Why Venture Investors Accept Most Bets Failing: Inside the Venture Mindset

The episode opens at Oracle Park in San Francisco, where Kevin Cool and his producer watched the Giants and the Cardinals with Lars Leckie, a venture capitalist at Aspenwood Ventures. Leckie said he finds the stories of professional players fascinating because each of them has reached the top of their field. He described a pitcher who, among many players with similar skills in his hometown and across his state, kept advancing from local leagues to the majors. Cool noted that the pitcher was having a bad moment, having just given up a home run, and that most swings in the game were misses, which he compared to the venture world.

Leckie put the economics of venture capital in simple terms: "You can only lose one times your money. But you can make five times, 10 times, 20 times, 100 times your money." He said investors therefore need to be willing to lose their principal many times over in the hope of backing an outsized winner, which in baseball terms means swinging for the fences and going for the big return.

Cool observed that venture investors place bets on many companies while knowing most will fail. Leckie agreed and said the investors call these bets at-bats. In his account, a fund needs enough at-bats to produce one or two outliers, and getting there takes time. Because of how venture capital works, he said investors need to make 20 or 25 investments in the hope that one works, and "most of these at-bats are gonna be strikeouts."

Leckie added that none of this matters until a fund actually scores a home run, and he said the process is painful but exciting. The ballpark scene continued as a Giants player hit a double and the Cardinals fan beside the producers was unhappy, and the Giants won the game on two solo home runs.

Leckie said that people would like a checklist for becoming a venture capitalist, but he argued that the world changes so quickly that investors must keep revising their models and their thinking. He said markets, people and opportunities are all changing, so venture capital is more a mindset than a checklist.

Cool then introduced the episode's focus: how VCs approach the world and how anyone in an organization can apply that thinking. He introduced Ilya Strebulaev, a professor of private equity and finance at Stanford Graduate School of Business, whose book The Venture Mindset draws on more than a decade of research into the principles VCs use to make decisions.

Strebulaev said the first principle, "home runs matter, strikeouts don't," is the foundational principle of the venture mindset. He explained that smart VCs understand failures are inevitable, and that they are not only inevitable but frequent and expected. For a typical portfolio of early-stage venture bets, he said, as many as 75% of the bets may fail.

He was careful not to say that venture capitalists love failure. In his account, nobody likes failure, but VCs take a different approach to it: the business model is built around accepting failure while taking very high risk for the chance of a large return.

Asked who the book is for, Strebulaev said the authors did not write it only for venture capitalists, even though VCs now assign it to their junior associates, analysts and newcomers. He added that it is not only for founders, although founders find it extremely helpful. The book was written for people far from Silicon Valley, thousands of miles away, and for people whose work has nothing to do with Silicon Valley, technology or startups.

He gave a reason for this broader audience: the world is changing very fast. He said the change was clear to him when he began thinking about the book in 2020 and that co-author and former student Alex Dang shared that view when they began writing in 2022 and 2023. He said that with changes in AI, robotics and other fields across every industry, the future is going to be very different and will require different kinds of decision-making.

Strebulaev said that because venture capitalists have faced what he called a hostile environment for decision-making for more than 50 years, they developed what he calls the venture mindset. He presented this mindset as a response to uncertainty, which he argued is especially relevant to a future that will require very different decision-making.

Cool introduced the discussion as a look at principles that underpin Strebulaev's research on the venture mindset, and said that the principles can be taken out of the venture capital context because they may be quite applicable across business. The book, The Venture Mindset, contains nine principles.

Strebulaev confessed that he does not know much about baseball, but said his publishing agent advised that the book would need a baseball analogy to become a bestseller. The authors therefore named one of the nine principles "Home runs matter, strikeouts don't."

Strebulaev said he studied baseball statistics while writing the book and found the same pattern for baseball players as for venture capitalists. Players with a very high home run rate, including the most successful players in history, also had a higher strikeout rate. Cool pointed out that Babe Ruth struck out thousands of times.

Strebulaev noted that successful VCs, who by construction have more home runs, also have higher failure rates and more strikeouts.

Cool raised the book's advice to go outside the four walls and look in unusual places for big ideas, citing Burning Man. Strebulaev said he does not suggest that everyone go to a hedonistic festival in the desert, and he gave a Finnish sauna festival as another example. In his view, the point is getting outside one's comfort zone rather than traveling to particular places.

