Venture Capital Isn't a Gamble—It's a Mindset

For 20 years, Professor Ilya Strebulaev has watched Stanford students chase the wrong metrics. They obsess over batting averages when they should be swinging for home runs.

Strebulaev isn't just another business school professor—he's spent two decades studying the venture capital industry that created Apple, Microsoft, and Nvidia. As a Professor of Venture Capital at Stanford Graduate School of Business, he's discovered that the world's most successful VCs share a counterintuitive decision-making framework that defies traditional business wisdom.

In this interview, Strebulaev reveals the "venture mindset"—four principles that transformed Silicon Valley's biggest winners from lottery players into calculated risk-takers, and why embracing failure might be the most strategic move you'll ever make.

Ilya Strebulaev: If you look at top companies today in the United States by market capitalization, the top 6 or 7 or 8 out of 10 were venture backed. So those are the names that everybody knows Apple, Microsoft, Nvidia, the venture capital industries behind most of the most successful companies that changed our life in the past 50 years.

So the venture capital industry invests in small young companies. That are high growth companies. Think about Uber or Airbnb or Nvidia. When venture capitalists invested for the first time in those companies, nobody heard about them, and those companies were not worth a lot. And nowadays, look at those companies, they're worth billions of dollars.

So that's what venture capitalists do. They try to find the most interesting young companies to invest in. They select them, they invest in them, then they nurture them, they help them to succeed. And if those companies become successful, they reap the benefits.

Ilya Strebulaev: There are many famous VCs in Silicon Valley. If we go back in history, then those who have been around for many, many years would be Sequoia. There's been an amazing venture capital firm for 30 plus years. Then there is Venrock, a venture capital firm that is a storied one from the 1960s and still very active today. Then there are venture capital firms that have been around for 20 years. For emergency capital that specializes in B2B or Andreessen Horowitz, also known as A16Z, that is investing in a lot of stuff and of course this day is leading, I think, in the field of AI.

The most important reason that successful venture capital firms last a long time is because they make these great investments that turn into home runs again and again and again. Effectively is we invest $1 you get $100 or more in return, 100x as we say.

Ilya Strebulaev: You know this is really important because many people who don't know much about venture capital but kind of know about startups, they think, well, venture capital is a gamble. You gamble on some kind of very uncertain startups, and some of them turn out to be great. Well, it is not a gamble, and how do we know?

Now you can play a lottery, and if you go out and buy a lottery ticket and win a jackpot, I'll say you're lucky. But if next week you go out and buy another lottery ticket and again win a jackpot, I'll say that's a great skill. Now in the world of finance, we call it persistence, and it's very difficult to find persistence in the world of finance, but there is one corner of the investment universe where persistence has been around for 50 years, and that's venture capital.

So those firms that are very successful, they tend to deliver outsized returns again and again, and that is really the reason why they're around.

Ilya Strebulaev: When I studied venture capitalist at Stanford for many, many years, what I discovered is that they all share specific principles of how they make decisions, and I found it so important that I had a special name for it. I call it the venture mindset. The venture mindset is a different mental model of how to make decisions in a supercharged, fast pacing, innovation driven world.

So let me start by describing one of them. Principle number one is home runs matter. Strikeouts don't. Venture capitalists don't really care how often they fail, how much money they're going to lose if they fail. They care about what happens if they succeed. They care about how much money they will make if they succeed. And by the way, my research shows that on average you have a home run, only 1 out of 20 times.

There are a lot of failures, but that 1 out of 20 can make your career, can make you huge returns that cover all the losses, and the philosophy of the venture mindset principles is that it is home runs that you have to think about.

Ilya Strebulaev: And this is really interesting because in the United States there is a museum called the Museum of Failure, and you'll see a lot of inventions there, many of them backed by venture capitalists that failed. For example, a startup called Juicero that allowed you to squeeze fresh juice right away. OK, cool stuff, and venture capitalists in fact backed Juicero and Juicero failed.

What would have happened in a, let's say a traditional company had a manager invested in Juicero project and Juicero project failed, and likely you would have lost $10 $15 million. Well, I guess that manager would be punished, because it's not a good idea, but in fact, if you look at venture capital firms that backed it, they are one of the most successful firms in Silicon Valley.

