story-based decision-making
A few times, I’ve talked to an executive manager or early-stage investor, and this happened:
me: Here’s the main plan. Now, we think the odds are good, but the most likely failure point is here. If necessary, we have an alternative plan for that part, which goes as follows...
them: (visible disgust)
I was so confused! Aren’t contingency plans good to have? Sure, investors want to see confidence, but what they really want is confidence in the overall vision. They expect some things to go wrong along the way, maybe even requiring “pivoting” to a different product.
Well, I’ve gotten more experience since then, and thought about things more, and I think I understand the thought process now.
Imagine you’re watching Star Wars, and the rebels are getting ready to destroy the Death Star. The guy planning the operation says:
OK, the primary plan is a torpedo to this exhaust port. You’ve all been briefed on it. But there are some key risks: the shielding could’ve been upgraded, it might be too heavily defended, and torpedo targeting could fail. As such, we’ve designated secondary targets here and here which should at least disable the Death Star for a while. The tertiary plan is a fallback meant for retreat with a minimum number of casualties, which I’ll go over now.
How does that make you feel about the chances of the rebels destroying the Death Star? Do you think that the competent planning being displayed is a good sign? According to movie logic, it’s a really bad sign.
Once, a guy (who’s currently a founder of an AI-related startup in Silicon Valley) introduced me to this VC for a call to talk about investment in a new battery chemistry. Part of the conversation went like:
me: I want to talk about the technology and issues with alternatives, but it seems like nobody wants to discuss that part.
VC: It’s just not that important to investing.
me: I see all these failures that happen that could’ve been easily avoided with competent technical due diligence. Softbank lost a lot of money on WeWork, wasn’t that worth avoiding?
VC: No, Softbank has their approach and it works. People make fun of WeWork but Softbank has actually done really well overall.
Well, a few years later, it seems like maybe the approach used by Softbank’s Vision Fund has some problems after all...? Anyway, about investment in that battery chemistry:
VC: So what’s your growth story?
me: Uh, raise some money, validate the technology to the satisfaction of investors, raise more money, demonstrate a production line, and then either get enough investment to do large-scale production or sell to, say, a large auto company.
VC: That sucks. Some advice for you: never talk about selling to a big company to a VC, at least not before it’s actually an option. And you should avoid saying your plan is to “raise more money” too, investors want to hear about what impressive stuff you can do with just the money they can provide.
me: Well, from my perspective this is...less far from commercial practicality than what QuantumScape has, and they’re worth a billion dollars already.
VC: You should look at SaaS startups. As a VC, it’s hard to justify investing in physical stuff when the growth stories those normally have are much better.
me: I see. Some of my friends have some other stuff they developed, so maybe you’d like one of their “growth stories” better. Is there something in particular you’re interested in?
VC: As I said, it’s not really about the specific technology. I tend to invest in SaaS startups, but it’s not because they’re SaaS per se.
What I eventually realized was that I wasn’t taking that word “story” literally enough.
Looking at the web pages of startups, I’d often see these descriptions of the founders that are like...descriptions of a five-man band in a TV show pitch, succinctly establishing backgrounds and personality traits that you might find on TvTropes. Eventually, I saw enough of them that I realized that there was something driving that format. And eventually, I realized that investors were actually making decisions based on that sort of thing.
When a customer at a bazaar haggles with a street vendor, they aren’t breaking out statistics and math. That kind of haggling is more of a duel of stories, with each side proposing a story about the item’s value, and the stronger story getting its number weighted more heavily.
With investment and hiring, there are people who want to see character archetypes they have in their head like “fresh MIT graduate” or “ex-googler” or “ex-SpaceX” or “Harvard grad MBA” or “former Fortune 500 executive director”. But actual people aren’t character archetypes, and the more interesting and capable people are, the less they’re well-represented by tropes.
Similarly, investors seem to want a concept pitched to them that appeals on a narrative level. It’s not “consider this techno-economic analysis that’s been done, and then we should adjust for X and Y”. It’s more like...
