A Manifesto For Mindset-Based Investing

Mindset-Based Investing is a new approach to select emerging VC managers based on their personality traits and approach to risk vs. track record and other usual metrics.

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In This Article

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What If Everything We Assume About Elite Venture Capitalists Is Wrong?

When I started investing in private companies in the mid-2000s, I believed outlier performance lay in being highly analytical—digging into financials, market trends, and historical data to build a strong thesis. Coming from an LBO and growth equity background, I was trained to assess companies based on what was already visible. The numbers told a story, and my job was to interpret it.

Then, I stepped into Venture Capital. And suddenly, everything I thought I knew about investing changed. There was so much uncertainty—the companies I evaluated had limited data, unproven models, and unpredictable markets—I felt I was improvising at every step, and it made me uncomfortable. Traditional data-based analysis wasn’t enough.

I started observing and talking to successful VCs to understand how they did it. At first, I assumed their unfair advantage was their superior gut instinct. The ability to sense a breakout company before anyone else, to recognize a winner when others hesitate.

I began paying more attention to my intuition, which I thought should be trained by pattern recognition. I was wrong, but it took me a long time to realize it.

Uncovering the secret sauce of elite-level early-stage Investors required engaging deeply in psychology research and closely observing the dozens of Investors and hundreds of students I trained to Venture Capital since founding The VC Factory in 2018.

Now, a decade later, it has all come together, resulting in a framework for identifying what truly separates the top 0.1% of Venture Capitalists from everyone else.

It forms the basis of what I call Mindset-Based Investing.

And I’m putting my money and time where my brain is, deploying capital to back emerging VC managers who embody these principles.

This post is both a manifesto and an invitation: if we want to rethink how we select (and train) the next generation of great investors, we need to start by understanding what truly makes them exceptional.

Why Traditional GP Selection Processes Fall Short

The main challenge for Limited Partners (LPs) investing in VC funds is selecting the right General Partners (GPs). The conventional method is track record-based selection. If a GP has already backed multiple unicorns, the decision is easy—prior success creates its own momentum.

But this method presents at least two flaws.

First, it’s useless when evaluating emerging VC managers, who, by definition, lack a history of exits. Second, while there is some indication of persistence in Venture Capital (GPs with a fund in the top quartile have a c.50% probability that their next fund also reaches top-quartile performance), it has been shown at the fund, not GP level, and there are confounding factors.

To work around these constraints, experienced LPs have developed evaluating processes that might predict a GP’s future performance beyond past peformance. Their criteria include:

• Repeatability of their investment process
• Portfolio construction strategy
• GP-Founder fit
• GP team dynamics

These are valuable insights, but the outcome variability casts doubt on this methodology’s strength. Spending time thinking about optimal portfolio construction or being nice to Founders may lessen the chances of failure, not explain how a VC makes a contrarian bet in a company or a team that nobody wants to back.

Only 20 VCs have made 1-billion-dollar exits more than once, and they are all exceptionally commercial-driven.

Chamath Palihapitiya – Social Capital (Source: All-in Podcast)

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A more promising approach is to focus on who elite VCs are and whether there are commonalities between them. Chamath’s analysis shows that top-performing VCs often came from finance, banking, or even journalism—fields that required strong market instincts and commercial acumen rather than product or engineering experience.

This line of reasoning doesn’t convince me either. The backgrounds Chamath references are too diverse to support a clear pattern. A journalist, an investment banker, and a corporate operator may all succeed in VC, but the idea that they share a common commercial mindset is ambiguous at best.

My own analysis of the 2019 Midas List confirms that there are no clear commonalities in background, training, or career trajectory among the top-performing VCs. Success in venture doesn’t stem from a specific career path—it comes from how Investors think and make decisions under uncertainty.

What Is Mindset-Based Investing?

I worked out a simple definition, as the term doesn’t exist in this sense.

