I think Albert Einstein could relate to venture capital. He didn’t thrive in formal education. He pioneered technology, often alone and discredited. He said hard work had more to do with his success than his genius, or “genius is 99% perspiration, 1% inspiration.” Every entrepreneur I know would agree with that.
Bigger picture, bigger returns
The hard road has payoffs in venture, too. A recent study in the Harvard Business Review pointed out that venture capital investors who are similar have lower performance when they invest together. “The success rate of acquisitions and IPOs was 11.5% lower, on average, for investments by partners with shared school backgrounds than for those by partners from different schools. The effect of shared ethnicity was even stronger, reducing an investment’s comparative success rate by 26.4% to 32.2%.”
Opening up the options
It’s not that similar investors find worse deals. The research showed deal sourcing was equivalent between similar and dissimilar investment partners, but the management of the deal was not. When an opportunity needed nurturing after investment, more similar networks had more limited information and operated with similar biases, narrowing the path for the firm they backed. This constrained returns. As Einstein put it, you “can’t solve a problem with the same thinking that created it.”
Sweat the details
So how do you do the hard work of creating the best opportunity for returns? Diversifying the fund leadership team, as we do at Valor. Creating a chorus of experienced voices around a startup is one way to open each deal up to its most optimal path. “Venture capital firms that increased their proportion of female partner hires by 10% saw, on average, a 1.5% spike in overall fund returns each year and had 9.7% more profitable exits (an impressive figure given that only 28.8% of all VC investments have a profitable exit),” the study authors wrote. Are you building diverse perspectives around your investment opportunities? Taking the hardest path–diverse perspectives, less consensus–often shows the highest returns.