Technology, Venture Capital, Private Equity

Okay, that (I mean the title) was a ploy to catch your attention! Actually, this is the second part of my drivel on successful investing. Amongst the six factors for successful investing listed in my previous post, “insight” stands out from everything else in a distinct way in that it is “non procedural” as against the rest, which are “procedural”. Let me explain that.
In the study of logic, there are two approaches – deductive approach and inductive approach. In the former, there are tenets or premises, which are accepted as a given and conclusions are drawn on that basis. An inductive approach, on the other hand is the process of building a coherent thesis based on numerous observations (akin to a bottoms up analysis). For example, the reasoning – “All men are mortal. Joe is a man. Therefore, Joe is mortal” is a deductive line of reasoning since it is based on the *irreducible* premise that “All men are mortal”. On the other hand “I have only observed black crows and never observed a crow of any other colour. Therefore, all crows are black” is an inductive line of reasoning since the conclusion is drawn from a set of verifiable observations.
In acquiring knowledge, making decisions or drawing conclusions we constantly switch between the two above mentioned approaches. At any point in time, we have a built up repository of knowledge, which forms the basis for gaining new knowledge (deduction). We also constantly assimilate new information or data and use intelligent ways of interpreting that data (induction). We then either accept the conclusions and add that to our existing knowledge repository or we modify our knowledge with the new conclusions or we reject the new conclusions, if the result is counter intuitive to our existing set of beliefs (or the new line of reasoning isn’t appealing enough).
Now, how is all this related to investing or entrepreneurship? It has to do with the understanding of this concept of *insight*. So, what is this “insight”? It is a glimpse of reality that is granted to someone. It is typically not a result of a step by step analysis of observable facts. Rather it is a leap of understanding. A moment of epiphany, when something suddenly becomes clear. And in my opinion, true entrepreneurs at some point in time are bestowed with this insight. They visualize a reality that is not immediately obvious to others. They then go on to *act* on this vision of their reality. Strange as it my sound, this is true not only of entrepreneurship, but also other fields of endeavour such as science. To quote from a biography of Albert Einstein on his discovery of the theory of relativity – “He awoke one morning in great agitation as if, he said “a storm broke loose in my mind”. He described it as having finally tapped “God’s thoughts”. He and a colleague were trying to think — ‘Can we get another idea that will solve this problem?’ when Einstein said “Ideas come from God””. Similar such revelations have been recorded by other scientists, who were instrumental in engendering huge leaps in our understanding of certain subjects. Maxwell, the author of the famous eponymous equations on electromagnetism recounts a similar relevation, where he could visualize the existence of electromagnetic fields (which was till then an unknown concept). In the case of science, the practitioners i.e. the scientists, then give shape to their insight by actually describing their thesis in scientific language. Similarly, in the case of entrepreneurs, they do so by actually building out the business.
Here’s also where the art of VC investing comes in (and this took me some time to understand borne from my own attempts to fathom where I fit into the larger scheme of things). I’ve realized that the role of the investor is to use the tools of induction to not only evaluate and help articulate the insights of entrepreneurs, but also to separate true insights from mere pipe dreams. That’s also the reason that people with business analysis skills such as management consultants are valued in the PE/VC industry. Its because, that’s what they are very well trained to do – build bottoms up models from existing data to verify or reach key conclusions.
And here’s the final catch. It is entirely possible that the deductive and inductive approaches may finally yield completely divergent results. And, this is not just a personal opinion, but a conclusion arrived at from a field of study no less objective than pure science (theoretical physics to be precise). This is captured in the most famous puzzle of quantum mechanics called the double slit experiment for electrons. Here, deduction or direct observation indicates one eventuality (that the electron has passed through one of the slits) while the mathematical analysis indicates an entirely different one (that the electron is “distributed” between the two slits). To realize this means to realize the importance of striking a balance between the two approaches, and to develop the humility to accept the limitations of both. Entrepreneurs, to admit that what they may be chasing may not be true insight but a delusive mirage and therefore, would do well to heed to dispassionate evaluation of their plans by others. Equally well, investors to also realize that not every insight is amenable to rigorous analysis of the kind we ideally seek (Bessemer’s “anti portfolio” being an excellent case in point). And the art of discovering the magic potion with the ideal mix of analysis and insight is in my opinion, what successful investing is all about.