Venture investors should embrace data over instinct

Venture investors should embrace data over instinct

Venture investors should embrace data over instinct

Go to enough venture capital conferences and you start to hear the same things.

Often, the venture capitalist will brag about “instincts” or “gut feel,” the impossible-to-quantify inner voice informed by years of experience and seemingly sound judgment. The entrepreneur deserves to be funded because the venture capitalist is relying on his intuition to produce a decision that just “feels right.”

Humans, however, are ultimately flawed creatures whose social and economic backgrounds inevitably influence how they see the world. Such bias can lead to negative consequences, especially in a relatively small industry like venture capital, experts say.

Venture capitalists are predominately white and male: Over 80 percent of people on senior investment teams at venture capital firms are white, according to a database compiled by Social + Capital Partnership.

These investors tend to prize intuition as a primary predictor of success. But venture capitalists often confuse instinct with connection, no matter how superficial, said Kate Mitchell, co-founder and partner with Scale Venture Partners in San Mateo.

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Whether they realize it or not, white men from Stanford will fund other white men from Stanford because familiarity breeds comfort, she said.

“We have to be careful about the gut feel,” said Mitchell, who is spearheading an effort by the National Venture Capital Association to diversify its ranks. “When we need to make tough business decisions, you go to the things that are safe and familiar. We all have our comfort zones.”

“Everyone has that experience when you connect with someone who turned out to be a real goofball,” she said.

Laura Huang, an assistant professor of management with the University of Pennsylvania’s Wharton School, has been researching how intuition and unconscious bias affect venture capitalists and how they invest. She found investors most often finance attractive male entrepreneurs versus women in general.

“Gut feelings might just be a cover for our biases,” Huang said. “The subjective things we can’t measure, which people call ‘noise,’ are actually driving most of our decisions.”

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Throughout history, we have celebrated business leaders like Henry Ford, Walt Disney and Steve Jobs, visionaries who were able to see or do things no one else could because of their impeccable instincts.

Even today, executives favor guts over analysis. According to a 2014 survey from the Economist Intelligence Unit and PricewaterhouseCoopers, 30 percent of business leaders say they relied most on their own instincts to make big recent decisions, edging out data (29 percent) and the advice of others (28 percent).

“The hardest battle may be to convince senior executives at the top of an organization that data and analysis can be a benefit to their role,” the report said.

Gut feelings are hard to copy. Only the truly gifted can see beyond the numbers.

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