Venture capitalism has been instrumental in bringing some of the most revolutionary solutions to market — many of which have served as engines for economic growth and societal progress across the globe. However, venture capital has been limited in reaching its potential for transformation in large part because of herd mentality and a lack of independent thinking. Herd mentality bias in venture capital shows up in a variety of ways and often leads to failure. In fact, herd mentality has caused some of the largest-ever failures of venture-backed companies in the U.S.
For example, the November 2022 collapse of the cryptocurrency exchange FTX is a case study of an overabundance of herding behavior in finance and a dearth of independent thinking and diligence. FTX’s founder and former CEO fooled many sophisticated institutional and individual investors, including some of the most recognizable names in the industry. The fallout from the FTX debacle will have far-ranging and far-lasting ramifications.
The FTX collapse is merely one example of the ramifications of herd mentality bias. Other examples readily come to mind, including Theranos and WeWork. While the details of how those firms came to collapse are different from those of FTX, the fundamental underpinnings of their collapse — herd mentality and a lack of independent thinking and diligence — are identical.
These shortcomings aren’t limited to venture capital, however. Those maladies are also prevalent in our politics. We see a lack of independent thinking clearly among the two major political parties. In contrast, political independents tend to be able to select whoever they judge to be the best candidate, regardless of party affiliation. More Americans — 41% — identify as independent versus either of the two major political parties. For example, independents are the largest voting bloc in Arizona. Because they are untethered to any party, independents more often tend to conduct their own diligence, think for themselves, and arrive at their own decisions.
How VC Can Take a Page Out of Political Independents’ Book
So, what can venture capital learn from political independents? For one, VCs would do well to fully do their own diligence and not over-rely on the fact that the largest names in venture capital are backing this or that startup. Second, VCs have to be willing to guard against herd mentality and groupthink. They have to be able to stand on their decisions — even if no or few other VCs or investors join in on their exuberance about a startup. After all, being able to stand on one’s diligent decision is much of the stuff of leadership in venture capital.
Our firm has leveraged this same type of independent thinking to make investment decisions. Arbol, one of our high-flying portfolio companies, is a shining example. Arbol was founded in 2020 by Sid Jha, a former financial industry operative with no experience in the insurance industry. Herd mentality thinking would have militated against investing in a founder with no insurance industry experience who was launching an insurtech startup when the rest of the planet was captivated by COVID-19.
In 2022, Arbol reported $170 million in gross premiums underwritten. In July 2023, Arbol announced it had transacted more than $1 billion in notional risk since its launch in early 2020. Further, it had surpassed its stellar performance in the first half of 2022, with record gross written premiums in the first half of 2023. In November 2023, Arbol launched in the United Kingdom. By making independent investment decisions, without the burden of herd mentality bias, our firm was able to contribute to and capitalize on Arbol’s success.
We encourage you to discover the power of thinking differently, like political independents who assess opportunities with an open mind and thorough diligence. Sign up for our newsletter today and be part of the movement shaping the future of venture capital. Don’t miss out on the opportunity to gain exclusive access to our insights, winners like Arbol, and more. Think independently: invest outside the herd.
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