Family Business Audiocast | Episode 25 | Prof. Ilya Strebulaev | Stanford Graduate School of Business

Available to Listen Now On: Amazon Music, Spotify, Apple Podcasts, Pandora, iHeart, YouTube

New Episodes Live: Subscribe to receive exclusive invitations to upcoming episodes of the Family Business Audiocast. Join us as we explore the pivotal strategies and stories behind successful family enterprises. Click to Follow on LinkedIn.

—————————————————

About Our Guest:

Ilya Strebulaev is a distinguished Professor of Finance and Private Equity at the Stanford Graduate School of Business, recognized for his expertise in venture capital, private equity, corporate finance, and innovation. As the founder and faculty director of the Stanford GSB Venture Capital Initiative, Strebulaev fosters collaboration between academic researchers and industry practitioners. His teaching includes topics such as angel financing and private equity, earning him the prestigious GSB MBA Distinguished Teacher Award from Stanford's MBA students. He conducts executive workshops, delivers keynote speeches globally, and consults for international companies and investors. His research has gained recognition in major publications like The New York Times and The Wall Street Journal, and he has received numerous awards for his contributions to the field.

—————————————————

[Transcript]

R. Adam Smith: [Intro] Welcome to the Family Business Audiocast on LinkedIn. I am R. Adam Smith, creator of this audiocast series. As an entrepreneur, investor, founder, investment banker, and board leader the last 25 years, I am fortunate for my many experiences within the family firm industry.

A warm thank you to our live audience on LinkedIn today – and for those listening in the future.

A brief comment on why I created this broadcast: private companies are a passion of mine, having grown up in a family of entrepreneurs, and having engaged for two decades in deals, strategic transformations, investments, and boards, with an array of fascinating family enterprises, family firms, and family offices. I founded this series to offer a useful platform for listeners to hear from veterans, academics, and leaders in the vast family firm ecosystem. Whether you are a family business owner, building, running, or advising a family office, or just expanding your family office activities, I hope these conversations are useful and enlightening. And now, it is time to turn our attention [01:00] to our accomplished guest on today’s episode.

I'm very pleased today to host Ilya Strebulaev. Ilya, it's great to have you today. Thank you so much for being our guest today.

Ilya Strebulaev: Thank you so much for inviting me.

R. Adam Smith: So, we have about exactly a half hour. I'm going to introduce Ilya briefly and then we'll get into it today. Ilya is a tenured chaired Professor of Finance and Private Equity at the Stanford Graduate School of Business, where he brings over two decades of experience in venture capital, entrepreneurial finance, and corporate finance. He's also the founder and facility director of the Stanford GSB Venture Capital Initiative—which we'll be talking about today—dedicated to bringing academic research and practical applications globally in innovation and venture capital. Ilya is renowned for his research published in top academic journals and featured in leading media outlets such as the New York Times and the Wall Street Journal, and he has received numerous awards including the GSB MBA Distinguished Teacher Award.

[02:00] Ilya is very deeply rooted in educating business leaders globally on venture capital and related financial decision-making. And also, he is celebrating his 20 years at Stanford this year, so we will congratulate him today on this remarkable accomplishment. That's fantastic. What a wonderful experience you've had there, Ilya, at Stanford for 20 years.

Ilya Strebulaev: Thank you, Adam.

R. Adam Smith: So, recently you posted on LinkedIn about your experience at Stanford, talking about a couple of things that stand out for you: preparation of the mind, embracing flexibility over rigid intellectual thinking, also thinking about incentives that drive behavior, and also as teachers that we learn more from our students than out there in the real world. Maybe talk a bit about your 20 years at Stanford with us briefly and what that's like.

Ilya Strebulaev: Of course. Well, first of all, the time has passed very quickly. I came yesterday and now it's 20 years. I still remember my [03:00] first drive on Stanford campus. And when I shared my key learnings over those 20 years, Stanford is an amazing community and I had great luck teaching thousands of students, and I keep in touch, I advise, I invest in many of them after they graduate. And so, I continue to learn from my students. And I think that is really an amazing Latin proverb from ancient Rome that “By teaching, [you] learn.” And I think that it's never been truer in my case.

