In the complex world of academia, corporate finance, and venture capital, few names resonate as powerfully as Ilya Strebulaev’s. As a Professor of Finance at the Stanford Graduate School of Business, Ilya has cemented his reputation as a leading authority in corporate finance, financial decision-making, and private company valuation.
Ilya’s academic journey is marked by countless accolades and published works in top-tier academic journals. In his latest book, The Venture Mindset, Ilya’s research provides profound insights into venture capital markets, offering a deeper understanding of financial strategies employed by firms today. Known for his rigorous analysis and clear articulation of complex financial concepts, Ilya’s work is a cornerstone for both scholars and practitioners alike.
In this episode, Ilya joins host Andrew Seski to discuss his extensive research and its implications for modern CFOs. He delves into the nuances of venture capital, the history that led him to his success, and some of the core principles that allow VCs to pursue success despite the odds.
Listeners will gain invaluable perspectives on how to navigate the intricate financial terrain from one of the foremost experts in the field. Whether you're a seasoned CFO or aspiring to enhance your financial acumen, this episode promises to enrich your understanding of corporate finance and venture capital, guided by Ilya’s expertise and experience.
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Transcript
Please note that the transcript is AI-generated and may contain errors. The content in the podcast is not intended as investment advice, and is meant for informational and entertainment purposes only.
[00:00:00] Andrew Seski: Hello and welcome back to another episode of the Modern CFO podcast. As always, I'm your host, Andrew Seski. Today we're incredibly fortunate to be joined by professor Ilya Strelbulaev, founder of the Venture Capital Initiative at Stanford GSB and one of the foremost academic experts on the venture capital industry. Thanks so much for joining me today.
[00:00:29] Ilya Strebulaev: Andrew, thank you. It is a pleasure to be here.
[00:00:32] Andrew Seski: I have to kick this episode off with a huge note of congratulations on the launch of your new book, “The Venture Mindset: How to Make Smarter Bets and Achieve Extraordinary Growth”. And while this book may not seem like a venture in itself to others, I can't wait to dive into the lessons that you learned even writing it. And of course over your incredible tenure at Stanford. But I'm going to hand it off to you to kind of explain the onus of the book and why it was so timely to right now.
[00:00:59] Ilya Strebulaev: Thank you, Andrew. Let me tell you, first of all, that I have been at Stanford for 20 years - and when I came as a junior professor of finance, young professor of finance, teach basic classes. So I started teaching basic classes back in 2004. I did not know anything about venture capital. When I was a PhD student in finance, the word venture capital was not mentioned at all. So the academic role of finance was really not interested in the world of venture that much. It was a niche industry about which not much was known.
[00:01:31] Ilya Strebulaev: And frankly, nobody wanted to know much. What I noticed though, in the first two years at Stanford is that my first students with whom I was close, some of them became founders of venture backed startups, or they went to work as associates in venture capital firms. And what I realized was that they were making decisions differently from how I taught them.
[00:01:55] Ilya Strebulaev: So I told them to do one thing, like use discounted cashflow analysis, use the net present value, okay, and various multipliers and various use various metrics and so on. And they did not use any of those. So I thought, I was intrigued. I thought, well, either all of them are wrong. Or I need to explore this a little bit further.
[00:02:17] Ilya Strebulaev: And so this is how I started on this journey that I think brought me adventure to the book. Now, the book is the Venture Mindset, and there's a really deep reason behind both of these words, venture and mindset. Venture, that is because what I realized after studying now how venture capitalists, how smart of venture capitalists make decisions for 10+ years, I realized they make decisions very differently from how most decision makers in large organizations, for example, or in more traditional organizations make decisions - either individually or in a group, and they do it not because they're really different from us, they're smarter than us, etc.
[00:03:00] Ilya Strebulaev: That's because they historically have been facing a very different environment, an environment of extremely high uncertainty, high unpredictability, the environment that was fast changing, and the environment where inevitably a lot of initiatives led to failure. And so to survive and succeed in that environment, they had to develop new tricks, so to say. And they did so, at least those that survived and succeeded did so.
[00:03:28] Ilya Strebulaev: And that's what I studied. So that is the word venture, okay? And the word mindset is that, by developing this, actually they became very successful. So if you think about this, if you looked at every single company in the US that became public in the last fifty years, do you know that every second company was venture backed?
