thus there is a small logical flaw in assuming that (A) will lead to (B). This logical flaw is significant in two ways.
First, if you describe in the course of a conversation the real logical decision-tree, and show the different logical branches, concluding that the most logical outcome is that (A) will lead to (B), even if the final conclusion remains the same, which is that (A) leads to (B), you will impress everybody as to how logically deep and thorough you are. However, I can tell you unequivocally that in most situations there are exceptions. Just look for them and you’ll find them. Should an exception you discover become key to solving a complex problem, you’ll be looked upon as something of a hero.
The second point could actually be much more important. It deals with the “influencing” dimension. Each of the two branches represents different “rhymes and reasons” or different situations and different people and motivations. So, although they both lead to (B), the reasons, conditions, people, and motivations may be completely different. If you want to influence, you will need to influence each of the branches. Present such a logical decision-tree, show the different “branches” and the need to address them separately, and you will stand out from everybody else.
To summarize: The “trick” is simply looking for the different paths (reasons) to an outcome and seeking commonalities and exceptions to the highest probability logic. Pointing out those exceptions and resolving them in whichever way may be appropriate will earn much credit for you. You will score the highest if, at the same time, you will show a better path to influence the outcome by following different logical branches. Below are three examples of what I mean. The first is something I have already used earlier in the book. It is a simple, conceptual example that is easy to understand and clearly demonstrates how breaking a mini common wisdom into its components could lead to better, more insightful solutions. The other two provide real-life examples demonstrating that the “trick” is not limited to simple applications only, but rather has a much broader relevance in practically all situational analyses, whether in business or life.
A Simple Conceptual Example
In chapter eleven I discussed the topic of seeking advice. I guided you to seek advice from the “best” experts, but warned you to expect that the advice you are likely to receive could vary substantially. The simple initial solution was obvious: weigh the advice you get very carefully, and always own the final judgement.
Had I stopped there I would have imparted to you a mini common wisdom, which you would have likely accepted as solid, valued advice, but perhaps not seen as insightful, per se, and for sure not a detailed enough solution for how to deal with it.
I didn’t just stop there, however. I used my “trick,” as I have done many times in this book, and pointed out that there were four different component reasons for why significant variances in advice occur, and as a result, I was able to explain a key insight that led to more specific and powerful recommendations on how to deal with the variance. Just to refresh your memory, the four reasons for the variance included differences in articulation, discernment and perspectives, superficial and analytical thinking, and top-of-the-wave advice givers.
As soon as I broke it down into the various paths (reasons), an insightful observation emerged. As I wrote in chapter eleven: The difference in the advice comes from how their brain works, and how they communicate it to the advice seeker. It does not at all reflect on how much knowledge they actually possess. It may appear like a nuanced observation, but it is not. It is the key to how to deal with it. It basically says that whereas most experts may not be able to originate and articulate “quality” thoughts themselves, they remain capable of grasping the implications and agreeing or disagreeing with someone else’s observations. Therefore, there are two ways to deal with this nuance effectively and maximize for yourself the value of the advice you finally accept:
1.Always ask the reasons for their observations and rationale. The more you know the reasoning behind what they say, the more likely you are to put yourself in a position to intelligently accept or reject it. Don’t forget to ask all the probing follow-up questions to make sure you truly understand their thinking and reasoning.
2.Confirm, and reconfirm, what you hear with other experts. Consult other experts to see how they react to what you have already been told. This will give you a great way to gauge the validity of what previous experts have told you. You will also hear different rationales and perspectives about the same observations, and thus be better able to decide, at the end of the process, which are the more correct and complete observations and recommendations for your situation.
I hope you agree that the outcome I achieved by applying the “trick” yielded a much more insightful and powerful one.
The REAL MILK Example
While at Booz Allen I worked on an interesting case. The client was the Dairy Industry Association. It was the association that represented the milk-producing farmers in the United States as well as the companies involved in the dairy industry’s supply chain, including manufacturers, distributors, and marketers of milk and dairy products. The study took place in the early 1980s. At the time, the U.S. government paid huge subsidies to the milk farmers by buying the milk they produced but could not sell. The price the government paid was based on the fat content per gallon of milk. The greater the percentage of fat, the higher the price paid. No surprise that all farmers were breeding and feeding cows to yield the highest-fat-content milk.
For about five years prior to my working on this case, the consumption of milk in the U.S. had declined precipitously. There were three main reasons. The first was the growing popularity, particularly among children, of soft drinks, which were offered in many flavors. The second was a huge trend in weight-loss programs and diets that advised avoiding high-calorie and high fat-content drinks. The third was the introduction of a product called a cheese substitute, which was much less expensive than the real thing and tasted like real cheese.
