Softbank’s Masayoshi Son has been credited with the largest win (Alibaba) and loss (WeWork) in Venture Capital’s history. As he’s commonly referred to, “Masa” is reported to be a very intuitive entrepreneur and Investor. His investment decisions rely more on gut than data. In the WeCrashed podcast and TV show, Masayoshi Son tells an incredulous Adam Neumann, who was about to flip through his WeWork pitch deck: “I don’t want to see your deck”. He then points out that he’s looking for Founders with a vision.
In this post, I go over the key investment criteria Venture Capitalists say they consider, focusing on the qualities they are looking for in Founding teams. I then introduce a framework that I believe, after years of investment experience and research in entrepreneurs’ psychology, VCs should put at the top of the list. I then take a look at the cognitive biases often preventing Investors from adequately evaluating entrepreneurs.
In This Post
What Venture Capitalists Say They Care About
The litany of investment criteria VCs use to invest in startups is both incredibly consistent and varied:
- Explicit criteria include the startup’s fit with the fund’s strategy, the size of the underlying market, the scalability of the business model, and potential exit routes
- Implicit criteria, i.e., those Investors don’t talk about or are often not even aware of, include Founder-related biases, being primed, return strategy, and groupthink. I uncovered seven such criteria in my article The 7 Secret Evaluation Criteria Venture Capitalists Use To Make Investment Decisions
But the single most cited criterion for all Venture Capitalists worldwide is the team. Imitating the famous phrase used for retail—all that matters is “location, location, location”—VCs like to repeat three times that all they care about is the Founding team. While VCs of old tended to jettison or sideline Founders as the IPO date approached, replacing them with grey-haired executives, the trend has changed since the mid-2000s.
In recent years, VC markets have become Founder-friendly, and the idea that Founders should lead their companies from rags to riches gained weigh. Among VC firms, Andreessen Horowitz spearheaded the Founder-CEO concept. I wrote about it in more detail in the article below.
VCs not only look for a long list of qualities in Founders; they also expect different things depending on past interactions and outcomes. Tim Draper looks for someone who is “enthusiastic but has quiet confidence”, while Brad Feld will tick at an obsession for the product. Other VCs, like Upfront Ventures’ Mark Suster, look for intangible Founder qualities, relying more on signals than hard data.
My bet is that this entrepreneur will create something out of nothing.
Mark Suster (Source: 20VC)
Founders trying to understand whether they have what it takes may be confused by so much variety. During live sessions of the VC Career Accelerator , participants—all of them active VCs—often ask what they should focus on when evaluating startup Founders. Masayoshi Son honed his gut skills over decades, and he still makes mistakes, as the WeWork debacle clearly shows. Is there a framework that VCs can use to reduce the uncertainty?
I believe there is one such framework, emanating from the regulatory focus theory. Before I lay it out, we take a detour analyzing Masayoshi Son’s “method,” which is uncommon.
Is Masayoshi Son A One-Trick Pony?
Masayoshi Son is credited with the most lucrative deal in VC history, turning a $20 million investment in Alibaba Group into a $50 billion stake by the IPO. In an interview with Carlyle’s Founder David Rubinstein, Masayoshi Son recounted that, despite Alibaba’s lack of a business plan and zero revenue at the time, he was captivated by Jack Ma’s vision, determination, and leadership qualities, particularly his ability to inspire young Chinese entrepreneurs.
His eyes were very strong. Shiny eyes. I could tell from the way he talked that he had charisma and leadership.
Masayoshi Son – Softbank (Source: Bloomberg)
For all his investment prowess, Masayoshi Son is He also made one of the biggest losses in VC history, posting close to $20 billion in write-offs on WeWork. Some commentators claimed that Masa was not the investment luminary many thought he was, and got lucky with Alibaba. Social Capital’s Chamath Palihapitiya retorted that “You only look like a moron to losers” in a recent episode of the All-In Podcast.
The “Besties” proceeded to recount how SoftBank acquired a significant stake in AI-tech provider Arm, increasing its ownership to 90% after purchasing the remaining shares from the Vision Fund at a valuation of $64 billion. This move has proven prescient as Arm’s valuation soared to $140 billion, with SoftBank’s position now valued at $125 billion.
Despite previous skepticism around his investment decisions, Masayoshi Son’s focus on AI and the chip sector through Arm has vindicated his long-term strategy. His ability to withstand criticism and maintain conviction in his vision underscores the potential of strategic, high-conviction investing in technology.
Detractors conveniently forgot that Masayoshi Son made other lucrative investments in the past beyond Alibaba. In the same interview mentioned before, he touched on his early investment in Yahoo!, taking 35% for a $100 million investment and co-founding Yahoo Japan with a modest $1.2 million, which both yielded tremendous returns.
Yet, Son’s journey wasn’t without its lows; he shared a candid recount of the tech crash around 2000-2002, during which he faced a personal net worth loss of $70 billion—the largest financial loss by an individual in history. Son’s resilience and strategic vision exemplify the highs and lows of tech investing, showcasing his unparalleled impact on the global tech landscape.