[00:03:51] Ilya Strebulaev: And by the way, when I came to Stanford in 2004, nobody knew about this because nobody cared. So in fact, back seven or eight years ago, my team and I did this research where we took every single company and we checked whether it was venture-backed or not. And do you know that seven or eight out of the top ten companies by market cap right now were venture-backed? And moreover, the venture capital industry is causally responsible for this. Like, have you heard about French Google? Or Italian Amazon, or Japanese Apple, or French NVIDIA, and I can continue the list. No. And it turns out that the reason is that none of these countries, developed countries, they never developed historically the venture capital industry.
[00:04:37] Ilya Strebulaev: Now, but that is not really the rationale for writing the book. The real rationale for writing the book, and this is Andrew where I think it's really important to emphasize this, is that because I now realized after working with a lot of executives and specifically with CFOs and senior finance executives, that this venture mindset, this different way of approaching problems and making decisions individually and group is now really important for every decision maker today.
[00:05:09] Ilya Strebulaev: Even decision makers who are far away from the world of Silicon Valley, far away from the world of startups, far away from the world of venture. And there are a number of reasons behind that, but most importantly is that the world is now becoming very similar to the world that those venture investors have been facing for this 50+ years.
[00:05:27] Ilya Strebulaev: The world is full of uncertainty. Industries are being disrupted as we speak. The environment is now more fast changing. And as a result of this organizations changing as well.
[00:05:38] Andrew Seski: One of the things about the word mindset that stands out to me is I think that because the venture world started as a cottage industry, there are so many folks out there who say that sort of risk-taking doesn't apply to me. But it sounds to me as if you're describing a mindset where we're making daily decisions, even if they're not betting capital on individual startups or corporate venture, there are still hundreds of decisions you're making a day where this mindset can be really valuable. Is that my reading that right, correctly?
[00:06:06] Ilya Strebulaev: First of all, I would say that many people think nowadays that venture capitalists are those gamblers who bet somebody else's money. I think that in fact, not only not gamblers, but in fact, I would call them - and I call them in the book - risk reduction engineers. So the whole point of what they do is that because they face so much uncertainty and so many risks is that the entire approach is try to reduce risk as much as they can.
[00:06:35] Ilya Strebulaev: So in fact most of the principles of the venture mindset is about trying to improve outcomes despite a lot of risk and they're not gamblers. Do you know the difference between gamblers and not gamblers when we think about uncertainty? Here's the parable I kind of like, Andrew. So if you go out after recording this podcast and you will buy a lottery ticket and you will win a jackpot, okay, and email me, I will reply, Andrew, “Well, you gambled and that was pure luck.”
[00:07:07] Ilya Strebulaev: But if then, next week you go and buy another lottery ticket in the next edition of the lottery and you will get yet another jackpot again. Then I will say, “Well, Andrew, it was a skill, not luck.” So what we see in the venture mindset that smart VCs and also executives in large organizations who follow the venture mindset, they in fact succeed again and again, not because they gamble, but despite the odds, that I think what is really critical to understand about the essence of the venture mindset.
[00:07:44] Andrew Seski: I'm glad you shared that parable with me, because I think one of the things that comes up on The Modern CFO podcast a lot is expanding the horizons on not only the IQ and the continued learning of the CFO, but also the EQ and learning to explain different investment styles to different types of stakeholders, whether you're a public company explaining to analysts on earnings calls, or if you're a venture backed or private equity-backed founder or CFO, how you explain those risks and explain those variables and explain why you're making these decisions. Can you tell me a little bit about how to get an alignment and be comfortable in disagreement and things in the book that kind of touch on that?
[00:08:22] Ilya Strebulaev: Sure, Andrew. First of all, let me step back for a second because, because we're being listened by senior finance executives, by the CFOs.
[00:08:32] Ilya Strebulaev: Let me tell you a little bit more about my history at Stanford. As I mentioned earlier, I came to Stanford as a professor of finance and what I realized so that, many of my students were making decisions differently than finance would teach them. But you know what? I also realized I started working with senior finance executives relatively early on in my in my life as a professor of finance.
[00:08:54] Ilya Strebulaev: And what I realized early on is that the CFO specifically will be viewed by everybody else in the firm as technical gurus, but they had difficulty communicating. They had difficulty participating in group decisions. And I think that is because they were very technical and very often it was very difficult for them to integrate into the qualitative nature of the processes within their organizations.
[00:09:22] Ilya Strebulaev: And moreover, the life and the responsibilities of the modern CFO are very, very different from what they were twenty years ago. And I looked at one survey that I think Bloomberg conducted many years ago, and I came to my dean and I said, we should create a special program with CFOs and luckily he agreed. And so we created a program and i became the founder and the faculty director back in 2010 I think on the heels of the financial crisis and initially it was for a cohort of 30 or 40 CFOs from Irish companies.