Although it was called a cheese substitute, it was still dairy based, but contained much less fat than natural cheese made from whole milk. Cheese and butter are made by extracting the fat content from milk. It takes a lot of milk to produce cheese and butter. The largest usage for cheese, in those days, was for making pizzas. The by-product from the milk, once the fat was extracted to make cheese and butter, was casein—milk without the fat content. Casein was dried and used to make powdered milk. Casein retained the protein, minerals, and vitamins originally in the milk. But there was little market for casein, and most of it was donated to countries in need.
Then a company “invented” a new type of cheese. They purchased casein at a very inexpensive price and added a small amount of real milk fat and some other ingredients to give the product the texture and look of real cheese. They introduced it to the market as “cheese with less fat and calories.” The texture was almost the same as real cheese, and the taste was very good. After a few years, frozen pizza manufacturers substituted the much cheaper alternative cheese for the real cheese. The consumers didn’t know the difference and perhaps would not have really cared. Not unexpectedly, many other food products that used milk as an ingredient began to use casein to reduce costs and calories in the product.
As a consequence, government subsidies increased at an alarming rate, making politicians very uncomfortable. They wanted to revisit the whole concept of subsidies. The Dairy Association was looking desperately at ways to increase consumer demand for milk in an attempt to avoid an increase in subsidies. Booz Allen was hired to look at the situation and make recommendations as to how to increase consumer demand for milk products.
By the time we entered the project, the association had devised a massive marketing campaign to alert the public to the fact that cheese-substitute products were not using real cheese, butter, and milk. This campaign would cost hundreds of millions of dollars over a five-year period. The association was betting on the fact that the consumer would no longer purchase cheese substitutes and other non-milk-based products once they knew the truth. The association would also print a seal on all milk-based products that would have the words “REAL MILK.”
The association took a survey of its members to test whether the concept made sense, and whether the members would be willing to pay for the expensive advertising campaign. The results were astounding: 95 percent of their members thought the campaign was a great idea and were willing to pay money to implement such a program. It made a lot of sense to everyone, including the Booz Allen team, since in those days there was a general aversion to things that were not “real” and “natural.” So, a mini common wisdom had just emerged into the light of day.
Coincidently, scientists discovered that the depletion of calcium during pregnancy and a subsequent lack of calcium in women’s diets was a significant factor in osteoporosis, a condition that led to the loss of bone density, causing problematic brittle bones for older women in particular. Unfortunately, there are very few foods that contain calcium. Milk was an exception; it is a rich dietary source of calcium. The association’s members believed that for this reason alone all women would now begin to drink milk to mitigate their calcium deficiency and help avoid longer-term osteoporosis issues. Everybody was convinced that this finding would contribute to reversing the trend and saving the industry. The Booz Allen team believed it, too.
So, as you can see, there were two (As) leading to a (B) solution for the industry. The first, the REAL MILK seal, had the expectation of alerting consumers to the “fake” alternative, and thereby they would purchase the “real” milk products. The second suggested that women would drink milk to avoid osteoporosis. The recommended daily consumption of milk to get the appropriate amount of calcium would be two glasses per day. Two glasses a day by women, by itself, would be enough to reverse the trend of milk consumption. Case closed! There was not a single person who didn’t accept the above (A) led to (B).
I was the outlier. I had become aware of a new trend that no one else was yet aware of, which could logically counter the perceived (A) leads to (B). Additionally, by happenstance, I “discovered” another scenario in which (A) didn’t necessarily lead to (B).
My father-in-law at the time suffered from a severe case of diabetes. He was taking insulin every day, which, over time, had a side effect of damaging his liver. He reached a point where his damaged liver became life threatening. My mother-in-law started to search for alternative ways to control his diabetic condition without resorting to insulin injections. This led her to seeking natural health alternatives. They became aware of claims that diabetes could be treated without insulin, strictly through “healthy” diet and food supplements.
For the next five years, my father-in-law never had to use insulin again, and his sugar level was in perfect balance. His diet was unpalatable, and I won’t wish it on anybody—few would have the willpower to stick with it. But he did, and it worked.
Through that experience, I became aware of the emergence of a new industry—the health food industry—and the availability of extremely concentrated minerals and other food supplements in the form of powders and pills.
Hence, I saw the first possible exception to (A) leads to (B). If concentrated calcium were available in a pill form, with no calories, people would prefer to take it as a pill over consuming two glasses of milk a day. Under such a scenario, most likely (A) would not lead to (B), as everybody believed. I had found my first mini common wisdom fallacy.
