Mental Shortcuts🧠

I’m Lazy

And so are you.

Whether we like to admit it or not, the truth is our brains take shortcuts all the time.

That plays a massive role in due diligence.

Let’s break it down.

The Observer Express

Don’t have time to read the entire post right now? No worries, here are the main points:

1. Our brains operate using two systems of thinking: System 1, which is automatic and impulsive, and System 2, which is conscious and effortful.

2. Due diligence is worthless without engaging System 2.

3. Understanding the context and motivation behind investment decisions helps determine the level of diligence required.

System Thinking

According to Nobel Prize winner Daniel Kahneman’s famous book “Thinking, Fast and Slow,” our brains are lazy.

The book explains how we operate using two “systems” of thinking.

System 1 is automatic and impulsive. It helps us make unconscious or split-second decisions such as recoiling from a hot stove, putting one foot in front of the other, or tying our shoes without thinking about how.

System 2 is conscious and effortful. It helps us make thoughtful and deliberate decisions such as where to live, how to invest our retirement, or which color of paint is best for the guest room.

To conserve energy and maximize efficiency, System 1 is in charge most of the time, and System 2 is called in only for particularly challenging scenarios.

An Example

Here’s a striking example he uses in the book.

What’s your first reaction?

$0.10, right?

Wrong.

The ball must cost $0.05 because then the bat would be $1.05, which combines to $1.10.

Yikes.

It’s a fairly simple problem that serves as a fantastic illustration of how our brains tempt us to think “Oh, this is easy, no big deal - System 1 can handle it” when in reality it’s a bit more complicated and can only be correctly solved through System 2’s involvement.

How does this impact due diligence?

Special Opportunity for Readers of the Diligent Observer

Interested in plugging into the Texas angel investing scene? Join the Aggie Angel Network’s Texas Startup Showcase on March 22 from 10 am - 12 pm CT and consider 4 exciting Texas-based angel investment opportunities. Membership is normally required ($1,750 per year), but this special event is available at no charge.

Worthless

Because due diligence is worthless unless we engage System 2.

System 2 requires hard work to activate and is reserved for “important” decisions.

In the context of seed-stage diligence, that takeaway leads to a natural question for each investor to consider.

Is making the best possible decision here important to me? 

Getting Honest

While it may feel weird to ask, I think if we’re honest, sometimes making the best decision really isn’t all that important to us.

I believe identifying the context and motivation for each decision is a helpful way to assess whether or not it’s generally worth engaging System 2 regularly.

What’s the Context?

• Are you making the decision personally or on behalf of others (ex: angel vs VC)?

• Is this a preliminary screening decision or a final call to write a check?

• Is this an area you understand deeply, or something unfamiliar?

• Are you taking a major shot with this investment, or is this a small shot of many?

What’s your Motivation?

• Why are you interested in this opportunity?

• Is this your job or for fun?

• How important is generating a return with this investment?

If I’m investing in startups primarily because I want to build relationships with founders, making money from the investments isn’t that important to me, and I’m investing my personal “fun money,” then spending the time and energy to activate my System 2 thinking by creating and analyzing good due diligence probably isn’t worth it. Better to go with my gut and focus mental resources elsewhere.

If, on the other hand, I’m investing in startups because I want to generate a return for my family and take each decision seriously, then activating System 2 on a regular basis to generate and review great diligence material is likely to help me achieve those outcomes.

Final Thoughts

We’re all lazy. The key is to understand this is true and to manage our laziness in concert with what we value most. Expending precious mental energy to engage our System 2 thinking in the context of startup investment diligence is only appropriate in the right context and with the right motivations. Otherwise, it’s a waste and our resources are better spent elsewhere.

What do you think?

What mental shortcuts do you tend to rely on when evaluating a deal?

Weekly Observations: 3 Lessons Learned

1. The stuff that moves the company forward is usually the hardest to find time for - there’s no deadline other than what you provide for yourself.⏳Saying “no” to urgent demands is tough. But I’ve realized prioritizing the important over the urgent is incredibly valuable. These important but not urgent projects tend to have the highest value for the organization because they drive growth and progress. Lesson learned: figure out how to focus, say no, manage expectations, delegate - whatever you have to do to get the important stuff done too.

2. DO NOT push website changes unless you know what you’re doing.🚨This week I killed our website for half a day. I was trying to spin up a new landing page and totally screwed up the site’s settings, which then took me half a day to fix. On the bright side, now I know how to throw together a decent landing page in just a couple of hours AND fix DNS settings.

3. Cold email does actually work (sometimes).🎯I can’t believe it but this week I responded to a cold email. I couldn’t help it. I probably get 2 dozen of these every week, and almost all of them are auto-deleted or unsubscribed. But this one was tailored to exactly a problem I’ve been trying (unsuccessfully) to solve and the language wasn’t trying to be overly cute or clever.

Weekly Links: 3 Things I Found Interesting

1. Seibel is stepping back at YC (link)🚶‍♂️

2. How to actually be helpful to portcos (link)🤝

3. The economics of Chick-Fil-A & more (link)🐔

Thanks for reading, have a great week.

-Andrew

Special Opportunity for Readers of the Diligent Observer

Interested in plugging into the Texas angel investing scene? Join the Aggie Angel Network’s Texas Startup Showcase on March 22 from 10 am - 12 pm CT and consider 4 exciting Texas-based angel investment opportunities. Membership is normally required ($1,750 per year), but this special event is available at no charge.

If you enjoyed this post, please share it with a friend, colleague, or anyone else who may benefit.

P.S. - I recently finished creating The Angel Network Toolkit: 90 Resources for Cultivating a Thriving Community of Pre-Series B Investors, and I’m sharing it with anyone who refers a friend.

How did I do this week?

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🤷‍♀️😐Okay

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About Me

I cultivate flourishing.

I'm also the CEO of PitchFact, where our mission is to cultivate flourishing specifically through efficient and collaborative early-stage diligence. I'm a proud husband, grateful father, and honest friend. My love languages include brisket, bourbon, and espresso.