"Airline Pilots" Make the Best Venture Investors

Use checklists. Via FT:

Such people are rare – and extremely hard to spot. Smart identified half-a-dozen different ways the venture capitalists he studied decided whether they’d found such a person. These were styles of thinking, really. He called one type of investor the “art critic”. He or she assessed entrepreneurs almost at a glance, the way a critic can assess the quality of a painting – intuitively and based on experience. “Sponges” took more time gathering information about their targets, soaking up whatever they could from interviews, on-site visits, references and the like. Then they followed their gut.

The “prosecutors” aggressively interrogated entrepreneurs; “suitors” focused more on wooing people than on evaluating them; “terminators” saw the whole effort as doomed to failure and skipped the evaluation part. They simply bought what they thought were the best ideas, fired entrepreneurs they found to be incompetent and hired replacements. And then there were the “airline captains”. Studying past mistakes and lessons from others in the field, they built formal checks into their process. They forced themselves to be disciplined and not to skip steps, even when they found an entrepreneur they “knew” intuitively was a real prospect.

Why were these last, methodical types labelled “airline captains”? Four generations after the first aviation checklists went into use – lists deemed necessary to get giant, complicated aircraft off the ground and over oceans and continents with minimum risk to passengers – people are starting to apply that methodology to a range of fields. In three years of research, I found that checklists were being used to improve patient outcomes after surgery, keep buildings from collapsing and ensure consistently excellent food at popular and high-quality restaurants. I also found that checklists seem able to protect their users against failure where they might have made mistakes – even the experts.

Sure enough, when Smart tracked the venture capitalists’ success over time, it became clear that the airline captains had by far the most effective style. Those investors taking the checklist-driven approach had a 10 per cent likelihood of later having to fire senior management for incompetence or concluding that their original evaluation was inaccurate. The others had at least a 50 per cent likelihood. The results showed up in their bottom lines, too. The airline captains had a median 80 per cent return on the investments studied, the others 35 per cent or less.

Those with other styles were not failures by any stretch – experience does count for something. But those who added checklists to experience proved substantially more successful.