What I found out, something that I think is very counterintuitive for most people, is that if you look at the most successful venture capital firms, they tend to have a higher rate of failures. They have more failures than average.

Ilya Strebulaev: Now what is the lesson for all of us? I think that in your life as you look back, it's all about home runs. It's all about what is the most successful thing that you've ever done, and to achieve those home runs, you have to experiment, and yes, you have to fail. I think failure is a good thing, as long as you achieve it fast, you achieve it cheaply, and you can try again.

Ilya Strebulaev: So the venture mindset principle number 2 is getting outside the four walls. In the venture capital world would be is that you can rarely meet venture capitalists in their shiny offices. They go out and meet founders in coffee shops, at fairs, etc.

The Sequoia, a well-known venture capital firm in Silicon Valley, they developed an algorithm that they called early bird. And the idea behind the early bird is kind of very simple, very simple really. They looked at the apps on the Apple store that increased dramatically in rankings. You know, they would look out for the founders of those apps. They would meet them and then they would decide whether they would like to invest in them or not.

Ilya Strebulaev: One day that early bird system started chirping particularly loudly. So they looked up and there was one app that they never heard before that was just killing the ratings. It was like number one everywhere. Nobody knew the founders, and nobody heard about the name of this app before. Now the app's name was WhatsApp.

The only thing that they knew when they went into the app store is the location of the company, and location of the company was Mountain View, which is a city of around 50,000 to 70,000 people in Silicon Valley. It's a large city. How would you go about it? Here's what Sequoia Partners did. They just decided to walk Mountain View. They decided to walk the streets of Mountain View, knocking on the doors and trying to find the founders of WhatsApp, and they took them several days and they did find it.

They did find the founders. They convinced the founders that they will be investing in WhatsApp and the rest is history. When very soon after that Facebook bought WhatsApp for billions and billions of dollars, and that of course became a very successful Sequoia investment. That is a principle of getting outside the four walls.

Ilya Strebulaev: Now the venture mind's principle number 3 is the prepared mind. The origin of this is science. A very famous French scientist of the 19th century, Louis Pasteur, said in the field of observation, chance favors only the prepared mind. What he really meant by that is that to discover something is not enough to be lucky. It's important to be lucky and see your luck.

Ilya Strebulaev: Let me give you an example. A student of mine was raising money from the VCs. What happened was that a quite well known venture capitalist sent him an email and we looked at your deck. We're actually quite interested. And here's the question. And my student was prepared. He responded within 2 minutes. 5 minutes later, oh interesting. Here's another question. And this continued. This ping pong continued throughout the night, and the student was ready with every single question and it was ready with deep answers. And the next day the fund decided to invest.

And you know it's interesting in Silicon Valley there is this myth that the venture capitalists are geniuses who meet an entrepreneur. The entrepreneur is going to write something on the napkin. The VCs fall in love with the founder, invest, and the rest is history. So the reality is very different. The reality is that venture capitalists are really prepared. They know right away the patterns that they seek, they know right away how to evaluate those entrepreneurs so they can make very, very fast decisions. Try to have the prepared mind. I think preparation is very, very important.

Ilya Strebulaev: The venture minded principle number 4 is say no 100 times. What I found out is that for each deal that venture capitalists make, they tend to say no to more than 100 opportunities. And in fact, the best VCs tend to say no more often. Indeed it's kind of their blood. They expanded their network. Now they need to be very effectively say no to many startups so that to invest in only one. They cannot invest in all of them.

And what is really important is how venture capitalists solve this issue, how they say no. This is what I found out. They're using two mechanisms. They're using the fast lane and the slow lane. To go from 100 to 10, they use the fast lane, and from 10 to 1 they use the slow lane. So the goal is for them to be able to narrow their deal funnel as quickly as possible initially, and that's where the fast lane comes about.