[00:09:57] Ilya Strebulaev: But then we opened it for everybody and i think since then we already had 15 additions. Stanford of this program, it's called the Emerging CFO. And I would say maybe more than 300 people, more than 300 senior finance executives from all over the world to that program. Okay! So therefore I think those challenges and issues were very relevant to me because I spent years designing and then redesigning the Emerging CFO program at Stanford.
[00:10:27] Ilya Strebulaev: Now to your specific questions. I think that one of the challenges that CFOs, but frankly also a lot of other technical people within the organization's face, is participating in group decisions.
[00:10:40] Ilya Strebulaev: Now, what does it mean, group decision? That means that we have five, six, ten people get together and they somehow have to come up with the rules to make a decision whether it’s to go forward with an investment or not to go forward with an investment. And by the way, in many organizations, there are no rules and when there are no rules then people naturally progress towards what we call consensus - and consensus or conformity, which is very natural.
[00:11:12] Ilya Strebulaev: And I experiment a lot on my MBA students. And in fact, in the book, we mentioned an amazing study of a Swiss professor on monkeys. It's evolutionary monkeys also prefer consensus and conformity. And consensus by the way, is great if we talk about issues where there is not much risk. There's not much uncertainty and where we absolutely know that there is no innovation, there's no new stuff. But once there's uncertainty, once we in fact don't really know about specific outcomes, then consensus is not a great idea.
[00:11:50] Ilya Strebulaev: And what I showed even on venture firms, is that those venture firms that pursue consensus - and there are some of them - they are much less successful than those that don't. And this led to one of the principles of the venture mindset that we detail in the book so much. And we call this principle: agree to disagree. Let me mention this a little bit more detail. What is behind it?
[00:12:17] Ilya Strebulaev: First is the idea is that if you would like to catch an outlier, if you would like to win that jackpot, Andrew, or as we say in the book, if you would like to get a home run, then it is very important to realize that those home runs, jackpots, outliers are by definition, those on which not all of us will agree right now. If we demand consensus on a decision, then almost by definition, if nine of us, let's say in a group, okay, all of us will need to say yes. And all of us are smart, sophisticated, independent thinkers, almost by definition, at least one will be against an idea that seems like outlandish.
[00:12:58] Ilya Strebulaev: And that is a major reason why many large organizations fail to invest in an amazing internal projects that even though they have better human talent, they have better financial resources, they have a better distribution chains and so on and so forth, because people, some people disagree. Now what the best venture firms do is that they realize this.
[00:13:25] Ilya Strebulaev: They also realize that consensus is a natural phenomenon. And so they introduce rules, specific rules, and they introduce rules at two points in group decisions. The first is at the point of discussion and information sharing. And the second is at the point of decision making. So let me deal with the first.
[00:13:45] Ilya Strebulaev: Initially, it's very important to share information in a way that if you have some negative information about, let's say my project, you share it. People otherwise tend not to share. This is by the way, I think challenges that many CFOs face because one of their responsibilities really is to produce information for everybody in the firm to make decisions on, including the board, the CEO, the chairman, the owners.
[00:14:11] Ilya Strebulaev: And this information production very often is impeded by the fact that not everybody is willing to share information. So what do VCs do? So here are some specific tricks that you can do in your firm that is relatively easy to implement. One: in every single group discussion, you pre-order who speaks and you pre-order by saying that juniors speak first.
[00:14:40] Ilya Strebulaev: If somebody who is a junior person, let's say an associate, worked on the project, then they speak first, not the big boss. Second is that a little bit more counterintuitive is that if this is a project that you really would like to catch a home run. So you expect like 10 times return, 20 times return on the project, potentially, I would suggest that experts, So those who you think are the experts on this, on this specific topic, do not speak first.
[00:15:10] Ilya Strebulaev: The whole definition of being an expert is that, I'm an expert in venture capital because I know about the past of venture capital very well. I can prognosticate about the future of the venture capital. I'm happy to do it, but am I an expert on the future? Perhaps not. In fact - and here is the truth about experts - is that very often they're in golden cages that they're surrounded by the history. So very often looking from the outside of the cage when the future is very unpredictable is a better idea.
[00:15:39] Ilya Strebulaev: To give you an example, in some venture firms, there are biotech VCs and IT VCs. And what is really interesting is that when they discuss an IT project, biotech VCs speak first. You will think, I mean, what do biotech VCs know about IT? Well, they, of course, know about decision making overall. They know a lot about various things, but not about the expertise, about the specific product or specific market.