Mindset-Based Investing is recognizing that success in Venture Capital depends primarily on the Investor’s mindset—not the usual metrics LPs use to select VC managers, such as deal flow, analytical skills, networks, and track record. 

Have you noticed how some of the greatest bets in VC history weren’t made because of a perfect market fit, a large TAM, or an impeccable resume, but because of a non-measurable element?

• Masayoshi Son invested in Alibaba because of something in Jack Ma’s eyes
• Brad Feld backed James Park when he finally read his “affect” correctly
• Garry Tan put money in Coinbase when everyone said no because of prior priming

Jack Ma had no business plans, no revenues, and maybe 35-40 employees. But his eyes were strong. He had strong, shining eyes.

Masayoshi Son – Softbank (Source: Bloomberg)

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Conversely, many of the biggest misses in the asset class can be imputed to a limit inside the VC’s head. It happens even to the best Investors.

• Bill Gurley passed on Google because he couldn’t believe two phDs could lead a startup
• Fred Wilson refused to meet the Airbnb team because he didn’t think there was a market
• Jeremy Levine passed on Facebook because there was an incumbent (Friendster)

I could go on. This website’s loyal readers know these stories and the litany of cognitive biases that accompany them.

It is clear that most VCs who are persistently able to produce outlier returns have a different mindset. While connections, value-add, and market vision play a role, the real source of their success lies in how they see the world.

Mindset-based investing proposes to prioritize these mental aspects over the technical dimensions.

How To Spot Elite VC Managers In The Making?

I propose identifying high-potential emerging VC managers primarily based on their personality traits and approach to risk, not their investing track record or previous experience. While crucial parameters such as the investment strategy, business network, and access to quality deal flow play a role in the analysis, they don’t take precedence over the mindset.

I isolated a few characteristics that help the highest-performing VCs repeatedly make outlier investments. Elite Venture Capitalists’ success doesn’t rely on better access, data, or connections. They succeed because they think differently.

Outlier VCs don’t optimize for downside protection, wait for validation, or care about what others think. They share a few defining traits making them masters of the power law:

• Comfortable with uncertainty
• Limited or no loss aversion
• Contrarian thinking
• Swing big
• Focus on what can go right

This mindset is rare, and it’s difficult to assess just by looking at someone’s past deals or track record.

I don’t mind a 90% probability of failure if there’s a 10% chance of changing the world.

Vinod Khosla – Khosla Ventures (Source: Bloomberg wealth)

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That’s why I’ve spent years developing a framework that applies Regulatory Focus Theory—a concept from psychology that distinguishes between two personality types—I adapted to VC decision-making:

Promotion-focused Investors seek upside, chase bold opportunities, and don’t need external validation to act. They are comfortable with uncertainty because they think in terms of potential gain. They are trying to win.

Prevention-focused Investors focus on avoiding mistakes, minimizing downside, and protecting what they have. They struggle in VC because they optimize for reducing risk rather than maximizing outcomes. They are trying to not lose.

Using this framework, I can assess emerging VC managers before they have a track record—identifying who is naturally wired for Venture Capital success. Instead of putting pedigree or experience, I focus on how they think, how they make decisions, and whether they have the psychological traits to thrive in a Power Law environment.

This is what Mindset-Based Investing is about. And now, I’m putting it into practice.

Apply now to The Emerging VC Accelerator.

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Linked Resources

I’ve written extensively about these topics, and will keep doing so with more focus on Mindset-Based Investing in the future. Below are some crucial articles to better understand the concept. Make sure you subscribe to the newsletter to get the latest articles as they appear.

Understanding the Power Law: Do Venture Capitalists Take Enough Risks?

The 7 Secret Evaluation Criteria Venture Capitalists Use To Make Investment Decisions

“I don’t look for companies. I look for Founders.” – Masayoshi Son

“Google’s funding round had red flags.” – Bill Gurley

How The Best LPs Evaluate Emerging VC Fund Managers

You can also browse the dedicated category, which also contains articles about entrepreneurs’ mindset and psychology.