He said he follows the principle himself. Although he flies often for business and pleasure, he used to travel like a professor and stay inside himself. Now, when he travels alone on business, his goal is to speak to at least five people.

Strebulaev said that a conversation of 5 to 25 minutes is often not interesting, or is interesting but not important. On rare occasions, however, something surprising comes up. He said smart VCs know how to use this part of the principle.

Cool suggested that AI as a tool would enable this process. Strebulaev agreed that AI is changing absolutely everything, but argued that human connections have never been more important. He said that analyzing a LinkedIn connection network now takes less than 10 seconds and produces a full analysis, a task that once required manual work or writing code. He added that taking action on that analysis is still up to the person.

For VCs, Strebulaev described AI as a double-edged sword. It is much easier to find companies, founders and ideas, analyze data and carry out due diligence, and it is easier to look outside the four walls. However, it also brings high competition: in the past only some people could do this successfully, but now many can, so standing out in a crowd has become more difficult.

Strebulaev said that in an age of AI, human connection matters more because the most valuable tool anyone has is their time. If someone devotes even 10 minutes of busy personal time to another person, he said, it is a costly signal, and that is important.

Cool noted that Strebulaev stresses saying no a great deal and asked whether it is a mindset, a matter of self-discipline, or a skill set. Strebulaev said he does believe in skill sets, which he said is obvious because he is a professor who teaches. He said one of the important skills he tries to teach is the power of saying no, which he said applies to investors and founders alike and is useful for everybody.

Strebulaev said that when people first see an opportunity, such as an investment or a hire, they typically ask why they should invest in the company or hire the person. VCs do not approach the question that way at first. They operate in what he calls the fast lane, or the red-flag approach, and ask the mirror question: why would I not invest in this opportunity, why would I not hire this person, or why would I not even spend another 10 minutes thinking about it?

When a red flag appears, they move on to the next opportunity. Strebulaev said this combines going outside the four walls, which yields hundreds or thousands of opportunities, with red-flag questions that efficiently reduce the number that move into the slow lane of full due diligence. He said AI has made the slow due diligence process faster.

Cool raised the point that venture capitalists' regrets are often not their mistakes but companies they did not invest in that went on to return 100x or 1,000x what the investment would have been. Strebulaev answered with a remark attributed to Bill Gurley, a partner at Benchmark. Gurley said that if you invest in a company that fails, you can lose only 1x your money, while if you miss investing in Google, you lose 10,000x your money.

Strebulaev said he thinks this is the approach of most VCs and that their sleepless nights concern investments they could have made but did not, rather than the companies that failed. This affects decision-making: when a VC sees a founder, the question is whether that founder can be the next Jensen Huang, or, following the red-flag approach, why that founder cannot be.

Strebulaev presented execution as critically important, saying there are many great ideas around the world but few people who can execute them really well. As a result, who executes the idea matters. He contrasted this with traditional business, where people think about the project, convince themselves it is great, and then ask who will do it. In the venture mindset, the team comes first, because a great project cannot be acted on without the right people.

Cool said that VCs may put more importance on who the founders are and what they are capable of than on the idea. Strebulaev said that is fair, but he added that VCs would not invest in a founder with nothing else simply because they are excited about the person. If a VC sees a team with a great product, a potentially large market or interesting technology but dislikes the team, most VCs would say to find someone else with a similar idea.

Cool gave his own hiring experience, saying he is sometimes moved by a person he wants to work with who is on the way up, full of ideas and energy.

Strebulaev said that wanting to work with people is different from wanting people who are easygoing, which he called a very different thing. He recounted a very famous VC, whom he did not identify, who told him during an argument about success factors that there is one type of founder he would never invest in: nice people. Nice people, the VC said, would have great difficulty firing or laying off staff and convincing customers they are the best.

Cool asked whether venture capital is always good for the world, given that venture-backed companies have exploded and been terrifically disruptive. Strebulaev said he does not think anything is always good for the world, because there is always a flip side, so the answer is no. He argued that this is not how venture capital should be judged, because the world is highly competitive among people, companies, universities and countries. If we do not proceed with venture capital, he said, somebody else will.

He agreed that the venture capital industry gives rise to many companies that are disruptive by nature. For this reason, he said, the venture mindset is critical: many large companies, he believes, will be displaced soon unless their leaders realize they need to change how they think.