some observations about optimism and pessimism. i first started thinking about this because someone told me vc is inherently pessimistic, but i thought the opposite was true
venture is a 99% “no” business (or more) - you obviously say no far more often than you say yes. you might meet ten to fifty companies in a week, and from there you have to choose one or maybe two to focus on, and say no to the rest (which could perhaps be great businesses - you just don’t have the time to diligence everything, and need to prioritize the ones you like most). many investors i know seem to be skeptical by default when jumping onto calls, or at least it seems that way, which makes sense - you’re trained to poke holes, to look for reasons why a business won’t work (tough market, tough sales cycles, etc). and each investment takes up a “slot” or shot-on-goal, so there must be a lot of conviction / confidence built up to use one of these
the fact that founders are generally very optimistic (which makes sense) combined with the fact that most venture-backed businesses fail, would mean that exercising caution or pessimism is not the worst idea. founders might over-sell their vision / team / gtm strategy because they are enthusiastic about what they’re working on and are trying to convince vc’s to be enthusiastic as well. you are probably more likely to get pitched an overly-optimistic set of milestones, than an underwhelming / bear-case scenario, as founders are incentivized to be ambitious in these pitch meetings
there is also a lot of pessimistic pattern-matching that happens. some general partners just hate certain spaces or ideas because they invested in an adjacent business previously that did really poorly. “i liked the idea of building a marketplace for medical tourism, but i invested in a company that went to zero there.” but the reason the company failed might have nothing to do with the industry (maybe you juts picked the wrong founder), and it also sets you up to miss outliers. it’s probably a bit of an emotional decision, to avoid a space that seems like a bit of a slog (that you have seen from first-hand experience)
but i think venture capital is built on optimism way more than pessimism. there are certain industries that train you to be skeptical - short-selling at a hedge fund, most types of insurance / cybersecurity, certain types of law / accounting / journalism, etc (you’re looking for things that can go wrong). venture looks for things that can go right. you’re betting on the growth of small businesses. you’re meeting a founder who is very early, maybe they moved back into their parents’ house and have a barely-functional prototype, and betting that they can become the next apple / nvidia / etc (it looks so unlikely at the surface, because it is). they might be building in a market that doesn’t exist yet (many great companies create or expand markets), so you have to bet that the market will take off too. some other thoughts:
- the power law in venture means that you’ll lose money on most investments and a tiny handful of companies will become so big that the returns from them will more than make up for the losses of the majority of your portfolio. every company you invest in, could be one of these big winners (you probably shouldn’t invest if you don’t think this can happen, or maybe a different form of financing is more appropriate) - this seems very optimistic
- long time horizons test your optimism and conviction way more than short ones - in early-stage venture it might take ten years for your returns to materialize from a company. “my strategy could work in a few days” vs “my strategy could work in ten years” - the latter requires a much heavier amount of positive thinking
- you could argue contrarian people are pessimistic, but i think they’re highly optimistic. it takes a lot of belief / hope to go against conventional wisdom and bet that you’re right when everyone is against you
- most founders envision a future that is better than the present, and they build towards that goal - vc’s are mostly bought into this too; beyond making some money, investors are able to work closely with people that are able to shape the future (at least in a small way)
i believe peter fenton described investing as “getting excited by a founder / idea, then trying to talk yourself out of it, and if you can’t, then you should invest.” i like this framework, notice it starts from a point of optimism. you’re not starting cynical and trying to talk yourself into investing, rather you get excited by a person and their vision for the future, then try to dig in deeper to see if this is a business you should partner with
i asked chatgpt what it thought of this and it said “pessimistic in process, optimistic in purpose” - this is a succinct way to put it
i think it’s more fun to hang out with people who are optimistic (one of the reasons i like this job a lot) - you could dismiss these people as naive, or you could let their energy transfer to you and build on top of it. it’s possible to be discerning and exercise critical thinking while also looking at the world glass-half-full