Consider unintended consequences to reduce confirmation bias

November 10, 2017

The CEO of one of my previous portfolio companies and I held a vigorous debate a while back about an acquisition he wanted to make.

This incident occurred a long time ago, but it lately returned to top of mind for me as I witness the hand-wringing over Facebook’s role in supporting fake Russian profiles which may have influenced the 2016 U.S. elections.

It was an unusual change of roles for us. Often with this company, I had become the VC voice of aggressive growth while he was usually the more cautious one.

In this case, however, this CEO badly wanted to move quickly on an acquisition target, while I was the one slowing the process. He was predicting that his existing business activity was flattening and was eager to keep company growth on track. He interpreted every piece of ambiguous new information about the prospective target as supporting the case for acquisition.

Fundamentally, this CEO was right. When growth starts to falter in a tech startup, it’s often a sign that either the existing business has found its ceiling or that the market has changed. Startups who do not take action may stagnate, and stagnation can be the first step toward irrelevance.

So directionally, the CEO and I agreed that something needed to be done. We differed in our enthusiasm for acting hastily on the particular target in question.

Two circumstantial issues gave me pause: i) the target had already been on the market for over a year; and ii) i had heard a casual comment from another VC in the space which raised doubt on the quality of the asset.

One particular exchange encapsulated our diverging perspectives:

CEO: “Look, we’re not perfect either, and we can’t wait for a pristine, flawless acquisition target to come along at a price we can afford.”

Me: “Agreed, but let’s at least take a moment to consider what can go wrong so that we go into this with our eyes wide open.”

I see this danger of ignoring unintended consequences playing out again in the present Facebook controversy… on both sides of the debate.

On the one hand, Mark Zuckerberg displays a seemingly unshakeable conviction that by building great technology, nothing but good will come to world. I’m sorry but no; technological progress impacts society in a range of ways, many good, but also some less beneficial.

On the other hand, the voices demanding regulation and editorial censorship controls on Facebook also miss an analysis of the potential adverse ramifications of such controls. To imagine just one example, might imposing more “KYC overhead” on FB advertisers hurt the little startup more than the deep-pocketed incumbent ?

I’m not advocating analysis-paralysis. Entrepreneurs wouldn’t get out of bed in the morning if they dwelled on everything that could go wrong. However, I do submit that seeking disconfirming evidence and considering the unintended consequences of our actions will increase our collective ability to guard against worst-case scenario outcomes.

Back on my original anecdote, in the end, the CEO (who was a fantastic manager I might add) came around and agreed on the importance of uncovering the bad news and performing the mental exercise of thinking through the potential pitfalls. There were indeed a handful of blemishes and concerns, but not any deal-breakers with the target, so we proceeded with the acquisition.

 

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posted in venture capital by mark bivens

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