On the Importance of Mental Models in Investing

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At times, venture can feel like the least structured form of professional investment approaches. The availability of data is sparse (especially at the earliest stages), its agency is far lower than private equity and its liquidity limitations (often over a decade!) can lead to incredibly long feedback cycles before determining what is and isn’t successful. I’ve been public about how I believe this leads to the many faults of our industry - namely around bias and momentum chasing - both of which I believe inhibit the greatest aspect of our industry: the ability to empower economic mobility in a way that no other asset class can. 

While even the greatest venture investors will attribute their success to luck, the consistency of returns amongst the top investors is evident. It’s not just luck when you're an investor that is consistently investing in amazing companies at the earliest stages. While early success certainly makes it easier to win subsequent opportunities, I’m a fervent believer that there are better “pickers” than others - those who can develop independent conviction in opportunities that are non-consensus. Finding opportunity where others don’t see it requires more than a crystal ball - it requires work! As I witness the best investors in the VC asset class, they put in this work to consistently see greatness where others don’t. Yes, they win consensus “hot” deals as well, but even those opportunities require them to develop a premium on their conviction. Developing that type of conviction requires a way to structure thoughts despite incredibly unstructured data - that’s done through mental models.

Kenneth Craik proposed the concept that individuals use “mental models” to “anticipate events, reason, and form explanations”, but it was Charlie Munger who popularized their application in the investing world, implying that he used a latticework of different mental models - essentially an integrated system of different mental models - to inform his investment perspectives. While value investing and venture investing are different disciplines, the best venture investors of the last decade all have their constructs for evaluating investment opportunities - some of which are based on popularized  emerging concepts like the power of network effects and others of which were likely home grown.

While process can inhibit some, I’ve personally found that as these mental models work together more synchronously, I move faster in my decisions, develop conviction more independently and, broadly speaking, make far better decisions. These models have empowered my thinking by making me far more focused on asking the “right questions,” rather than attempting to get every last piece of information. Our team shares many mental models with each other (we’ve published our open sourced our voting form), but each investor on our team possesses their own latticework of models (each as unique as a snowflake) and will contribute new mental models that influence our collective decision making prowess. We’ve written about some of these mental models (including building capabilities, measuring moats, and the disruptive potential of platform conglomerates) and will share further as they evolve. 

The beauty of these models working together is that it creates an approach that is wholly original to YOU - anyone can leverage content readily/publicly available to everyone and the combination, integration and weighting of these models in any given decision will always be unique to the individual. While I’m not particularly smart, studying the mental models of more seasoned and successful investors has been the single most influential factor in my professional growth as an investor. I didn’t have the opportunity to learn under the wings of Charlie Munger, Michael Porter, Bruce Greenwald, Michael Mauboussin, Bill Gurley, Roger Ehrenberg or Fred Wilson, but thanks to what they’ve written and what others have written about them, I’ve been able to develop my own latticework of mental models based on their work. As I get deeper into my learnings, I feel the influence of the models in every investment decision I make - in many ways, it feels like they are around the table of our partner meetings (wouldn’t that be a sight!). You don’t need an MBA to learn these lessons, all you need is a library card and a laptop. Knowledge is power and these insider lessons are more available than they’ve ever been, making the playing field a lot more open for all of us.

While the venture environment is as wild as it ever has been (and that’s likely to persist), I’m not one to leave the fate of our dollars and our companies to throwing darts at a board. Learning from these models is my best bet for creating structure out of the insanity to develop independent conviction, rather than just chasing the same shiny objects as the herd. Plenty of our fate will be left to chance, but I believe these models are our firm’s best bet to roll the dice favorably, rather than letting the dice roll us.