But I think there is something else which is really important and also is very much related to a topic of my research, my teaching, is about flexibility and commitment. I think that in many businesses, commitment is, I would say, like on a pedestal of importance. But in real life, flexibility is [04:00] very important. And the way I say it, both to my students, to myself, but also to many people with whom I work, whom I advise, including investors, founders, is that sometimes in order to move forward, you need to retreat, you need to pivot. And so, embracing this flexibility of a rigid commitment, I think, is really important. And that is also one of the key insights I had in my personal and professional life at Stanford over those 20 years.

R. Adam Smith: That's wonderful. We will talk a bit about that more. And of course, I'm sure people will want to be in touch with you as well to discuss some of your philosophy and classes and so on.

Let's talk about Stanford briefly. It's such a magnificent and powerful brand and academic institution in the world. Stanford was founded in 1885 by the railroad magnate Leland Stanford, [05:00] which was then the governor of California, and became just such an incredible university globally. Today, it has an over 36 billion dollar endowment. It has over 18,000 students and such a massive alumni base going back to 1891.

What are some of your personal thoughts about Stanford and what really stands out as a university today?

Ilya Strebulaev: You know, the quality of every single organization, Stanford including, is the people. It's all about the culture and the design. And, you know, the way I think about culture is, if I would like to join any organization, I'm going to ask people, “What should I do? What behavior should I adopt to become successful?” And I think Stanford is categorized by the culture of excellent people [06:00] from whom one can learn again and again and again, and people to whom you would like to go back and work with them together.

As I mentioned, I have thousands of students who took my classes. So I'm teaching these days a very popular venture capital class that is taken by many students who would like to become founders and investors, as well as the private equity class taken by future private equity investors. And, you know, I go back to the students that graduated and I keep in touch with many, many of them. And that is not just because they were my students and I learned a lot about them, but because that is the collection of, I would say, really interesting, accomplished individuals. And they're constantly doing something new. So, every single time I talk to somebody from those student cohorts, you know, [07:00] I learn something new, which I think is really impressive. And I think that is the real reason behind Stanford excellence. But there is something else.

And something else is, I think, it's all about leadership. And you mentioned that Stanford was founded in 1885. The business school where I’m in was founded in 1925. In fact, next year it's going to be 100 years. And I think leadership, historical leadership, has been very important. Let me just give you one example; it's that Stanford is a very interdisciplinary place. And it came about because a number of our past leaders—for example, our former President Hennessey—just fostered this interdisciplinary collaboration between subjects that historically didn't have much to do with each other, such as business and medicine, medicine and engineering, education and engineering, and so on and so forth. [08:00] That, I think, at the time was not that popular but now the most interesting research, the most interesting teaching staff is happening at the edge of various disciplines.

And so, just an example from my perspective, I advise all of the students who work on their startups. So, I advised hundreds of students. And you know, one of the most interesting startups come when a business school student of mine is joining forces with another student from the School of Engineering, or the School of Medicine, or the School of Education, and so on. And I just don't think that it is possible in other universities, even in one of the best universities in the nation. So from this point of view, I think Stanford has quite a unique place.

R. Adam Smith: And how is this interdisciplinary approach, how does that enhance the venture capital initiatives, and how does it affect teaching philosophy [09:00] across generations and different types of students? What does it actually mean to be interdisciplinary? And then, why don't you lead that into The Venture Mindset book that you recently published as well?

Ilya Strebulaev: Right, well, The Venture Mindset is really, you know, a new mental model of how you make decisions to improve the outcomes, whether you're the CEO of a family business, the head of the family office, the venture investor, the founder, the CEO of a large company, and so on. And I studied venture capitalists for 20 years now and I kind of digested the nine key principles that they used to make decisions. Historically, venture capitalists have been facing, I would say, a very hostile environment; the environment of extremely high failure rates, high uncertainty, where they needed to be flexible, as I mentioned, not committed. And as a result of that, they developed different decision-making processes. And I think now, in today's environment, whoever you are, [10:00] wherever you're making decisions, these venture mindset principles are going to be very helpful. And I see this at Stanford every single day.

So, going back to interdisciplinary, let me just give you an example. So, I had a student in my venture capital class this year, her name is Anne, and she then joined forces with the students from outside the business school. I think one was from computer science, another one from engineering, I believe another one from the School of Medicine. Again, this was very unlikely to have happened anywhere else, I think, but Stanford. And the idea that they generated is really outstanding, which is trying to help people who are blind to be able to read using Braille on iPhone.

