IBM is one of my favorite sales and marketing case studies. As the saying goes: nobody ever got fired for buying IBM. I had always appreciated the sales hustle, but thinking more about the “Buying IBM Effect,” I began seeing the same dynamic elsewhere:
Huge fund sizes, for example, can hurt VC returns. Deploying large amounts of capital is difficult if you’re only seeing a limited number of worthy startups. You have to choose between investing more capital per company and investing in a larger number of startups. Many investors chose the latter option. This explains some quirks of highly-saturated funding ecosystems like Stanford’s. I’ve seen companies there raise ~1mm with nothing more than an idea and a decent-but-nothing-special team. That’s not to say this strategy is impossible to pull off, but in every case I’ve seen, it’d be crazy to invest on team alone. Nobody ever lost an LP because they invested in Stanford startups, so excess capital is deployed there.
As a manager it can be too risky to hire a brilliant-yet-under-credentialed or not-well-rounded candidate. The upside is simply making the hire and your boss not realizing that you made a tough yet successful decision. The downside is that the candidate, while exceptional in one dimension, can’t cut it some other respect and drops the ball. Then you’re on the hook for bringing them on the team. Unless you’re fortunate enough to work in a managerial environment that understands the risks and rewards of making such a hire, it’s not worth it to take the risk of making the hire. Nobody ever got fired for hiring a mediocre candidate with the right background on paper. But exceptional is often what the organization needs.
Wealth managers want to provide clients with reasonable returns. Although active management and picking individual assets lets you attempt to beat the market, you’ll lose more clients by underperforming than you’ll gain by over-performing. So wealth managers usually defer to index funds which stick to average returns. (In my opinion this is the best strategy anyway, but the point I’m making is that wealth managers are forced into the passive/conservative strategy.) Nobody ever withdrew from a retirement fund because their returns were just fine.
The Buying IBM Effect is just a symptom: asymmetry between the upside and downside is the real problem.
In environments you can control, install a system that judges decisions on the swing instead of the hit. (My deepest apologies for the platitude.)
In environments you can’t control, design your product or pitch to cap the downside. Risk aversion is often an ulterior motive that you won’t uncover directly through conversation. It’s important to anticipate the structural biases of anybody you’re interfacing with and account for their internal decision making considerations.