Investment committees are adept at analyzing deal specifics like cash flow and competition. However, they systematically fail to discuss the more influential internal firm dynamics—such as pressure to deploy capital or individual biases—that are often the true cause of poor investment decisions and bad outcomes.
The traditional 'risks and attractions' list creates a false opposition. A better framework is asking, 'What do you have to believe to be true to be attracted to this?' This reframes the diligence process constructively, acknowledging that the goal of an investor is to find reasons to put money to work, not just to identify risks.
Instead of a binary risk/reward model, view compelling investments through the lens of 'approach avoidance.' Every good opportunity contains elements that are both attractive (approach) and fearful (avoid). Acknowledging this inherent tension by using 'and' instead of 'but' leads to a more nuanced and effective decision-making process.
A 'failure' is a planned endeavor that doesn't succeed, which society often admires. A 'mistake' is an unplanned, individual decision made without self-awareness that leads to shame. This shame causes us to hide mistakes, preventing the self-reflection necessary for growth, unlike failures which often yield public lessons.
Firm growth, like raising larger funds or opening new offices, is often driven by internal politics—the need to create career paths and pay raises for ambitious junior staff. This can lead to strategic drift and diluted returns if the expansion is not aligned with the core investment philosophy that made the firm successful.
We operate using 'schemas'—mental templates that serve as efficient shortcuts for processing the world. While often helpful, a schema that led to success in one context (e.g., 'repress for success') can cause a major mistake when misapplied to a new situation where it is not appropriate, leading to poor, unexamined decisions.
A powerful test of a manager's effectiveness is asking them to articulate the specific career goals of each direct report. Being able to answer indicates a leader who invests in their people's future success, which is far more impactful than merely managing processes like compensation plans and performance reviews.
Every mistake unfolds in three acts: 1) the development of your underlying mental models, 2) the mistaken decision itself, and 3) the aftermath and how you process it. Many people focus only on Act 2 (the mistake), but the most damaging error is often made in Act 3 by failing to unpack and learn from the experience.
Citing former Treasury Secretary Bob Rubin, Josh Steiner argues you should never judge a decision by its outcome. A bad process can get lucky, and a rigorous one can fail. The key is to run a process that gathers all available information and empowers experts. Once that decision is made, don't look back, regardless of the result.