Amazingly enough, we're in 2024, but if you're a blind person—and there are unfortunately millions of blind people around the world—you know, you can’t really use your smartphone very effectively. So, this is just [11:00] an example of something that I just don't think would be possible to come up with unless you pursue an interdisciplinary engagement. You know, if we had enough time, I can give you like hundreds of examples like this.

Now, many of them are not going to be successful because people try and then pivot. But you know, some are going to change our life, I think, and the life of many, many people for the better. So, I think that is both the venture mindset and the way Stanford is designed to apply this venture mindset into the reality.

R. Adam Smith: That's wonderful. I did get your book and I did read it and learned a lot. I'm super impressed. I do recommend for everyone to pick up a copy of The Venture Mindset now available on his sites and also Amazon.

Let's talk a bit about the contrast of innovation and failure in the sense that venture capital is really one of the most powerful capitalist systems ever in the history of the world, [12:00] and it is increasingly essential in the creation of companies and the growth of companies and the power of entrepreneurship and innovation. How do you contrast the encouragement of innovation, but also the reality in accepting failure? And also keeping in mind that there is a great deal of thought out there about the concept and approach of failure, I often like to think about the quote by Thomas Edison saying that “[He has] not failed, but [he has] only found 10,000 ways that don't work.”

So, a bit on innovation and failure, please.

Ilya Strebulaev: Well, I use this quote in the slide in one of my classes on venture capital when I teach students. So, I think failure is very important for venture capitalists. Now, let me try to unpack it. First, a couple of facts [13:00] about the venture capital industry in this country. And if you are unaware of these facts, then I think you're up for a surprise.

First, if you look at every single public company in the US that went public in the last 50 years, every second company was backed by venture capital. If you look at top companies in the US right now by market cap, six, seven, or eight are going to be venture-backed companies—so, those companies that used to be venture-backed.

But more importantly, I showed in my research that there's a causality, meaning that the venture capital industry is behind those companies. So, had there been no venture capital industry, you know, our life would have been quite a bit different. We would not have had Apple, Microsoft, Intel, Netflix, Airbnb, Uber, and so on and so forth. Like for example, have you ever heard about the French Google, or Japanese NVIDIA, [14:00] or German Microsoft? So, there is a reason behind it, which is these countries historically never developed venture capital industry.

And the venture capital industry has a very special approach to failure, but it stems not from failure, and I think that is really, really important to understand. It stems from the very first principle of the venture mindset, which is “home runs matter, strikeouts don't,” which means that in the world of disruption and uncertainty, we are trying to find those ideas that can generate very substantial impact, both financial and non-financial. And in order to do so, because we are trying to find home runs, trying to find those, you know, outliers, jackpots, it's inevitable that there will be lack of success. [15:00] So, if you are in an organization where you're pursuing many projects, but there is no failure, so that every single project kind of is successful, that also means that you are not pursuing home runs.

One day, I consulted with the CEO of a very large company, and I spent the entire day with him and his C-suite leaders. And we talked about venture capital and innovation and how to design this internally within the company. And at one point, he turned to his chief innovation officer and asked the chief innovation officer, “So, how many projects for the head and accelerator failed in the past year?” And there was a very proud reply, “None,” which really means is that that company or the accelerator of that company will not produce anything that will change the company in a non-trivial way. And I think [16:00] that is the critical point to consider.

When I say “home runs matter, strikeouts don't,” this is a very important maxim. But there are very specific behaviors behind that. I believe in intentions, but I believe in behaviors even more. And so, whether you are a family business or family office, you might want to consider what are the situations where you would like to use that specific maxim, and we provide in the book very specific mechanisms that you can use to foster this on your organization to achieve the results.

R. Adam Smith: Okay, great. I'm going to pick up a little bit more there about this concept of failure in terms of intellectual growth and cognitive knowledge acquisition. So, Darwin, we know, came up with his term “Darwinism,” or coined it actually, in 1860, and we know Darwinism is quite a powerful theory, right? [17:00] Talking about the ability to survive and grow with heritable traits. That's somewhat controversial.

