Investors recognize patterns. The introspective ones put effort into making sure they’re following the right ones.
“Red swans,” according to the company’s webpage, are ventures that are successful despite the fact that no one saw them coming.
At Red Swan, instead of having a list of checkboxes we pattern-match to, we have a framework of an iconic entrepreneur in mind, which we aspire to, both in ourselves as well as in the founders we back.
We believe that these founders correlate highly with movements that have large followings of passionate people (customers, employees, investors, advisors) who would follow them to the ends of the earth.
That perspective lead to another post by Peng: history does not repeat itself, but it does rhyme. Using formulas to make the final decision about an investment can be worrisome, he said. Instead, he argues that the final winnowing should be done more by a process than any sort of rigorous evaluation tool:
At the core of venture capital decision making is pattern matching. But the paradox of venture capital is that the same pattern matching that helps you identify winners can also pigeonhole your decision making into unoriginal, non-power law groupthink.
Pattern matching as a decision making process needs a corollary as a more satisfactory explanation for pattern matching.
And he gives some interesting examples of tests for breaking an investor out of their own set of preconceptions, such as the $20 Starbucks Test (if anyone ever does this, please let us know about your experience) and problematizing the whole notion that similar ventures compete based on matching each other in the basics and then, somewhere, upping the game.
Knowledge is power!
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