My team did not accept my findings at first. Extracting minerals and converting foods into concentrated pills or powders was a foreign concept and somewhat defied logic at the time. I had to fight hard not to have the idea dismissed. I put a lot of time and effort into gathering enough information to present a compelling case to my team. The team eventually accepted the findings, which changed our entire thinking about what to recommend to our client. To this day I consider my contribution on this project to be one of the highlights of my consulting career.
The second case of (A) not leading to (B) happened luckily through one of the interviews I conducted as part of the project. As consultants, we interview a cross section of many different experts to gain knowledge and insights about a particular company, the industry, and its competitors. In a typical study, we may have in-person interviews with as many as twenty to fifty people, complemented by many more phone interviews.
In one of those interviews I met with a vice president of marketing for the largest manufacturer, distributor, and marketer of dairy products. This was a huge conglomerate with a well-known brand name. I was exploring with him the best way to launch the REAL MILK seal and advertising program. I must have spent almost three hours with him. During those three hours, I noticed that I kept using the words “dairy products,” yet he kept using the word “milk.” He never once used the word “dairy.”
I told him what I noticed and asked him whether the fact that he consistently used the word “milk” instead of “dairy products” had any significance. He looked puzzled and said, “What do you mean? Use the REAL MILK seal for dairy products? There is no way we’ll do it. We are only willing to do it for pure milk and nothing else!” Now it was my turn to be puzzled. His response made no sense to me, and without the endorsement of the largest player in the industry, there was no way the program could be successfully launched.
He continued by providing an explanation, which did make logical sense. He said, “We have spent hundreds of millions of dollars over many years on marketing and advertising campaigns to convince the consumer that our brand-name cheeses, butter, and dairy products are better than our competitors’ products, so that consumers will buy our products. If we, and our competitors, put the same REAL MILK seal on all our products, it will commoditize our products. It will give the consumer the impression that our products and our competitors’ products are exactly the same. Milk is the only product that everybody knows to be the same. So, putting the seal on milk would be fine with us; it is already viewed as a commodity item. Putting it on all other dairy products is a nonstarter for us.”
He then proceeded to tell me that all the “smaller” players in the industry—hundreds of them—would love nothing more than to commoditize all dairy products, thereby erasing the competitive advantage his company enjoyed.
I suddenly understood why the association’s members showed 95 percent support in the surveys for this proposition. No one seemed to pay much attention to the 5 percent that didn’t approve—apparently too few to worry about, even though they represented the largest players in the industry. I now saw that this program was going to be dead on arrival! Again, a small exception to (A) leads to (B), but a fatal one here!
I immediately interviewed the other large competitors, and sure enough they all confirmed the same point. I gathered the team and shared my findings. This time it was easy to convince them, and I became a “hero” again. Unfortunately, we now had no immediate solutions as to how to reverse the decline in milk consumption. We knew we had to come up with some new strategies.
As it turned out, I was also instrumental in conceiving and shaping the final recommendations because, again by happenstance, I also benefited from one additional coincidence. In the previous year, I was involved with a study that required quite a bit of travel to Europe. What I had happened to notice, particularly in France and Germany, triggered what I realized could be a solution for the dairy industry.
At the time, in the U.S., there was minimal selection of milk and cheeses, while in Europe the variety of cheeses was remarkable. So we recommended that the government no longer link subsidies to the fat content of milk. We then recommended that producers should be encouraged to bring to market new varieties of dairy products, starting with nonfat milk; 1 percent, 2 percent, and 3 percent milk and cheeses; and other dairy products in a multitude of varieties. We recommended that the Dairy Association be funded to manage a new R&D effort to help develop new varieties for dairy products. Booz Allen made a presentation to the U.S. Congress, which accepted all our recommendations and applied pressure on the association and the farmers to adopt the recommendations so that the government wouldn’t have to purchase so much unsold milk. The rest, as they say, is history. In retrospect, we were right on with our observations, conclusions, and recommendations.
The “Incompetent Management” Example
Shortly after I started JK&B Capital in 1996, I saw a great opportunity to raise a new substantial fund. The venture capital industry had begun to grow exponentially, and new sources of institutional capital became available to venture capital funds. The institutional investors had little experience in evaluating fund managers because it was an emerging industry. The tendency for investors was to invest in funds that had a proven track record, and it was difficult to convince them to invest in new funds that didn’t. I represented one of those new funds.