But since we're talking about failure, maybe what are your thoughts on a more Darwinistic approach to venture capital portfolio versus actually acquiring the intellectual capital, let's say, at the board, governance, learning, enhancement? How do you balance the two concepts of whether a leader is born, whether a concept is meant to be successful, versus the actual grind and the changing of that concept over time, over the venture capital cycle?

Ilya Strebulaev: Okay, I think there are several layers in your question. The first layer is about different ways to pursue innovation and change. There are really three layers, especially for large organizations, let's say for large family businesses. First, trying to improve your internal innovation; it is difficult, especially for a very traditional company, but it is possible. I've seen this [18:00] first-hand, very closely, how large companies, including large family businesses, succeed in dramatically improving the internal innovation, again, by digesting or by applying specific principles of the venture mindset.

The second is by going outside. And there are two ways to go outside. First, to invest and collaborate with startups. So, everybody is talking these days about corporate venture funds. Do you know that there are more than 3,000 of them around the world? And I've been studying them very, very carefully for many years now. And I think corporate venture funds that both public and private companies in these countries have could be very successful if they are designed properly, again, with the venture mindset principles in mind.

And finally, the third layer, [19:00] and I think you alluded to it, is what I kind of call M&A, so acquiring innovation. And acquiring innovation could be very successful, but the reality is that when you acquire innovation and you're trying to incorporate innovators into your organization, the truth is, it's difficult to do, and I think that most companies are not truly successful in doing this. Because, if you think about a large traditional business that is acquiring, let's say, a small, very innovative company with a very different culture, it is relatively difficult. It's easier for this large company to change the culture of the small company than vice versa. But again, there are specific ways to improve this. And I've seen how large, traditional companies can be very successful in acquiring truly disruptive innovators.

[20:00] So, there are three layers on your Darwinistic approach. So, I'm always very careful about drawing any parallels between evolutionary biology and business. But I think that, you know, there's a little bit of this kind of theme going on in venture capital in the following interesting way: startups raise money all the time. If you look at unicorns—very successful venture-backed companies in this country—on average, they raise money more than seven times. And this is just from venture capitalists. This doesn't take into account angels or early rounds.

And every single time when a startup raises another round of fundraising, the previous investors, the existing investors, have to make a decision whether they're going to support this company again [21:00] or not. It's kind of Darwinian in many ways, which is an investor is very unlikely to have the money, the resources, to support every single of their portfolio companies. So, they have to make a choice. They have to select. Now, it's not exactly natural selection. They have to select based effectively on the expectations of which companies are going to be more successful in the future.

But again, what I showed is that using a very specific principle of the venture mindset that in the book we call “double-down or quit,” these types of investors can, I would say, dramatically improve the outcomes. And what I found out is that if you're in traditional business, then this specific principle, “double-down or quit,” is particularly important to apply. Like, for example, how often you've heard about [22:00] these very large projects that are not really going anywhere in a large business, but also are not killed so that you continue investing again and again in a money-losing proposition. So that is, I think, something that venture capitalists are very aware of. And if this is something that sounds familiar, I advise you to look at the specific mechanisms that VCs use and try to adopt it in your environment.

R. Adam Smith: Thank you for that. We have five minutes left, so we won't be doing Q&A today. We won't go pontificating much either, but that's a wonderful commentary just then. Thank you.

I'm also admiring your bio on the Stanford website—I do encourage everybody to do the same—and I noticed that you have obviously a tremendous amount of papers that you've written. I just want to say that my thesis at Columbia Business School GSB was on the mechanisms [23:00] of an LBO structure, and I did extensive research with Steven Kaplan with his materials, so I know that that's part of your research. Comrades.

Back to the importance of a broader venture capital portfolio, maybe just a minute or two on the importance of a larger family office to have a diversified portfolio, perhaps even across different cycles or picking certain industries. And also, I think we might see some evolution of the venture capital industry in terms of consolidation. Maybe just a minute or two on consolidation. I can see venture capital firms merging or even partnering with CBC and corporate strategic partners.

Ilya Strebulaev: Right. So, I do work a lot with large family offices, first of all, on really two, I think, big issues. The first one is the portfolio construction because, as you correctly pointed out, one of the biggest challenges and one of the biggest decision points of really any investor, but specifically of the family office—because [24:00] the family office faces so many additional challenges such as, let's say, liquidity of the main business and so on—is, what fraction of the investment of AUM should be allocated to illiquid assets such as venture capital and private equity? So, I think that is a very, very big question.