[00:16:05] Ilya Strebulaev: So experts speak last - counterintuitive, very valuable. Also, my suggestion is before the group decision, before the group meets to discuss or to decide, ask everybody to provide feedback in advance. I mean, these days it's very easy to do computationally. And also request an anonymous feedback so that you know when I see somebody is negative information or negative opinion on the project I don't know whether it's Elias or it's Andrews right away, okay? So those are some of the tricks we discussed in the book that about the first step that really helped me
[00:16:46] Ilya Strebulaev: Now, the second step is how to make decisions. And let me just give you some examples: Founders Fund, which was started by Peter Thiel. And they have very simple rule, which is, if the investment is relatively small, then each partner who would like to make an investment needs to convince just one another partner. And they had like seven, eight, nine partners.
[00:17:06] Ilya Strebulaev: So you have Andrew, you need to convince only me. That's enough to make an investment. It's a big investment. You need to convince three, four, five partners. You never need to convince everybody even for the largest possible investment. That's one example. Another example is a firm called VanRock, which is a famous storied venture firm, and in fact, it's a firm that I think is the oldest VC firm still in existence in Silicon Valley, at least, founded back in the 1960s.
[00:17:40] Ilya Strebulaev: And they don't have an investment committee. Which is, they have seven or eight or nine partners, they meet together, they discuss, they argue, of course. And then the champion of the deal leaves the room, and the champion needs to make their own individual decision. Now, contrast this with situations in many corporate venture capital units.
[00:18:02] Ilya Strebulaev: And I've been working a lot with large organizations with their leaders on strategic offsides, on innovation, on their corporate VC initiatives. But also I started more than 150 CVC units in great detail, and then major challenges they have to pre-socialize or to convince every single member of their IC to go ahead with the startup.
[00:18:26] Ilya Strebulaev: And so that is not the best idea. As a result of this, many CVCs will tell me that unfortunately we really have to go with the safest investments, the ones that really [are] potentially riskier, but also where the outcome is much, much better. If it's a good outcome, we will have to pass because it will be somebody who will not be convinced in the IC.
[00:18:52] Andrew Seski: So those two points, that point of decision making - obviously the second, when you're actually making those decisions, what are some other tricks in the book of explaining the framework that went into evaluating risk? Do you have any advice for communicating how the process actually worked? I liked your breakdown of those two points, but then in that second point, in those meetings, in those boardrooms, do you have any advice for those folks as they communicate out how they came to their decision?
[00:19:19] Ilya Strebulaev: Sure. Let me step back for a second; so the book is organized about nine principles of the venture mindset. What i discovered my research that we detail in the book and those nine principles are all about how to make decisions: either individual or in groups. Now this is a good principle is one out of nine and it's about of course group decisions right?
[00:19:42] Ilya Strebulaev: By the way, I'm very glad that you mentioned the word board because this is nothing special about the venture partnerships. In fact, there is nothing in the book about venture partnerships, even though venture investors will learn as well. A lot about from the book. I think the book is not really for VCs.
[00:20:02] Ilya Strebulaev: The book, if anything, is for exactly people like finance executives in a large organization that are trying to make much better decisions in the world of increasing uncertainty. So let me give you an example of another a principle that speaks to your question. That is the principle: double down or quit.
[00:20:24] Ilya Strebulaev: And Andrew, as I mentioned, I've been working a lot with a large global companies, leading the strategic offsides, leadership sessions, and so on, or consulting the CEOs and other leaders. And I think that is the single biggest challenge they face, that they realize. So what is about double down and quit?
[00:20:46] Ilya Strebulaev: In the world of startups, startups, as you probably know, have to raise money all the time. In fact, I teach a very popular venture capital class at Stanford, and I help many of my former students to raise money. And so once they raise that round, I tell everybody, congratulations. Now it's about time to raise your next round, okay?
[00:21:04] Ilya Strebulaev: Now that is the biggest problem that VCs face. Because, what VCs do is that they put the first check and then when the startup raises again, they have to make a decision whether to invest again or not. And of course, any corporation has to make the same decision - and the CFO has to participate in the decision, whether to make an investment again and again on the same project.
[00:21:34] Ilya Strebulaev: And this is where I think large organizations bogged down. And this is where many VCs bogged down. But VCs came up with specific solutions. Now, there's a name for this. There are actually two names. One, economists call it sunk costs. So it's throwing good money after bad. I, in fact, prefer a psychological name for this.