Ilya Strebulaev: Here is the one point to remember about the fast lane. You ask a different question. You ask a question, Why should I not invest in this deal? And once you ask a question, not in fact, the way you reach an answer is very different. So what I observed in novice investors, they right away go to the slow lane. And then they are unable to process a lot of information and their investments are not the best.

It's also important for our personal life whenever you are trying to make a decision and you anything, I think the very first question you should ask, do I have enough choices, especially if it's about, let's say, finding a job or joining a startup, making an investment, a personal investment. Do I have enough choices? Because sometimes I think you need to expand your choices to make a better decision.

Once you've expanded your choices, the question is how to make the decisions more effectively. Remember, always start with the fast lane. Always ask why should I not do it? And the way you reach a decision is going to be different than when you ask yourself, well, why should I do it? You say, why should I not do it? Why should I do it? Sounds similar, but actually very different. There's a lot of psychological research that shows that just adding this not changes the decision making process.

Ilya Strebulaev: Many VCs would carefully check every single email they are getting. We call it cold calls in English or cold emails. So what I tell my students and I tell founders from all over the world, if you don't know a venture capitalist, then you should not lose hope. You should construct a very smart blurb about your startup, and the probability that the venture capitalist will respond to it is pretty high. How do I know? Well, I've done research on it.

Several years ago, my former student and I created 50 fake startups. For each fake startup we created 4 fake founders. For each fake startup we created websites, profiles, blurbs, and then we sent 80,000 cold emails to actual investors. What we found out is that if you restructure your blurb in an appropriate way, the positive response rate by investors is very large. 1 out of 6 to 1 out of 12 investors contacted.

Ilya Strebulaev: There are many tips that will help you to write an amazing blurb if you are a founder. First of all, you need to remember a very important principle bet on the jockey, not just the horse. When I say bet on the jockey, it means that they really care about the founder, the founding team, and the very first question they will ask is why is it you, you, who would be the best fit for this product for this market for the service and so on.

And so when you think about a blurb, the tip should be it should be about you. Too often I see blurbs by founders where founders describe the business model, the market, the value proposition, etc. etc. They don't describe themselves or they don't answer the question, why is it you that would be the best to do it? So in every single blurb, make sure that you spend one paragraph about you or your team and why it is you who would be the best. Remember the word unfair advantage, which is what is your unfair advantage.

The second tip every single blurb should be very short. In this day, everybody has a short attention span. Venture capitalists are not an exception, so your email should be a maximum of 2 paragraphs, and the first paragraph should be about you. The second paragraph should be about what you do. And when you say what you do, it could become in the first paragraph as well. It should be what is the pain point that you identified? Why this pain point can change people's lives, why this pain point is important, what is the solution?

And final tip, like a famous poem, poets or famous authors, they will spend a lot of time thinking, crafting, editing, rewriting, so you have to spend time on crafting that blurb, practice, practice and practice. And my advice, especially for founders here, is when you create a blurb, first practice on your friends. Ask them to give you critical remarks, and only then send to actual investors because I just told you the response rate is actually very high if you succeed in writing a very interesting, attractive blurb, but also you have only one chance to open the door. If a venture capitalist gets this blurb and is not interested, that's kind of that.

Ilya Strebulaev: And final tip is the real question that a smart investor would be asking when they get a blurb from you. The question would be, why should I spend 30 more minutes learning about this founder or that startup, and that is the question you have to answer before you click that button and send your email to the venture capitalist.

Ilya Strebulaev: So obviously I'm investing, I'm investing in a lot of my former students, and yes, there are some home runs, and of course there are many strikeouts. There are different types of failure, and I like the terminology constructive failure, and constructive failure is the failure that you can use to learn. You can use to improve your decisions in the future.

I think it's really important to approach this from the psychological point of view. Strikeouts are strikeouts. So when a student emails me back, when a startup fund emails me back and saying, you know, unfortunately we have to close the shop because the startup is not very successful. I just wish you good luck and I tell the students, when you have your next startup, come back, and I think that attitude towards strikeouts is much more important than your attitude towards home runs and the best strategy about not successful, try to be not successful much more often.

And so my maybe important personal advice for everybody just step back and think about when was the last time you think you failed and what you could have learned from that. Become a failure champion.