“we’re going to do AI stuff, but we’ll sell tools to the AI startups” to an investor who likes AI and often heard a story about selling shovels to gold rush miners
“we’re going to pull CO2 out of the atmosphere and use it to make valuable products” to an investor who feel that the course of technological progress should naturally lead to global warming being solved, so logically something like that must be viable
“we’re going to do nuclear power but with a Silicon Valley attitude” to someone frequently exposed to memes about “nuclear power rightfully being super cheap” who also likes Silicon Valley
“we’re going to do manufacturing IN SPACE” to an investor who thinks “space is the future”
a concept that follows (some rule about which option to take) that’s common advice that coexists with the opposite advice, that the investor believes in really hard because it worked for them in the past and they want to believe they know something other people don’t and weren’t just lucky
So, if you’re working on a pitch to investors or executives, perhaps what’s most important is understanding what kind of stories they like—real stories, fictional stories, and fake stories they believe are real. Look at bios of founders of their last few investments (as presented on company websites) and see if they follow a pattern. Look at the main characters of the movies they like. Look at their retweets and see what stupid memes they fall for. And so on.
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Here are some questions this post raises for me.
Do people ever try to pitch you on projects, and if so, do the story-based pitches work better or worse than others?
Where are the investors that you expected? With Vision Fund way down, are the reality-based decision makers on the rise, or not?
Is this because of that thing about multi-stage processes and Keynsian beauty contests?
“Look at bios of founders of their last few investments (as presented on company websites) and see if they follow a pattern. Look at the main characters of the movies they like. Look at their retweets and see what stupid memes they fall for.” This sounds like advice on how to be a better grifter. Is there an implicit step 0 where you try and fail to get money from the less manipulable investors? Is your idea that if some entrepreneurial LW users swallow this particular red pill, they will be less held back by their maladaptive honesty and be more competitive in raising money, and that this will result in more rational entrepreneurs?
Have you read The Scout Mindset? In it, author Julia Galef gives examples of entrepreneurs who honestly and publicly gave low odds of success, but were able to raise funding and succeed anyway (like Musk and Buterin). Were these just random flukes? Did I get the wrong takeaway from that part of the book?
Not exactly. I’ve evaluated project pitches for other people, and sometimes people pitch me personally on ideas. To the extent that I’ve been trusted on technical things by people directing large amounts of money, it’s been a narrow/limited sort of trust, not “let’s do whatever this guy says”.
Relative to VCs, I think (private equity that quietly does large acquisitions) and (internal project evaluations at engineering companies (eg BASF)) do better technical due diligence.
But internal project evaluation at big companies is conservative yet typically requires 15%+ ROI for approval—which is a result of managers’ job cycles. As for private equity, people seem more interested in acquisitions to establish enough of a monopoly to have pricing power than new technology. Which is smart.
The actual answer to that question, tho, is that they don’t exist to the extent it seems like they should, that cultural factors prevent an economic equilibrium. Elon Musk is dumb enough to think the Hyperloop is genius, and there’s free money on the sidewalk for people with that level of technical knowledge who also have either enormous wealth or credibility with and connections to investors. But the selection processes involved reject them at earlier points.
Yes, that’s a big factor in how the current situation got established. I thought of that independently and have mentioned it before.
Partly that. Partly it’s an example of irrational thinking that people might see in their own approach. Partly other things.
I haven’t.
Bezos gave some of his investors a 70% chance they’d lose their whole investment. Those investors...were his parents.
Elon Musk was hooked up to the Palpal Mafia social network.
Anyway, a lot of stories like that are misleading. My understanding is that those examples are mostly just their after-the-fact disclosures of their private thinking, not what they told investors at the time?
Thanks for the reply. Maybe I’ll reread that chapter of the book and see if there are any sharp updates to make.
I think a big variable here is how complex your pitch is. Even highly intelligent people have trouble following a branching narrative, and will wind up less focused on and invested in the main story. For this reason, I think a complex main story pitch will fail for most of the same reasons.
