The idea of venture capital (VC) dates back to 1492, when the Spanish royal family financed Christopher Columbus' expedition. That first journey across the Atlantic bears a striking resemblance to modern VC: risky, uncertain, but potentially revolutionary. Today, as then, investment decisions can be deeply influenced by cognitive biases. But what are these biases and how prevalent are they? More importantly, how can today's VCs avoid them?
What VCs do (and why it matters)
Venture capital, at its core, is about risky investments in innovative start-ups with the goal of achieving above-average returns. Due diligence — that is, the thorough evaluation of the start-up's potential — is the basis for these decisions. Pioneering studies in the field have structured this process into five stages: business origin, screening, evaluation, structuring, and monitoring. Complementarily, an integrated three-phase model can be considered: pre-investment, management, and exit — highlighting the continuous and iterative nature of due diligence.
Successful venture capital investment relies heavily on the assessment of four main areas:
1. VC requirements: clear criteria such as sector, profitability, and exit potential;
2. Management Team: experience and ability to deal with start-ups directly influence risk perception;
3. Economic Environment: market size, growth, and resilience are critical factors for sustainable profitability; and
4. Product and Unique Selling Proposition (USP): differentiation and intellectual property enhance competitive advantage.
Yet despite the apparent rigor, investors are not always as objective as they think they are.
When judgment fails
Our study, which combined qualitative data from 10 experienced VC professionals and a survey of 303 participants, identified five cognitive biases that severely limit decision-making.
· First impressions were the most frequently cited: 49% of respondents admit to basing decisions on their initial impression of the founders. Charisma often overshadows substance, pushing aside viable projects that are less captivating at first glance.
· Overconfidence came in second, influencing 21% of decisions. Investors tend to overestimate their predictive ability based on past successes, sometimes ignoring critical risks. While confidence is essential, excessive optimism can blind one to clear warning signs.
· Delayed feedback also proved significant: with return periods of between five and eight years, 13% of respondents pointed to the delay in feedback as a highly influential factor — hindering rapid learning and possible course corrections.
· Social connections weigh heavily. Investments originating from cold introductions (without prior referral) are often dismissed: 13.5% of respondents said they completely reject such approaches, emphasizing the importance of networking and the risk of missing opportunities due to its absence.
· Herd behavior: 27% said they were influenced when other reputable funds had already invested. In heated markets—such as in 2021, when “cash was free”—this behavior intensifies, generating a widespread fear of missing out (FOMO), which leads to hasty and superficial decisions. The result? Inflated valuations, unsuccessful investments, and less diversity in the portfolio. It is important to note, however, that herd behavior is not always negative. In some cases, it can direct capital to neglected sectors or, from the founders' point of view, generate beneficial overfunding. But for investors, caution is needed: entering a round late can substantially increase the risk of losses.
Practical strategies for overcoming biases
Experienced investors combat these biases through structured and consistent practices. Clear due diligence protocols with transparent criteria reduce impulsive decisions. Collaborative evaluations — involving at least two analysts — help neutralize individual blind spots, such as charisma or overconfidence, ensuring greater neutrality and balance. Aligning incentives is also important: when analysts invest some of their own capital in the businesses they recommend, the level of accountability and analytical depth increases, reducing opportunistic and reactive behavior.
However, structured methods alone are not enough — it is not just a matter of checking boxes, but of adopting a more profound investment philosophy. The founders of companies that redefine markets rarely fit into standardized models; they are, by nature, outliers. To generate exceptional returns, it is necessary to embrace the unconventional. Great investors don't evaluate differently — they think differently. Some, like Benchmark, value open debate and decisions based on collective conviction. Others, like Accel, rely on mathematical models to challenge intuition. There is no single path to success,
but there is one common trait among the best funds: they try at all costs to avoid biases in the decision-making process.
Recognizing biases is not enough — you have to deliberately confront them. Structured, team-based evaluations and incentive alignment are proven strategies for effectively neutralizing these biases. History illustrates this clearly: Christopher Columbus did not follow the majority; he created a path. And Queen Isabella took a bold risk in supporting his journey, even when no one else did. Today's venture capital requires the same courage: balancing disciplined evaluation with critical and independent thinking. Investing well is not about following trends — it's about identifying what few others can see. As Andy Rachleff sums it up: “Being right is not enough. To truly win, your investment decision must be non-consensual.” The message is clear: to achieve sustainable success, thinking for yourself is not just recommended — it's essential.
Diogo Moraes, Research Fellow at CLEC and Jan Frederick Bock, Student of Católica-Lisbon SBE