Go with your gut! Why instinct delivers better results.

WHAT IS INSTINCT? That was the question I put to legendary venture capitalist Alan Patricof 10 or so years ago when I teamed up with him to launch a Japan-based VC company.

As an industry newcomer, I was keen to learn all I could from Patricof. “What’s the secret of success in VC?” I asked him. “What do you need to make good investment decisions?”

His answer was short and simple: Instinct.

I then went on to ask him what instinct was. He did not reply, so I had to try to and work that out one for myself.

So what is instinct?

  • A vague sixth sense? 
  “I just know this will work.”

  • Judgment based on the sum of your experience?
  “I’ve seen enough to know how this will go.

  • A serendipitous feeling of attraction?
  “This CEO has what it takes. I can feel it in my gut.

All of the above are good, but in the end, I decided to define instinct as “everything that’s not covered by the intellect or the emotions.”

Instinct and decision-making

When I make decisions (including about VC investing), we rely on some combination of 1. intellect 2. emotion and 3. gut instinct.

Most of us are probably too willing to trust the first two—intellect and emotion—and not willing enough to trust the third—instinct.

Personally, I’m the opposite. I’m a little skeptical about my intellect and emotions, and more inclined to respect my gut responses—even if I can’t explain why.

—Why am I suspicious of the intellect?
When VC professionals make investment decisions, they run various what-if scenarios. Since some of our assumptions are necessarily based on imperfect data and there are always quite a few unknowns, the most intellectually rigorous methodology can lead us to conclusions that are quite wrong.

My takeaway? The intellectual approach is less reliable than we think. Don’t over-rely on the intellectual approach.

—Why am I suspicious of the emotions?
When selecting a business to invest in, it’s obviously good to feel positive about it. Emotions like excitement, enjoyment and optimism can be harnessed in a positive way to help overcome the challenges that startups inevitably face as they grow.

At the same time, you need to guard against getting carried away by your emotions. Just think of all the money that over-excited investors threw at Internet companies in the late 1990s when their feelings took over.

…That brings us to instinct.

What role does instinct play in investing?

Trusting your instinct means being prepared to walk away from a deal if it makes you feel uncomfortable.

Equally, it means having the courage to put money into a deal for no more reason than that something “just clicks” or “feels right.”

Perhaps the best thing I can do is to give you an example from my own experience.

One of the most successful investments that my firm GLOBIS Capital Partners ever made was in GREE, a Japanese social networking service. We multiplied our investment by 97 times!

When we invested in 2005, GREE was a modest outfit based in an apartment with only a handful of employees—just like most seed-stage ventures. It went public in December 2008 (a major news event, since it was just three months after the collapse of Lehman Brothers) and by 2010, Forbes was listing the founder Yoshikazu Tanaka as the world’s second-youngest self-made billionaire after Facebook’s Mark Zuckerberg.

Nonetheless, when we invested, GREE’s eventual success was far from a sure thing.

• In the social networking space, GREE was just a follower. In 2005, Mixi (a sort of Japanese proto-Facebook) was the pioneer and dominant player in the social networking space. GREE was No. 2 (which is nowhere in the winner-takes-all world of the internet). We had an intellectual reason not to invest.

• I could not find anything exciting about GREE’s business. I felt neither very positive nor negative about the company. My emotions didn’t pull me strongly either way.

• Nonetheless something “just clicked” when I met the founder. When he talked about his passion for the Internet, his career, and his struggles as an entrepreneur, I felt drawn to him.

If I had to rationalize after the fact, factors that contributed to my decision included the following.
   (1) As a college student, the founder had interned at one of our portfolio companies.
   (2) He had gone from working in a Japanese blue-chip company to launching a startup in an apartment.
   (3) I liked his paradoxical combination of passion and calm.

Anyway, this mixture of coincidences and personal taste played a part in nudging me into one of the most successful investments of my career.

In a further irony, GREE really took off when Tanaka switched his business model away from social networking to social gaming.

It just goes to show how right Alan Patricof was: instinct is what counts when making VC investments—even if you have a hard time defining it.

Whatever field you’re in, I urge you to move beyond intellect and emotion and act more upon instinct.

I’m not quite sure why, but my sixth sense tell me that it will work out well for you…

Photo copyright: steigele

Mr. Yoshito Hori established GLOBIS Management School in 1992 and GLOBIS Capital Partners in 1996. In 2003, GLOBIS started its original MBA program which, in 2006, received accreditation from the Japanese Ministry of Education and gained “university” status. GLOBIS started a part-time MBA program in English in 2009 and a full-time MBA program in English in 2012.

A Harvard MBA graduate and former Sumitomo Corporation employee, Mr. Hori founded the Entrepreneurs’ Organization (EO) Japan Chapter in 1995 and became the first board member from Asia in charge of Asia Pacific region in 1996. He also served on the World Economic Forum (WEF)’s New Asian Leaders Executive Committee and Global Agenda Council on New Models of Leadership, as well as the Harvard Business School Alumni Board from 2005 to 2008. Currently, Mr. Hori is a board member of the Keizai Doyukai (Japan Association of Corporate Executives), and serves as co-chair of WEF’s Global Growth Companies.

In 2008, he launched the G1 Summit – a Japanese version of the WEF’s annual Davos forum. This led to the foundation of G1 Summit Institute in 2013, which Mr. Hori serves as Representative Director.

Just days after a huge earthquake struck northeast Japan in March 2011, Mr. Hori launched Project KIBOW to support the rebuilding of the disaster-affected areas. The following year Project KIBOW was incorporated as the KIBOW Foundation, which Mr. Hori serves as Representative Director.

An avid enthusiast of the Japanese game Go since age 40, Mr. Hori has been Director of the Nihon Ki-in (Japan Go Association) since June 2013.

Since October 2013, Mr. Hori has hosted a weekly TV program in Japan called Nippon Mirai Kaigi (Japan Future Conference). He has authored several books including Visionary Leaders who Create and Innovate Societies, Six Dimensions of Life, and My Personal Mission Statement.

Mr. Hori received his BS in Engineering from Kyoto University and his MBA from Harvard Business School.

He is an avid swimmer and enjoys spending time with his family, especially his five sons.

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