One difference between VCs and Entrepreneurs April 20, 2009
Posted by jeremyliew in decision making, Entrepreneur, VC.trackback
Steve Blank had a great post last week about speed and tempo in startup decision making recently where he says:
… think of decisions of having two states: those that are reversible and those that are irreversible. An example of a reversible decision could be adding a product feature, a new algorithm in the code, targeting a specific set of customers, etc. If the decision was a bad call you can unwind it in a reasonable period of time. An irreversible decision is firing an employee, launching your product, a five-year lease for an expensive new building, etc. These are usually difficult or impossible to reverse.
My advice was to start a policy of making reversible decisions before anyone left his office or before a meeting ended. In a startup it doesn’t matter if you’re 100% right 100% of the time. What matters is having forward momentum and a tight fact-based feedback loop (i.e. Customer Development) to help you quickly recognize and reverse any incorrect decisions. That’s why startups are agile. By the time a big company gets the committee to organize the subcommittee to pick a meeting date, your startup could have made 20 decisions, reversed five of them and implemented the fifteen that worked.
I think this is great advice.
Entrepreneurs will find that almost all of their decisions are reversible. As a result, good operators get into the habit of making decisions quickly even with incomplete information. Entrepreneurs make 1000s of reversible decisions per year.
On the other hand, VCs will find that almost all of their decisions are irreversible. You can’t really “ask for your money back” once you’ve made an investment. This is one reason that fundraising can take so much time and effort for entrepreneurs. VCs want to know as much as they can before making a decision. VCs make one or two irreversible decisions per year.
That’s a big difference in decision making style
Lightspeed Venture Partners Blog 
That’s one very interesting application/interpretation of Steve’s theory/observation.
Instead of discretely categorizing decisions as either reversible or irreversible, I tend to map the real world onto a more continuous function from less irreversible to more irreversible based on their cost/possibility of reversal.
For example, changing a website’s background color is very reversible, adding a new feature that’d take 4 weeks to develop and test is less reversible, committing a five-year lease of a new building is not truly _irreversible_, it’s just less reversible than the previous examples, and lastly, firing an employee is pretty much irreversible.
As for VC decisions, especially those of early stage VCs, I believe they are on par with the 5-year-lease example.
[…] 11:38 am on April 20, 2009 | 0 Permalink | Reply Good points about decision making by Steve […]
Jeremy
We talk about this everyday….take big high beta risk where we can always reverse them
I agree that in general VCs make irreversible decisions while entrepreneurs make reversible decisions. However, when an entrepreneur brings on a VC and takes his money, gives a board seat, and whatever else – that decision is completely irreversible. You are married to your VC for better or worse. So entrepreneurs better treat that decision as irreversible and pick their VCs wisely. Jeremy would be a wise choice 🙂