[00:21:55] Ilya Strebulaev: Psychologists call it escalation of commitment. An escalation of commitment is the situation where you feel psychologically committed, behaviorally committed, and incentive-wise committed to continue an investment, either because you convince yourself it's a good idea, even though it's not a bad idea, it's really a bad idea, or because you're really trying to win back those lost opportunities.
[00:22:26] Ilya Strebulaev: Now, I'm curious whether it's going to be the first episode of your podcast, Andrew, of hundreds you recorded that is poker is going to be mentioned because … see, if wasn't poker did not seem to be a great match, but here's something fascinating about poker players. Do you know the single biggest difference between professional poker players and amateurs like me, is that professional poker players quit or fold much more often.
[00:22:53] Ilya Strebulaev: Amateur players, they have their hand, they have their chips on the table, and then a couple of cards revealed on the table, and their hand is very weak, they realize. But they already have chips on the table. They say, well, we cannot afford to lose those chips, and therefore they go forward, and of course lose more money.
[00:23:16] Ilya Strebulaev: Professional poker players fold much more often. They know this is a bad hand. They do not escalate their commitment. Now that is the single biggest problem in large companies, I believe. And I'm pretty sure that every single of our listeners who is making decisions on behalf of companies, actually large or small, immediately, immediately will be able to come up with many, many stories that they faced.
[00:23:42] Ilya Strebulaev: So, VCs have been facing this for many, many years. That is in fact, in the whole nature of this startup process, as I mentioned. So they came up with specific ways to solve this, okay? And I think that is very useful for specifically CFOs, by the way, because well, the CFOs are in the at the very kind of center, the very nexus of the budget allocation process of their companies.
[00:24:07] Ilya Strebulaev: So here are some tricks based on what VCs do. First is that if the project comes to you again after a year and more money is requested, what VCs would do is that they changed the way they make decisions. Remember: the first check, like in Founders Fund, it was very easy. You need to convince one other partner.
[00:24:32] Ilya Strebulaev: But now when the second check is requested, you now need to convince more people. You need to convince everybody. In fact, very often, the partner who initially made the decision is not any longer a decision maker. And, just to give you an example, another well known venture firm in Silicon Valley is called Lightspeed Capital Partners.
[00:24:53] Ilya Strebulaev: And what Lightspeed did is that they came up with what they called reinvestment team that did not include the initial decision makers. And so if there is a budget allocation for the next startup, for the next round of the startup that you already invested in above a certain value, then you have to go to that reinvestment team and the reinvestment team will kind of need to approve the deal.
[00:25:19] Ilya Strebulaev: And the whole idea is that the reinvestment team does not face the escalation of commitment. They did not make the original decision. Let me give you another example. For example, a venture firm called Hammer Wimbledon. It's, I think it's a typical case where Hammer Wimbledon, well known it software VC firm, they would tell their founders, we love you.
[00:25:41] Ilya Strebulaev: Here's your millions of dollars in the bank. We'll also set aside money to invest with you in the future, but we'll invest only allowing, if we find together another investor to lead the round. So if you don't - and we'll help you - but if you don't find another investor, we will not be able to invest.
[00:26:04] Ilya Strebulaev: And I think within any organization, you can use those venture minded principle applications. You can introduce the reinvestment team. You can introduce the situation where people who did not originally make the decision contribute to the next decision layer. You can ensure that others either within your organization should support the project or even sometimes outside.
[00:26:32] Ilya Strebulaev: For example, Google, that is I would say awash with money, raised outside money for its self-driving unit called Waymo. Why? Why on earth Google would do this? One of the very important reasons is to get the check, the independent check on how Waymo is doing, to reduce the internal escalation of commitment.
[00:26:53] Ilya Strebulaev: My final recommendation based on this is what I call devil's advocate. And the idea here is that very often - and very often for projects that are already in progress - people are worried or afraid of raising negative thoughts for cultural, political reasons within organizations. So devil's advocate, meaning that you appoint somebody - so I appoint Andrew, you to be a devil advocate.
[00:27:19] Ilya Strebulaev: Which is, it is your responsibility, not because you wanted, but because, you were appointed, I selected you to try to find out all the reasons why we should not proceed with funding this project again. And then this will be summarizing the memo that you will produce and we'll discuss them.
[00:27:39] Ilya Strebulaev: And I think this will open up the conversation. And you will see not only the selling points of the project, but tend to dominate this type of discussions, but also negative points. So my suggestion is for every single decision maker in an organization that's been facing this escalation of commitment, is listening to us: let's introduce those right away.
