Workshop: A Decision Analysis Approach to Venture Capital

Venture Capitalists (VCs) could be poster children for cognitive biases. Most successful VCs conclude they “have the magic.” Forbes even celebrates the best performing VCs each year with their Midas List. However, few VCs test their gut feel driven decision making with data or frameworks. Fewer still distinguish between luck and skill in a decision context characterized by extreme uncertainty, few data points, and long timeframes. Clint argues many of the patterns VCs hold up as their special insights are just as likely to be cognitive biases reinforced by luck.

In this workshop, Clint will provide an overview of venture capital, the challenges with traditional VC decision making, and how Ulu’s Decision Analytic approach produces higher quality decisions and has led to industry leading performance for Ulu.

Clint will also describe Ulu’s approach to portfolio construction. In most asset classes, returns are normally distributed and portfolio construction is an exercise in risk reduction. In early stage venture capital, however, returns follow a power law distribution and portfolio construction becomes more important than just risk reduction. The vast majority of early stage VC investments return little to nothing and a small number of outliers drive all of industry’s profit. This asset level difference drives the need for a different portfolio construction toolset and mindset. Clint will present a framework for venture portfolio construction and show how Ulu is using this framework to increase the odds of strong fund performance.

Clint concludes with a consideration of the implications of decision analysis for the venture industry.