Delusion

The art of fooling ourselves

The other day I tweeted about two of our companies that unfortunately didn’t make it. We had invested about $150k in each one of them, they had raised about $75M each, and for some time, those two investments combined were worth about $8M in our books, which accounted for a bit less than 1% of our asset value in startups (realized and unrealized). It’s like a landslide. Those two companies are part of a portfolio of 1200 companies in total, and they are just larger rocks that followed a lot of small ones over the past few months, but I do believe that sooner rather than later, larger ones will come off that mountain of paper money. The next six to eighteen months won’t be pretty, that’s for sure.

A lot of people asked what happened to those companies and their leaders. Nothing spectacular, I am afraid, just basic first principles lost within delusion.

Richard Feynman’s first principle is not to fool yourself, knowing that you are the easiest person to fool. I often say that entrepreneurs have some sort of madness in them, and it’s necessary in order to pursue the hard truth of entrepreneurship, but the difference between being crazy and being stupid is that the former ask themselves why they are truly making certain choices. Unfortunately, most of the time, we just persuade ourselves about whatever we want our world to be, driven by illusion more than a clear vision.

For instance, I have a bunch of companies in our portfolio that have a war chest in the hundreds of millions, and they are very intentional about getting to profitability before they run out of money. However, when I talk with some of those founders, I find their sense of urgency baffling. They have managed to convince themselves that they will reach profitability by the end of 2025, while in the meantime, they are still burning 50 to 60 million every year, not realizing that their current business ratios do require to be a lot more aggressive in cutting costs and making their team more efficient. The reason is the illusion that within two years, they will be profitable with more than 50 million in the bank. The reality is that they are completely ignoring the nonsense of a framework of thinking they have set to reassure themselves. If they were facing a company in their situation, they would definitely not encourage them to continue on that course.

Self-awareness is so underrated, and we very much suck at it because it hurts to be confronted with our failures, flaws, and biases. We are looking to avoid pain, so we build workarounds, we are masters at building fortresses of good-looking principles behind which we hide ourselves.

Understanding the latter is critical because to avoid delusion, you must surround yourself with the right people. But it only works if you really open up to them and the constructive inner and outer conflicts that will arise.

• Ask them to first share how they feel about you and how you react to certain critics. It says a lot about how we function. For instance, I am meeting with a founder next week, and whenever we touch a striking point, he becomes very defensive, so naturally, he’s closing down instead of opening up, and it takes too much time to address some issues correctly. Making sure that he first understands how he functions will help us go through certain matters with better awareness and efficiency.

• Then, ask them to address the few points that worry them the most about your business and, more importantly, ask them to demonstrate clearly their thinking. Very often, people have rightful intuitions but fail to deliver the message in a clear way.

• Finally, assume that what they are saying is right and work towards their arguments and not against them. It doesn’t necessarily mean that they are fully right, but in every impression lies truth, so dig into them in order to extract some value during those discussions.

This is true for your investors but also for your advisors. I was on the phone the other day with a founder who is raising a small round with strategic angels. During our chat, he mentioned some of them who are either irrelevant to his business or, even worst, frauds who have achieved a lot less than what they claim. This kind of mistake can be easily avoided if you ask the right questions instead of remaining blinded by compelling speeches with very little ground.

Chase the nonsense.