Are you thinking independently or is the crowd thinking for you?
Or how to avoid falling prey to herd mentality in tech & VC investing
Herd mentality has become a huge part of the tech & VC culture and the single most important driver of the industry deteriorating returns in the recent years. The fear of missing out (FOMO) leads many VCs to buy into ‘hot’ industries at highly inflated prices. It also leads founders to build startups in those industry because the chances to get funded are higher. Yesterday it was last-mile delivery, web3 and crypto. Today it’s generative AI.
The main problem with herd mentality, though, is that it kills innovations and undermines the very essence of venture capitalism. What helped VC & tech as an industry to rise to its current power was the exact opposite of groupthink.
What makes great venture capitalists and great founders alike is their ability to think and act independently. So how do you foster independent thought and keep the FOMO in check? Here are five strategies👇🏻💡
1️⃣ Use first principle thinking
First principle thinking is a reverse-engineering of complex problems. It involves breaking down these problems into basic elements and reassembling them from the ground up. A great example is Elon Musk’s approach towards making a decision to build SpaceX rockets in-house instead of relying on external suppliers like Boeing and Lockheed Martin did 👇🏻
“Physics teaches you to reason from first principles rather than by analogy. So I said, okay, let’s look at the first principles. What is a rocket made of? Aerospace-grade aluminum alloys, plus some titanium, copper, and carbon fiber. Then I asked, what is the value of those materials on the commodity market? It turned out that the materials cost of a rocket was around 2% of the typical price…”
The key to leveraging first principle thinking is asking the right questions and constantly challenging your beliefs.
2️⃣ Curate your information intake
The information we absorb shapes our ability to think and create. The more shallow the input the less deep the output. Today the attention of the world lives in social media with over 31% of U.S. population getting news from Facebook, 14% from Twitter and 10% from TikTok. The biggest problem with short-form content posted on Twitter and TikTok though, is that it’s addictive and slashes our attention span and ability to concentrate. Another problem with social media is that it limits the exposure to diverse perspectives and favor the formation of groups of like-minded users framing and reinforcing the so-called, online echo chambers.
Here are some strategy to boost mindful consumption and turn down the noise:
- Run your ‘consumption due diligence’
For a week or so, pay close attention to the content you routinely consume including tweets (XS?), Instagram & TikTok, newsletters, blogs, TV and books. Cut 25%-30% of the content that you browse on autopilot and that doesn’t stimulate your thinking or add meaning to your life.
2. Make reading books your automatic daily habit 👇🏻
Charlie Munger, the business partner of Warren Buffett and a billionaire himself, once noted, “In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time — none. Zero. You’d be amazed at how much Warren reads — and how much I read. My children laugh at me. They think I’m a book with a couple of legs sticking out.”
Make notes, highlight the quotes that you liked or ideas worth exploring further — this will help with concentration. When choosing a new book, seek for the recommendations from credible, reliable and authoritative sources.
3. Identify thought leaders in your niche and watch / read / listen to the content they create
I consume ridiculous number of newsletters, blogs and podcasts related to tech, venture capital, entrepreneurship and performance. Some of my favorites are
🎧 Podcasts:
✍🏻 Evergreen Newsletters & blogs:
Above the crowd by Bill Gurley
👩💻 Tech Industry News:
3️⃣ Make NO your default answer to anyone who urges you to make a quick ill-informed decision
When it comes to startup fundraising, founders use FOMO (fear of missing out) as a powerful tool to attract investors. I mean… who wants to miss out on the next big thing, right?!
Resist this temptation. Reflective decision-making is more important than ever when we feel pressured to act fast.
Founder — VC partnership is the one for a decade. You really need time to understand if you believe in the firm’s purpose, if you are comfortable with the team and if what you are funding / building will be relevant 10+ years from now.
4️⃣ Let your gut instinct guide you
Routinely make time to connect with your inner world as it holds the ultimate database of all of the conscious and subconscious experiences that you’ve learned over the course of your life. Very frequently, our guts access and apply this information before our conscious brain does. So if your gut feeling tells you to pursue an opportunity in an industry or geography that no one around seems to be excited about, go with your gut feeling and not with the opinions of the crowd.
5️⃣ Find your Why
My favorite question to founders is:
Why do you care about this specific problem?
Having a strong personal connection to the problem frequently translates into intrinsic motivation to find a solution. The focus of entrepreneurs shifts from ‘what we are building’ to ‘what are we solving for’ and all next big things in tech become the means to an end but not an end itself. Hence the fear of being different is way less pronounced.
To conclude:
Herd mentality is inherently human: we crave community and belonging. At the same time, it is a dangerous trap in tech investing and company building as it forces us to outsource our brain function to the crowd. That leads to marginal innovations and underperforming portfolios.
When you find yourself regressing into herd mentality, there are 2 things worth reminding yourself about:
- You will be the one in charge of the outcomes of your decisions
- Assumption that something is worth investing your time and money in because a large number of people believe it is, is wrong
