Talent and venture investing

Success is all about long-hours of practice and strong self-belief, characteristics essential to successful venture capital investing, writes Jo Oliver.

Malcolm Gladwell, author of The Tipping Point, de-bunks the long accepted correlation between talent and success in his recent book: Outliers: The Story of Success. Instead, he concludes that practice truly does make perfect. Ten thousand hours to be precise. Achieve this and you will be world class at what you do.

Matthew Syed develops the concept further in Bounce, adding quality of practice and self belief, to quantity of practice, as the tripartite determinants of success. From Steve Jobs to Roger Federer. From Mozart to Einstein. Across the worlds of business, sport, the arts and academia. 

Gladwell and Syed’s conclusions derive from observing people’s ability to deal with “combinational explosion”, the incredibly complex challenges that are regularly faced in all walks of life.

To illustrate combinational explosion, consider tossing a coin. We all know that there are two potential outcomes. Now consider tossing twenty, different coloured coins at the same time. How many unique outcomes could this relatively simple example generate? Most people would guess in the hundreds or thousands. The actual answer is over a million.

Jo Oliver

Comprehensively dealing with combinational explosion is, to all intents and purposes, impossible in the real world, either due to time or processing constraints; or usually due to both. Good decision making in such scenarios is therefore about compressing the information, determining what is salient, and spotting patterns. This can only be achieved through practice.

By way of further illustration, Wayne Gretsky, indisputably the greatest ever ice hockey player, described greatness in his sport as “Skating to where the puck is going to be, not where it has been”. His unrivalled ability to do this, according to Gladwell and Syed, was due to years of practice which encompassed countless, similarly hugely complex, combinational explosion scenarios. Not because he was talented, or intuitive, or a genius.

In short: Success is based on practice or experience and attitude, with talent being a product, not a gift; learnt, not innate.

That's pretty contrarian. 

Combinational explosion applies to businesses too, particularly highly disruptive ones that are operating in dynamic markets, in a world where technology is evolving at a faster pace than ever before. This suggests seemingly infinite outcomes, and arguably, seemingly infinite risk.  

These are the types of businesses that Venture Capitalists deliberately look to invest in. The ultimate priority is to invest in talent, as conventionally defined, to mitigate the risk and maximise the return potential.

How do you square this investment approach with Gladwell and Syed’s findings?

Firstly, Venture Capitalists will often look to back entrepreneurs that have succeeded in the past. Take the following four companies: Zoopla, Graze.com, Secretescapes.com and ECN Live.  These companies were all spawned from founders of LoveFiLM, which was first invested into in 2003 and which was sold to Amazon for a reported $312m last year.

Secondly, entrepreneurs that receive backing by Venture Capitalists often possess an abundance of the characteristics that satisfy Syed’s second and third required attributes for success: quality of practice and self-belief. They make bold decisions based on their own experiences and those of their trusted network of advisors. They then test and challenge those decisions aggressively in their markets, voraciously gathering and analyzing information, which they then use to rapidly iterate and improve their decisions, thereby driving an accelerating positive feedback loop. 

Finally, Venture Capitalists have the additional benefit of collective experience, and as such, entrepreneurs can then benefit from this.   By using their well-harnessed ability to identify the entrepreneurs that have the potential and desire to be successful, VCs can then partner these entrepreneurs, using their collective experience, attitude and networks to bridge any talent gaps, however defined.

Jo Oliver is Investment Director at Octopus Investments.