From Jan Andriessen – HenQ (@janandrssn)

​It seems to be a strong human tendency to be looking for that one thing that answers it all. We are looking for that one technology that solves all of our problems. In one of my previous blogs about the technology effect, ​I write about how this can lead entrepreneurs and investors to overestimate the potential of new, unfamiliar technologies. Today I will focus on how I, as well as fellow venture capitalists, are sometimes tempted to look for that one Holy Grail factor that determines the success of a business and how this might both be an opportunity as well as a threat to venture capitalists’ future investment decision making and portfolio management.

A good example of the tendency to seek one single explanation for everything is that it now seems to be conventional wisdom once again that you need good unit economics to eventually turn growth into a profitable business, after a long period of reading about how ‘growth only’ based valuations prevailed​. Don’t get me wrong, I think it is great that unit economics are strongly taken into account by all investors; this will be beneficial to everyone involved in the tech scene. I am however afraid that, after having over-​focused on growth and perhaps taking a downround or two because of some errors in​ investment hypotheses, bipolarity might kick in and the focus on unit economics might get ​taken too far by some.

In my view​ the risk is simply that as human beings, after having been burned for overlooking or ignoring something, we tend to overcompensate for our mistakes. So in case of unit economics, for example, after having invested in companies solely based on growth, it might now be a risk for some investors to overlook that one killer opportunity that does not have positive unit economics yet but will have in the future. As such, the fear of making the mistakes they made before might drive certain investors into making new mistakes that are the inverse of their old mistakes.

I think the above bipolar tendency is driven by the confluence of two human psychological errors. First of all, there is the recency bias, the tendency to overweigh recent information and events when making decisions. It makes us overvalue the importance and impact of what recently went wrong or right. The effect of the recency bias is complemented and increased by another flaw of our brain that makes us physically inclined to only zoom into a single aspect of a situation or opportunity (“the focusing effect”).

In the example of priorly having over-​focused on growth without sufficiently taking into account the importance ​of ​unit economics, the recency bias might make investors think that unit economics are more important than they really are, compared to other success factors. (And just to be clear: they are super important, among a bunch of other things that are incredibly important.) Because human beings are inclined to zoom in on a single factor of an equation by nature, our imperfect brains might now lead some to have the tendency to strongly focus on unit economics, perhaps giving other equally important aspects – such as momentum through revenue growth – slightly too little attention.

The fundamentals of a great business, however, probably do not change as quickly as the general perception of value. Beyond good unit economics, other factors such as the potential to grow quickly and raise barriers to entry might still be good reasons to delay focusing on unit economics for a while. (As long as there is a clear view and understanding that unit economics will become positive eventually.) In fact, nothing about building a great business has probably changed significantly since the broader view shifted from growth to unit economics. And that’s where the opportunity arises for the opportunistic investor.

The opportunity can be found in that, if you successfully manage to stay clear of being biased towards the recent and force yourself to consider the whole picture, you will see value where some others perhaps won’t. You might, for example, recognize an opportunity in a deal that currently has negative unit economics for a good reason and will become profitable on a unit economics basis in the near future; a deal that for its current negative unit economics might be overlooked by many investors for the fear of making the growth-only focus type of mistake. In managing your portfolio, by staying clear from these biases, you might be able to much more steadily manage your portfolio companies towards the winning position in the market, as you prevent them from being steered from one extreme direction into the other.

Like all people, investors do sometimes look for the holy grail. And like everyone who looks for the holy grail the problem is in the seeking itself, as it means seeking for something that doesn’t exist. It might lead you from one extreme into the other, overlooking the fact that a wide set of different factors is always to be considered. There are no easy answers. The shift from growth to unit economics is just one among many examples in which investors could be tempted to focus on recency and a too limited set of factors that influence value. Instead, we should avoid the bias to focus only on what recently went wrong and right, always aiming to understand the bigger picture and asking ourselves the question what drives value over time. Doing so, we might discover value we otherwise wouldn’t see and prove to be much more valuable to our portfolio!