All funds, and in particular new funds, were competing for those institutional investors. Institutional investors primarily looked for three differentiating criteria in making their investment decisions: (i) previous track record; (ii) past experience of the fund’s manager, which would imply that they possessed the kind of skills necessary to do well in this emerging industry; and (iii) the specific investment strategy that the fund would pursue.
To invest in a fund, the institutional investor would have to conclude that the experience of the fund manager and the investment strategy of the new fund would indeed yield superior returns. Since the hi-tech industry was just emerging, investors had to use their subjective judgment in ascertaining what was really critical for a hi-tech start-up to succeed in the marketplace against the few but dominant corporations. As a result, they would also have difficulties ascertaining whether fund managers indeed possessed the necessary skills to help lead the hi-tech start-ups to success. The challenge for the new fund managers was similar to the challenges that candidates face in a job interview. They are competing against many other potential candidates and need to differentiate themselves in a superior way. Also, any negative proxy was enough to result in rejection.
I devised what I believed was a unique and compelling strategy to attract investors. I knew that conceptually it would be very impressive, convincing and uniquely so, enough to significantly differentiate my fund from all other funds. I was certain that the industry was about to undergo major, radical changes, with significant implications for which funds and investment strategies would likely yield superior returns. I needed to explain it to investors in a persuasive way.
The challenge was that what I had to say would sound completely different from the common wisdom at the time. Also, investors had neither the context nor the expertise to confidently conclude whether I was right. I decided that I needed some way to make them believe that I was more insightful and knowledgeable about the industry than all other fund managers. In other words, I needed some way to influence their perception of me and get them to accept, up front, that my opinions, even if radically different, were credible. If I was able to do so, then the investors would be much more likely to accept my view about the future of hi-tech and what it would take to be successful as a fund manager.
I became preoccupied with this dilemma. After five days something suddenly clicked. I found a mini common wisdom that had a major fallacy, a situation where everybody believes that (A) leads to (B), but I could disprove it conceptually.
If one would have asked anybody in the venture industry to enumerate the three most important things in a hi-tech start-up’s success, one would have consistently heard the same answer: management, management, management. The quality of the management team was critical to the success of the start-up. Having a poor management team invariably resulted in failure. As a result, all fund managers seeking to raise a new fund needed to convince investors that they had the strongest experience in evaluating managers and/or had a great network of contacts that would result in the identification and hiring of the best management talent for their portfolio companies.
I found a fallacy in this common wisdom, which I could use to help influence their mindset about my understanding and insightfulness of the industry. Most VCs in the early stages of our industry came from financial, banking, and insurance companies. These companies had capital, which they were routinely investing in a wide range of industries. As such, they were the first to invest in start-ups, thereby creating a new category of investments: venture capital. The early VCs came from within their ranks. They knew how the process worked and whom to contact to receive the funds for investments. Bankers were perceived to have the knowledge of how to evaluate investment risk because, presumably, they did it for a living when approving loans (even though evaluating risk associated with debt is completely different from risk associated with business success of technology start-ups—but few understood it at the time). Thus, financial investors within the insurance investment departments and bankers were the first to take advantage of this new and emerging VC industry.
Another important, well-known fact was the failure rate of hi-tech start-ups. The majority would either completely fail, or fail to reach a success level that enables exit with attractive returns on investments. The industry more than made up for this ratio because the few that succeeded provided more than enough profits to cover the high ratio of failures. I used both facts to help influence their mindset about my credibility.
At the beginning of the presentation, I made an “innocent” comment to the effect that the industry was new and that most VCs, even those with some experience, didn’t really understand it all that well. Thus, as a result, they were prone to making major mistakes. My comment naturally caught the attention of the investors, followed by a request to elaborate.
I then said, “Well, a good example is the pervasive belief that the most important thing for success in the VC industry is ‘management, management, management.’ It couldn’t be further from the truth.”
I let that sink in for a couple of seconds and could see the puzzled expressions on their faces. I continued, “Well, if I am not right [I specifically didn’t use the phrase “if I am wrong”], then how could you explain the high ratio of failures, when every fund manager claims that they are able to evaluate and hire superior managers? Either they don’t know how to hire well, because they fail with over 50 percent of their companies, or the ‘management, management, management’ mantra is not the true differentiator.”
I could see the logic sink in and their facial expressions become less quizzical and more curious. I continued, “Obviously, fund managers have the experience to know what to look for in management teams and hire well. So one cannot help but draw the conclusion that the management team is not the most important reason for success or failure. Let me be clear: I’m not disagreeing with the statement that bad management will yield failures. I am also not disagreeing with the statement that good management is needed to succeed. I am, however, saying that good management is not the most important thing in determining success or failure. There are other reasons that are more critical than management, without which even the best management team will fail. Understanding those factors is much more relevant and more important to achieving superior returns. This is the only rationale that explains the paradox I pointed out earlier.”
