Networking with VC’s And Their Brains Mindset

The PE/VC business is a unique one in that there is a 5+ year lag between inputs (investment decisions) and outputs (investment returns). 

That sets up two common scenarios that experienced investors often go through in their career:

1. Strong outputs, bad inputs.

2. Bad outputs, strong inputs.  

Scenario 1 (strong outputs, bad inputs):

This is an investor who has a great portfolio, there are strong realized returns happening. Maybe they recently hit a home run investment. This person has the “hot hand”, the Midas touch, etc. No one will question what this all-star is doing. Whatever investment this person makes, everyone thinks it could be the next big one. Ironically, it’s that success that can lead to bad inputs. It can come from personal over-confidence, a loss of discipline, a lack of skeptical voices, etc. The perception of this investor is at its highest due to strong outputs, but they may in fact be doing some of their worst new work due to bad inputs.  

Scenario 2 (bad outputs, strong inputs): 

This is an investor whose portfolio is struggling, they’ve had some losses, made some bad decisions, etc. Their peers are questioning their judgment. The partners and LPs are wondering if this person even belongs. Whatever investment this person makes, no one thinks much of, or even more likely, it’s heavily doubted.  But, what’s unseen, is this person is learning and getting better, but it’s invisible to those around them. Those mistakes are leading to better decisions, improved judgment, and greater discipline. The perception of this investor is at its lowest due to bad outputs, but they may in fact be doing some of their best new work due to strong inputs.

Of course, we’d all like to be in a consistent state of strong inputs and strong outputs. If there’s one thing you can do to give yourself the opportunity to stay in the strong inputs and strong outputs zone consistently, rather than cycling back and forth between the two prior scenarios, it’s this:

Have capable people around you who will always tell you what they really think and will have the strength to question you when you’re up and the empathy to encourage you when you’re down. That helps one stay grounded and humble during upswings and believing and confident during downswings – both of which are against human nature but are essential to consistently strong performance.