[00:28:04] Andrew Seski: I really appreciate that practical advice because it's one thing to encourage a culture that allows for dissenting opinions. These are very practical rule based things that you can encourage where that culture can form over time to become more natural. But these are great steps to not only encourage it, but enforce that you're getting all the data that you need to be able to fold fast comfortably, to get more data, to make the bigger bets in a structure that works within your organization. So I think this is really, really helpful to a lot of folks.
[00:28:34] Ilya Strebulaev: Sorry for interrupting you, but let me comment on this very, very briefly, which is: it's interesting because I'm a great believer. I'm that very, very rare professor of finance, maybe a non-existent breed, that believes in the importance of culture.
[00:28:49] Ilya Strebulaev: However, however, I think that without detailing what culture actually is, culture by itself is useless. If I just tell you, improve the culture of whatever, it's not completely unhelpful. I think culture is all about behaviors, and it's about changing behavior. And let me mention one of my favorite codes at Stanford.
[00:29:13] Ilya Strebulaev: My colleague, Professor Charles O'Reilly, he's an expert on organizational culture. And this is how he defines culture: he says, if I, Andrew, join your firm, I'm a new employee, and I will come to and say, “Andrew, you've been around, what should I do to be successful in this firm?”
[00:29:32] Ilya Strebulaev: And you will tell me, “Do this, don't do that”. Okay. Like, and that will be implementation. So culture is all about behaviors. And you're right, which is behind every single principle of the venture mindset. Like, it's a very interesting principle. It's very counterintuitive to me. Trust me, all those principles are very counterintuitive to many CFOs, I believe.
[00:29:52] Ilya Strebulaev: So we, of course, spend time to explain this, why it's important. But then we say how venture investors, smart VCs, implement all those, and then we provide specific tactics to change your and your colleagues behavior, or change the rules within an organization. Because otherwise, I don't think any of those principles by themselves, however cute they are - and we try to make them cute, sounding cute, they're kind of implementable. So they should be implementable to be successful.
[00:30:21] Andrew Seski: Excellent. Thanks for commenting though. That's really interesting. I'm going to have to look at your colleagues work as well. One of my favorite parts of all of these podcasts is kind of bringing us up to 30,000 feet and asking, what do you feel is underestimated in the world today?
[00:30:33] Andrew Seski: It's just because the vantage point of these different CFOs that we speak to come from different industries, different backgrounds. Just given that you've studied abroad internationally, you've been at Stanford for 20 years. You've got really the epitome of some of the highest quality data and resources in the world. I would love to hear - however you'd like to take the conversation from here - what you feel is really underestimated today.
[00:30:57] Ilya Strebulaev: Well, Andrew, perhaps it will not be surprising by what I'm going to say, but the implications are, I think, just humongous. I think the disruption wave that is coming is underestimated by many, many people.
[00:31:12] Ilya Strebulaev: Many people have the tendency to think, “Not in my backyard.” So that there's a lot of disruption in somebody else's industry, but not in mine. A friend of mine, an economist loves this joke about the difference between recession and depression: recession is when your neighbor loses the job and depression is when you lose the job.
[00:31:33] Ilya Strebulaev: Okay? And I think that is being underestimated. So everything that I've been observing in Stanford at Silicon Valley, and now that I've been leading for 8+ years the venture capital initiative, suggests to me that the disruption is coming to everybody in every single geography and in every single industry.
[00:31:53] Ilya Strebulaev: What I mean by disruption specifically just to materialize this somehow for our listeners. I mean, by disruption is in whatever industry you are, your business model will no longer work either. It's already no longer working or will no longer work in a couple of years, but very soon. The nature of your customers will change.
[00:32:13] Ilya Strebulaev: The nature of the supply change will change. And most importantly, the nature of your competition will change - and the relationship with your competitors. And by the way, I believe that the toughest competition for every single, especially more traditional companies today, will come from outside the industry, from outside their specific competitors that they've been kind of thinking about and following.
[00:32:32] Ilya Strebulaev: Just to give you a couple of examples when I give strategic offsides to leaders of large companies, I tend to start with showing them two photographs - and just if you're listening this in the car or you know while having breakfast, just imagine.
[00:32:58] Ilya Strebulaev: Okay, imagine these photographs. The first one is the Easter parade in New York City on 5th Avenue in the year of 1900. It's a black and white photo, and you will see hundreds and hundreds and hundreds of people, and there are hundreds and hundreds and hundreds of horses. All the carriages in this Easter parade are horse driven.
