Thinking Like a Venture Capitalist in Day-to-Day Life

An introduction to the benefits of risk-taking for people who grew up in risk-averse homes

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I grew up in a risk-averse middle-class home and only in my late 30s did I realize that this had given me a set of attitudes which were limiting my potential. Let me start with an example.

Consider buying books. When I was a child, we only ever bought a book after much research: Did it get glowing reviews? Did we know people who loved it? Was it reasonably priced? How many people in the family were likely to read it? The reason for this careful approach was that when we spent money, we considered it very important to keep in mind the return on investment. Every rupee spent had to be worth it.

Much later in life, I came across a different approach: I now regularly buy a book even if there’s just a 10% chance that I’ll read it. Imagine I buy 10 books. 7 of them I never even read. Of the 3 that I read, 2 turn out to be just OK, and I’ll soon forget most of what’s in them. But one out of the 10 will probably make such a deep impression on me that it will change my life. The cost of 10 books is nothing compared to that return on investment.

Here’s a different example, from the movie industry. As a child, I was fascinated by Bollywood movies, and my uncle owned a movie theater, which gave me an insight into the workings of the movie business. I was shocked to discover that eight out of ten Bollywood movies lose most of their money, another one just breaks even, and only one out of the ten is a hit. But this hit compensates for all the losses incurred by the others and that’s what keeps the industry afloat.

Later in life, I learnt that the same thought process is used by Venture Capitalists to think about the startups they invest in. They are fully prepared for the fact that out of every 10 startups they invest in, 8 will fail and take the entire investment with them. Another one will make only a small amount of profit. But the 10th will make so much money that it will make up for all the losses incurred on the others.

And I realized that for my book buying, I needed to think like a VC. One grand success can make up 10 losses. And slowly, I found a number of other areas of life where the same idea is applicable. The mindset that helps VCs and Bollywood producers can work for us too, even if we’re not big-shot investors.

Thinking like a VC for regular people

When posting on social media, earlier I used to think a lot before every post: Is this really a worthwhile post? Will people think I’m an idiot? And every time a post did not get enough likes, I would feel like a bit of a failure. However, now I approach it like a VC: most of my posts fail. But the rare one that succeeds makes up for all the others.

Consider making friends: It is easy to make friends when you’re in school and college and at work. But many people find it difficult to make friends in other contexts. Much of this has to do with fear of rejection. Why not suggest “let’s get together for coffee” to 10 different acquaintances (or 10 different small groups of people)? Some of them will say no. Others will accept but the conversation won’t be great and you’ll not really connect. But if one of them clicks, you have a new friend and that more than makes up for all the other “failures”. (This also applies to dating and relationships, but that part, I believe, is well-understood by most people.)

Consider looking for a job: I know a lot of people who don’t apply for certain jobs because they’re sure they’ll not get through the interview process. Ten failed job interviews are totally worth it if that results in you ultimately finding one job that is much better than your current job.

The fear of failure prevents us from being all that we can be.

Sometimes, it is not even fear of failure. Why not try 10 different hobbies until you hit upon one that you love so much that it becomes a passion for life? When my friend first suggested that we should go scuba diving, my first reaction was to say no. I’m still not sure why that was my first reaction: some combination of “that sounds way too difficult” and “people like us don’t really do that”. But I’m glad we said yes because scuba diving is one of the most rewarding activities I’ve ever done¹.

Don’t Apply This Principle Everywhere

You can’t apply this principle everywhere. Remember, for a VC to actually make money, the successful startup must return more than 10 times the original investment because it has to make up for the losses on the other 9 startups. This means that VCs cannot afford to invest in startups which give a nice 20% or even 50% return. They can only invest in hit-out-or-get-out startups: those that will return either 0% or 1000%—they’re not interested in anything in between. A business that gives 30% returns on investment is a great business—but it is not a VC-fundable startup. (This often comes as a surprise to many first-time startup founders—VCs ask them “How much money will you make if you succeed” and then the founders quote a number less than 1000% and don’t understand why the VCs rejected them.)

When I’m buying jeans, I don’t say “Let me buy 10 different ones and I’ll discard the 9 that don’t quite work out” because the tenth is not going to make up for those. No matter how good a pair of jeans is, it is not going to give you a 10x ROI.

Also, you don’t want to try this technique in cases where the cost of failure is high: you don’t want to end up in jail, or broke, or on the first page of a newspaper for bad reasons.

In other words, to think like a VC, the activity should have two characteristics: 1. The cost of failure should be low, and 2. the rewards of success should be outsized. Or to use NN Taleb’s language, only do this when the downside is low and the upside is unlimited or very high.

Understanding that Failure is Normal

For most things in life, the middle-class strategy of being prudent and thinking twice before any investment of time or effort makes sense. But once you are aware of the “think like a VC” strategy, you will start noticing more and more opportunities in your life where it is applicable.

I think the most important thing is to become comfortable with “failure”. Realize that for some activities, failing 8 times out of 10 is part of the plan. Salespeople know this. People who grew up in business families know this instinctively. The rest of us have to learn it slowly and painfully (and every failure still hurts, but we need to teach our brain to accept that this was expected and normal and does not reflect badly on our abilities or reputation.) When dealing with these failures, it helps to keep in mind that you need to keep following your strategy: you can only control the inputs to the process, you can’t control the output (success or failure). Karmanyevaadhikaraste baby.

I’ve wanted to write this post for a long time but I didn’t do so because I felt that I couldn’t do justice to the post—that I wouldn’t be able to give good enough examples. Now of course, I’m giving it a shot—if it fails, it fails, but at least I’ll have tried. So if this idea resonates with you please let me know. And more importantly, if you can think of good examples, I really want a collection of those. Please leave a comment below or write to me. Thanks

And if you know someone who is too conservative and risk-averse, please share this article with them:

1. I wish to point out that this was before ZNMD made scuba diving popular. We also did a Spain road trip before ZNMD 😀