The discussion highlights the significance of the power law in Venture Capital, where a single successful investment can offset multiple other losses. Son’s gamble on Arm, like his earlier bet on Alibaba and Yahoo!, illustrates VC’s high-risk, high-reward nature.
Are Founders Promotion or Prevention-Focused?
My doctoral journey into the psychology of entrepreneurs—with a focus on how they manage their stress and mental well-being—took an unsuspected turn a few months in. While formulating assumptions on whether Founders were more or less likely to suffer from stress than employees, I picked up a set of theories that, applied to entrepreneurship, may explain why most Founders fail.
The corresponding conference, “Why Do Entrepreneurs Succeed?”, is now presented to scores of entrepreneurs worldwide. I’ve recently had the opportunity to run it with startup accelerators of the GAN network in the US and Olam Ventures in the UK. The list is constantly growing as it strikes a chord with entrepreneurs.
In this training, I demonstrate that the main roadblock to the top three challenges entrepreneurs face is not of a cognitive but of a mental nature. The three common mistakes I analyze are:
- Not focusing on the right tasks
- Overinvesting in the product
- Launching for a market that doesn’t exist
Evaluating whether Founders are likely to make these mistakes is a critical part of early-stage investors’ due diligence process.
What I found in my research so far—I always preface the “Why Do Entrepreneurs Succeed?” training with a notion that this is still work in progress—is that the common causes of these mistakes are fear of failure, overconfidence, and entrepreneurial learning. These personality traits are also found in the regulatory focus theory, pioneered by Columbia professor E. Tory Higgins twenty-five years ago. He distinguishes two types of motives for making decisions: promotion and prevention.
Here’s how I apply the theory to entrepreneurs:
- Promotion-focused Founders are trying to achieve growth at all costs. They don’t care about having prospects turn them down or a product being shipped to market too soon. They don’t let a stone unturned, they will test and test again until they find the correct answer. In a word, they play to win.
- Prevention-focused Founders, on the other hand, are trying to avoid failure at all costs. They are more deliberate, work consciously and meticulously (and slowly), and possess good problem-solving skills. They play not to lose.
Which one should VCs look for in entrepreneurs?
Well, that’s where it gets complicated. First of all, most people seem to possess both of these traits, although one is dominant. For instance, I currently work with a pair of Founders who are almost archetypical illustrations of this theory. However, the promotion-oriented one is prone to making plans B and even C, a characteristic typically found in prevention-focused individuals.
Should Masayoshi Son Have Betted On Adam Neumann?
At first glance, promotion-focused Founders are everything Venture Capitalists dream of.
During the conference mentioned above, I show a video of Airbnb’s co-Founder Brian Chesky talking about the decision-making process behind the startup’s foray into payment. “It was scary, so we did it.” says a confident Chesky as he reflects on the crazy move they made at a time when peer-to-peer payment was quasi-inexistent.
Promotion-focused Founders fit the narrative of the maverick approach many successful entrepreneurs, from Elon Musk to Mark Zuckerberg, seem to go by. They will do what it takes to succeed, which is a determining skill in a context where most of your peers will go bankrupt at some point.
For the promotion-focused, the worst thing is a chance not taken, a reward unearned, a failure to advance.
Heidi Grant & E. tory higgins (Harvard Business review)
However, these types of Founders also have weak spots. WeWork’s Adam Neumann is a living testament to that darker side. In the mesmerizing WeCrashed TV show, based on a well-documented podcast, it becomes clear that Neumann is a typical promotion-focused Founder. He’s an optimist who will make moves others may judge crazy because he only focuses on best-case scenarios. But he also fails to plan for alternative routes.
Each time funding options disappear (first with Benchmark, then with Softbank), he hastily jumps on the next bandwagon. But that strategy cannot last forever and has serious repercussions. When the last-chance IPO is shelved, Neumann can’t help to “feel dejected or depressed”, which is a symptom Grant and Tory Higgins lend to promotion-focused individuals.
Why did Masa take such an enormous risk on Neumann? I believe he did so because his own life experience primed him.
As his patronym suggests, Masa has Korean ancestry. I spent a couple of years studying and working in Japan in the late 1990s and early 2000s. Although fascinated with its people, culture and language, it’s hard to ignore Japan’s insular nature. As any foreigner will tell you, you quickly realize, after settling there, that you don’t belong. Attaining mastery of the language doesn’t change the situation. I remember my Korean friends from university bringing this point home even more acutely, given the troubled history between the two countries.
I have no doubt Masa could have felt estranged from the country he was born in. Adam Neumann’s vision of curing loneliness through communities must have resonated strongly with Masayoshi Son. (For the record, many other countries fail to make people feel at home, mine probably included, and I have a lot of love and respect for Japanese culture. Gambarimashou!).
This idea of being primed permeates Venture Capitalists’ decision-making, sometimes at an unconscious level. If you want to learn more about it, and other implicit criteria I identified, read the article mentioned above.
In the end, Masa embarked on a journey with Neumann’s vision. He looked not at the company but at its Founder.