[00:33:22] Ilya Strebulaev: In fact, there's one exception; there's one automobile, one, in that huge picture. And this picture has really thousands of people, okay, hundreds of horses. And then I'm showing them the second photograph, which is the same Easter parade, more or less the same angle of view, the same black and white photograph, but from the year 1914.
[00:33:43] Ilya Strebulaev: It's now fourteen years difference, Andrew. Fourteen years. And again, there's hundreds of people, and there's only one horse. Only one. Only one. Okay? There are hundreds of automobiles. Now, in fourteen years, the life of horse breeders and everybody who was around that, huge horse industry that employed millions of people in the United States at the beginning of the 20th century changed completely and irrevocably.
[00:34:14] Ilya Strebulaev: And trust me, many are unprepared. Well, almost everybody was unprepared. How many horse breeders - there were very famous brands at the day, 1900. How many do you know? I guess you don't know any, okay. Unless, unless you're a history buff. Now, this is going to happen to every single industry. And the difference between 1900 and today is that this change will come much quicker.
[00:34:42] Ilya Strebulaev: And you know what? Right now people are talking about AI, and of course AI will speed this up, but AI is only one consequence of this. Only one. And by the way, I actually think that AI is not the most consequential. There'll be more consequential things. And I started a lot of the fundamental reasons behind why it's happening today.
[00:35:03] Ilya Strebulaev: Why didn't it happen a hundred years ago to all the industries? There are some fundamental reasons. And I would say that especially decision makers in more traditional organizations that tend to concentrate on day-to-day job, you know what? And so they should, okay. There's cash loss to take care of, their customers, products, et cetera. I think it behooves them to think about a longer-term strategy if they want their company, their organization to survive.
[00:35:33] Andrew Seski: Given that I'm really, really curious as to what is most exciting to you just on the horizon, maybe even just three to five years out.
[00:35:42] Ilya Strebulaev: I believe that we are on the cusp of big changes in how we are going to work and study. Now, I'm not very sure what's going to be in three to five years, or eight to ten years, but I think there's big changes. Now, of course, I'm a professor, I'm a researcher and educator. And so I care a lot about education. I think the education of the future is going to be very, very different from the education of today.
[00:36:07] Ilya Strebulaev: If you think about the business model like of Stanford University, okay, what is the business model? Well, people are born, people go to high school, then they go to university. so they kind of, they study for the entire first half of their life. Then they go and work for twenty years, and then they retire.
[00:36:26] Ilya Strebulaev: Okay? And then they hopefully enjoy the time in retirement, five to hopefully thirty-five years, and then they die. That's kind of - I think the future is going to be very different. I think people will alternate between studying and working. As a professor, I take sabbatical once every six or seven years.
[00:36:45] Ilya Strebulaev: It's a one-year sabbatical, and I think that almost all, at least white collar jobs, will include those sabbaticals, where people go back and retool themselves or change their profession to a large extent. In fact, at Stanford, we already have this. Did you know that Stanford became the first place in the United States, maybe in the world, to introduce this one year program – it was called DCI, Distinguished Fellow Initiative, where people who are already very mature, very experienced with maybe twenty-five years plus experience, come back and spend the entire year retooling themselves. And this now is being taken on by many other universities. Now right now it's concentrated mostly towards like elite universities, but this is only the start.
[00:37:31] Ilya Strebulaev: I think it's going to penetrate. And I'm really excited about this. And the other side of this, maybe for everybody who is not an educator is the future of work. Many people are pessimistic about the future of work. Like there are a lot of doomsday scenarios out there saying that, AI will come and kill all these jobs.
[00:37:51] Ilya Strebulaev: I am of a different opinion. And I think that what - not just AI, but a lot of other things will do, they will make humans much more valuable. Much more productive. So things that you could do in one day, you'll be able to do in one hour - but for this It will be very, very important to have the right skills and the right tools.
[00:38:15] Ilya Strebulaev: So I'm excited about the future work, but it inevitably will introduce a lot of dislocations, a lot. So again, if you are the leader, the decision maker with a long term vision, you absolutely have to think about this. This is beyond your day-to-day horizon, but absolutely have to think about this.
[00:38:38] Ilya Strebulaev: And again, we talk about how this venture minded principles can be used - not just for a short term decision like whether to proceed with an investment or not, but how to prepare yourself for much bigger changes over a subsequent substantial, substantial period of time.