I’d say keep it simple, and present only as much of the fallback plans as necessary for this brief pitch.
So I think the pitch is:
“We are attacking the Death Star because we have a unique, hard-won opportunity to destroy it in a single blow. We will fire a torpedo into the undefended exhaust shaft, using these tactics.… (many tactics and specific battle plans follow).
Should this plan somehow fail (no mention of specific failure possibilities), we will disable the Death Star’s offensive capabilities, which will allow us time to pursue other paths to victory. Should this happen, you will hear this call to regroup around these targets… This attack can shift the course of the war (back to mainline story of the opportunity and worth of the risk).”
This is a bad analogy because you need fallback plans before going into battle, to avoid confusion and chaos; in running a startup, you have orders of magnitude more time and communication opportunities, and can come up with fallback plans as you go. So the pitch would be:
“we will commercialize this product, which is a unique opportunity for these reasons… (reasoning follows). Should that plan fail, there are many other possible applications for the technology we’ve developed. These include… (possible directions follow, but not details). This is an opportunity to take advantage of new developments… (back to main story).
The bulk of the time and enthusiasm should be spent on the main plan, with only as much mention of other opportunities as necessary in the limited time and attention you’ve got to spend on them.
A snarky reply to that would be: “OK, now put that on a powerpoint slide with 3 bullet points.”
Part of the point of my post is that the (reasoning follows) can’t actually be a real analysis in a pitch like this; to be appealing, it has to be a narrative that fits people’s preconceptions, a story that’s the kind of thing the executive-types being pitched to like. The part with technical details seems to just fill the same role as technobabble in Star Trek. Sometimes you’ll see sales guys who do the pitch listen to the engineering stuff and just pick out a couple keywords to use in the story they’ll make up.
Yeah. This matches my (limited) experience chatting with investors. They’re a lot less smart than I was anticipating.
I’m reminded of something I recall Paul Graham saying (and I think I also remember hearing others saying the same thing): that you can think of investors as being like an iceberg where the tip that is above water provide a real value-add with their wisdom and guidance in addition to the money you received from them, and the bulk of the iceberg that is underwater are investors who you should just treat as providing you with no value-add on top of the money you’re receiving from them.
Would the following be a reasonable recap?
What you want to start with is a narrative/story that gets someone’s interest in hear how something might end. At that point they will ask about the details they are interested. Anticipating all the details fails from the start because you never got someone’s attention or interest in what come later.
Even in the realm of movie logic, I always thought the lack of backup plans was supposed to signal how unlikely the operation is to work, so as to create at least some instinctive tension in the viewer when they know perfectly well that this isn’t the kind of movie that realistically ends with the Death Star blowing everyone up. In fact, these scenes usually have characters directly stating how nigh-impossible the mission is.
To the extent that the presence of backup plans make me worried, it’s because so many movies have pulled this cheap trick that my brain now associates the presence of backup plans with the more uncommon kind of story that attempts to work a little like real life, so things won’t just magically work out and the Death Star really might blow everyone up.
Thank you for sharing. For me your original talk is more convincing, and your Death Star strike plan is the one I would be more willing to follow rather than movie one.
I suppose this is an area where one can have a strong conviction on how things ought to be done, assuming other smart people think the same way, but in reality the way they think about it is closer to the base rate, so communication towards them should be as such.
Good stories rank well on google, social media, & word of mouth; drawing in more customers and prospective employees. The market of ideas is reflexive. If more people pay attention to a field / framework / method / company, more progress is made.
(There’s also sampling bias. You are more likely to hear the fun stories than the numbers from your friends, twitter feed, etc)
I’m reminded of a movie quote: “Don’t have a fallback plan. If you have a fallback plan, you’ll fall back.”
There are also stories of military leaders burning their ships after landing, making retreat impossible and leaving the only possibilities as victory or death.
I think the VCs aren’t doubting your competence, but rather your commitment.