The investors had warmed up and were ready for my knockout blow. “It is easy to fall into the trap and the misconception that the most important aspect is ‘management, management, management.’ Assume for a second that there are other reasons for a hi-tech start-up to fail, completely independent of the quality of the management team. I claim that in most cases it is the architecture of the technology of the start-up that is the most important element for success or failure.” (You may safely surmise that one of my proposed fund’s differentiated strategies centered around it being the most “technical” fund in the industry.)
“Let’s say for the sake of argument that a start-up developed a great technology and has the best management team. Let’s say that six months later a new start-up introduces a competitive product, with a great feature that the market liked. Clearly, our company now must change its technology to add this feature. Most VCs in the industry do not understand technology, because they all came from financial backgrounds and not technical backgrounds.
“One important thing to understand about technology development is that there is an underlying architecture, a kind of a blueprint of the technology. This blueprint represents many trade-offs that affect the features and cost of the technology. This architecture becomes the most important part of the ability to make changes in the future. If it is designed in a way that does not allow flexibility for potential future changes, then changes would be costly to accommodate. If the architecture didn’t take into consideration the capability to adapt, and didn’t appropriately plan for future requirements, then it could never incorporate those changes. If the architecture anticipated some future changes, but those changes didn’t occur while other changes did, the architecture would not be able to accommodate them. In other words, predicting what the technology trends will be and having the capability to incorporate them in a sound, flexible architecture that would permit quick and easy changes in the future is critical for any new technology and start-up company.
“So, back to our example. A new feature due to a change in the technology needed to be added, but the architecture wasn’t designed with this in mind. It is very easy to underestimate the efforts in accommodating changes, particularly when the architecture didn’t anticipate them. So, management teams always believe that they can make the changes quickly. They then lean on the R&D engineers to make it happen quickly. But it is very difficult. The VCs make demands, the management teams say that it is ‘right around the corner,’ and again it doesn’t happen and the cycle repeats. Because it is unable to make those adjustments in time, the company’s technology becomes uncompetitive and the company begins to fail.
“From the perspective of a VC, all they see is that management kept promising change but never delivered, which is clearly the sign of incompetent management; thus the VCs conclude that management incompetence leads to the failures. Since the VCs don’t understand technology, they never suspect, nor understand, that failure is a product of inflexible architecture and not the wrong management team.”
I had everybody’s full attention when I then proceeded with my formal presentation. Needless to say, the central theme of my differentiation was that we would assemble a team with senior technical expertise and would become an exceptionally strong technology-oriented fund. In fact, a prominent statement in my presentation describing my newly proposed fund was: “We understand technology better than the chief technology officers of our portfolio companies.” I also plowed new ground with that vision. Until then, the common wisdom was that the most important value-added skills that VCs brought to the scientist inventor/founder were financial, M&A, fundraising, marketing, and deal negotiation skills—in short, MBA-type skills. I proposed to bring in technology people with no MBA skills whatsoever. The more established funds had technical experts on their advisory board who were relied upon for quick advice during the due diligence process to help with the judgment of whether there was a need for the proposed technology. What I proposed to do was to take what other funds had on their advisory board and bring them as full-time and fully functioning partners of the fund itself. My logic was that if indeed the understanding of the technology and how it needs to change over time becomes more important, then my fund will be able to provide such value-added skills to the start-up companies on a constant and ongoing basis. Additionally, I argued that all other funds had a weakness with their board members, since none understood the technology side of the business, so how could they provide effective board oversight on anything that dealt with technology issues? I also argued that because we would be able to provide unique value in that respect, we would be invited to join many more potential deals to complement what other funds lacked, and therefore would be in a better position to select the better deals to invest in. Nobody at the time believed that non-MBAs, or anyone without a deep understanding of finance, could be successful in the VC industry. Every time I was asked, my answer was: “I can teach a good engineer everything about finance in two, three years, but I can never teach a good financial guy everything about engineering!” I also had two “traditional” (MBA-skilled) partners with financial/transactional backgrounds (one was myself) and made sure that we worked as a team on all investments so that all the necessary skills were brought together at the same time on all our deals. Investors seemed to have accepted my logic. I successfully raised over $500 million from some of the top names of institutional investors. All I predicted in my presentation indeed did come to pass. The industry changed completely over the following decade, as I foresaw, and we were well positioned to take full advantage of it.