Thin-Slicing

So, today I did my civic duty and appeared at the Suffolk Superior Courthouse in Boston for jury duty. It was my first time being summoned for jury duty so I was interested to see what the process was like and if I would be put on a case. Alas, I wasn't put on a case and neither were any of the other members of the jury pool. However, sitting in a room for about five hours allowed me do a lot of reading which spurred this blog entry.

I brought along Malcolm Gladwell's new book "blink" as my reading for the day. I started the book a few days ago and was upset every night when I had to put it down due to my body begging for sleep. The book is great and the concept of thin-slicing is fascinating. For all those who have not read the book yet, thin-slicing is a term Gladwell created to describe how our subconscious works. Essentially, our subconscious makes decisions in milliseconds by extracting the important bits of information from a situation (i.e. thin-slicing) and comparing it to experiences that we have had in the past.

A lot of the time we are unaware of this process going on in our brains. We wonder why we get a "gut" feeling about something and begin analyze whether or not we should go with our gut. However, as everyone probably heard from their teachers about the SATs, you should always go with your first instinct. This is because our subconscious does a great job of providing us quick answers to complex problems (although it is not always right). I won't say more because Gladwell does a great job exploring thin-slicing in the book and I want you all to read it and start a dialogue on my blog about what you think.

I bet everyone reading this blog has, at one point or another, had a distinct voice in their head telling them to make a certain choice. I can remember one case in my career specifically. I was working in the equities department at a well known mutual fund house as an intern in the summer of 2003 and I had the opportunity to meet the management team of LifeCell (nasdaq: LIFC). Within a couple minutes of meeting them I had a strong urge to dump a ton of money into their company. Now, if I were managing someone's money and I told them that I just felt this company was going to do well they would probably not let me invest their hard earned cash in it and they would probably question my sanity.

Knowing this I, along with my Bentley Investment Group team, created an elaborate presentation detailing the technology, the numbers and why we thought this company would be a good investment for the group. The group ultimately decided to purchase the stock a few months after I had met LifeCell's team for around $7 per share (when I met the team it was at $4) and the stock currently trades at roughly $23. Without the lengthy analysis my subconscious had thin-sliced the information about the company and essentially gave me a "buy" signal based on the team sitting in front of me. This "buy" signal turned out to be right as had a few other overwhelming urges to buy I had previous to this but I never thought much of this impulse until reading "blink" and reading Dave Hornick's blog about teams he posted today.

Of course the company has to have a good idea or product for one to even consider investing but the product or idea are only half (if not less than half) of the package. The main key to success of any business, either just starting up or public, is the team. I have heard this from every early stage venture investor I have talked with and read and most other investors in general. People, they are the key to a great business.

Our subconscious is good at thin-slicing people because it does it every day. Now, it does make mistakes from time to time based on stereotypes that clog the mechanism (again, more in Gladwell's book) but for the most part, it works. It works even better if one is an expert or knows a lot about a subject (i.e. I know a good amount about young high tech and biotech companies so I am better at judging those opportunities). In a venture investors case, his or her subconscious is probably very good at picking out winning management teams because they have seen a lot win and even more lose allowing their subconscious to build a staggering database of traits to look for to identify a company as either a potential winner or loser.

My thought is that many venture investors (especially those in the early stage area) probably judge a team within the few minutes of their pitch (whether they know it or not) and probably do an accurate job of assessing winning teams and losing teams. However, because many investors would never invest in a VC fund that invests based on hunches, VCs are forced to create piles of due diligence materials before they can invest in a deal. I wonder if all of this due diligence clouds the judgment of VCs who would normally have great investing ability through thin-slicing. I am not advocating that no diligence should be done but possibly less could be done with the investment outcome remaining the same. I bet the best VCs all had "gut" feelings about their best investments after meeting them the first time and, almost as an afterthought, had to find a way to explain the investments to the investment committees at their respective firms.

I suggest "blink" to anyone who is curious about how we think and make decisions. It is a fascinating book and as the book jacket says, "Never again will you think about thinking the same way."

P.S. If you are so inclined, please post narratives of times when you knew an investment/management team was good but just couldn't explain it in words and whether or not the investment panned out. Also, I would like to hear from some VCs as well if there are any reading this blog.