[00:38:54] Andrew Seski: That's a very rose-colored lens. I'm glad we had that opportunity to share that. One thing that just dawned on me is that I would love to hear a lesson that you've learned recently trying to use the venture mindset to promote the book and to launch the book. Is there something that you learned in this iterative process in practice that maybe you've taught over time or, or try to, repeat from other venture firms or other great entrepreneurs.
[00:39:19] Ilya Strebulaev: Andrew many! We can have another podcast just to tell me about what I've learned personally. Let me give you this one. One of the principles I haven't yet talked about, which I think is very useful, especially for, CFOs and other folks in large organizations is the principle that we call: getting outside the four walls. And that is very simple. You almost never find VCs in their offices.
[00:39:45] Ilya Strebulaev: They know that ideas don't come to them. They have to come to seek the ideas. You will find them in the coffee shops. You'll find them traveling around the country at various events and so on and so forth. In fact, in one of my research pieces, we compared the LinkedIn profiles of VCs with their corporate peers, corporate VCs.
[00:40:06] Ilya Strebulaev: So those who are looking outside on behalf of large organizations. And we found out that the VCs have not just richer, longer, more LinkedIn connections, but also much more diversified. So corporate VCs have connections mostly to their college classmates, their peers in the company they used to work, their current peers and so on.
[00:40:29] Ilya Strebulaev: And VCs have a lot of connections to a lot of unusual, unusual, different geographies, different industries, different titles, different colleges, and so on and so forth, getting outside the four walls. So here's how I personally implement this: I've been traveling a lot all my professorial life. Professors do travel a lot to give a talk, a keynote speech, for consulting, whatever.
[00:40:51] Ilya Strebulaev: So what I used to do, Andrew - well, I always would have my laptop with me. I also have my recent paper that I'm working on or whatever. And I would work, I would read, I would enjoy myself, I would never talk to anybody. Why would I, a Stanford, a famous Stanford professor, okay, an expert in this and that - why would I ever talk to a person whom I don't know?
[00:41:14] Ilya Strebulaev: So, well, I have to say the thought, I'm kind of joking a little bit, but the thought never crossed my mind. That is the truth. So I'm now using this principle. How? Here's my rule, which is these days when I travel on the plane, I have a commitment to talk meaningfully to at least four people who otherwise I don't know.
[00:41:37] Ilya Strebulaev: And sometimes, first of all, do I mean, these people are preselected. They do travel on the plane. Okay? Most of them on business, even though not necessarily, but you know what? I met so many interesting people that I would never meet otherwise. And by the way, in some cases, it led to some interesting conversations, like in one case, I met a guy who was a journalist and he was covering horse races.
[00:42:03] Ilya Strebulaev: He was just coming from Dubai, from Dubai World Cup. And we started talking to him about, what's more important, jockey and the horse. And of course that's a very important question for VCs as well. Jockey meaning the founder and the horse means like the product, the business, whatever. And I learned a lot about horse races, he learned a lot about VCs, and I think he is going to write an article in his horse race publication. So we're going to push the venture mindset to lovers of the hippodrome.
[00:42:33] Andrew Seski: That's so cool. Well, Ilya, I just want to give you an opportunity to kind of share where people can find you. I mentioned before we started recording that I think we've been connected on LinkedIn for some time and I've always enjoyed the continuous really-high quality content that you're putting out. Where should people reach out to you? How can they find the book? And how can they stay engaged with your work?
[00:42:55] Ilya Strebulaev: Well, the book is available everywhere, of course, on Amazon and so on. We sometimes have special bonuses if people are interested in, and you just go to the website, thevcmindset.com, and I will repeat, thevcmindset.com.
[00:43:11] Ilya Strebulaev: And I really think that the main organizations that I've been already working with, even though the book just came out, they looked at the book and they say, “You know what, we would like to ensure that every single person in our organization gets the book.” Because the whole point is not just for me to read and make better decisions, but as you said earlier, Andrew, to change culture.
[00:43:35] Ilya Strebulaev: And for this, everybody needs to be on the same page and then we can discuss how, what to do about it. In fact, two organizations already, I know, organized like book clubs around this book. So if you would like to order a lot of books, then just email at team@thevcmindset.com.
[00:43:53] Andrew Seski: Excellent. Well, thank you so much. I know that we have a relatively new book club at Nth Round and I know what my choice is. So thank you for that as well. One less decision for me, and I'm really excited to share this with my team and with obviously this network of incredible CFOs. But Ilya, thank you so much for your time and congratulations on the new launch.
[00:44:11] Ilya Strebulaev: Andrew, thank you so much. Bye for now.
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