The second issue I've been working a lot with the family offices is on fund manager selection. So, let's say if you decide to allocate 20%, or your AUM, to venture, then how do you do it? How do you select managers? Do you invest directly or indirectly? Especially because I think one of the biggest changes in the venture capital industry is how it's, I would say, proliferated and diversified in the last five, seven years. It used to be much, much easier, I think.

There was very limited number of venture capital funds. In these days, we observe everything [25:00] from thousands of emerging fund managers to, of course, late-stage growth equity investments to secondaries, and so on. So, I think that any family office has to answer really several questions.

One, I would say is the horizon question, which is over what horizon you're actually investing. Surprisingly now, very often when I lead strategy offsides for family offices, this is the question that very often is not, I would say, explored in any great depth. So, my advice is to think about the horizon. A lot of decisions for the family office will depend on the horizon.

The second question is, at the end of the day, whether it is wealth creation or wealth preservation, and both the portfolio construction and the fund manager selection I think is going to depend on the answer to this question.

And finally, I think that family offices are really well positioned [26:00] to take advantage of these dramatic new changes in the venture capital landscape. Exactly because I think, like endowments for example, and like some pension funds, I think family offices can afford to put their money into illiquid, risky assets that provide higher risk-adjusted returns.

So again, I do think that family offices are really well positioned in the current landscape. Again, they just need to acquire the venture mindset to do so.

R. Adam Smith: Absolutely. I agree with you. Just briefly, maybe share one or a few of some of your favorite learnings from your students and how you view the privilege and the importance and honor of being a teacher.

Ilya Strebulaev: Well, if I start, I won't finish for a long time because the amazing thing is that I have so many students that I [27:00] learn different things from, from many of them. But let me give you a couple of examples. The first one is, many of my students are very charismatic. And charisma is something that is difficult to define, but I think when you see it you know what it is. And the way I'm trying to kind of explain charisma, including when I talk to family offices when we select fund managers or founders of startups, is if somebody without any resources, without any money, is starting his or her own business, whether it's a startup or a fund, and they are enabled to attract amazing people to follow them. And I think that when you see charismatic people, you would like to follow them. And I've been very lucky. I encountered many, many charismatic students in my 20 years at Stanford.

Another one is passion. I think passion is really important and resilience. I've learned [28:00] a lot from my students about resilience when many of them face very unfortunate situations, challenges, both professional and personal, how they overcome those. I have to say that they taught me, I think more along this dimension than I taught them.

R. Adam Smith: I love that, Ilya. Thank you so much. So, today we covered a lot of ground, obviously. I like that we were able to discuss the essential balance between determination and continued innovation of being an entrepreneur and sticking with it, but also being prepared for failure and the black swan potential to be out there in the world, that we can't always predict everything. We have to be ready for failure. And when we do have failure, to make sure we have an open mind to learn from that, as we heard from Ilya, to embrace flexibility and to be prepared. Being prepared does not mean that we avoid failure, but it might come. And when it comes to be, embrace it and to learn from that.

And then lastly, [29:00] I like these three drivers and core pillars of your experience with students working with them, with their charisma, their passion, their resilience.

So, thank you. It's really been great to have you today. Look forward to staying in touch, and hopefully, you'll be hearing from some of our guests. This will be going up in the global podcast channel shortly and really wonderful to speak with you today.

Ilya Strebulaev: Thank you, Adam. And bye for now.

R. Adam Smith: Yes, of course. Bye for now. Thank you, Ilya Strebulaev from Stanford University.

This is R. Adam Smith signing off. Stay tuned for the next episode of the Family Business Audiocast on LinkedIn.

—

Explore the strategic intricacies of family business success with the RAS Family Business Audiocast. Join R. Adam Smith as he delves into exclusive discussions with global leaders shaping the future of private wealth and enterprise. Each episode offers a rare glimpse into the core decisions driving prosperity in high-stakes markets. Tune in to gain expert insights and innovative strategies that empower family businesses to thrive across generations.

Available On : Amazon Music, Spotify, Apple Podcasts, Pandora, iHeart, YouTube

Disclaimer:
Opinions presented are personal and do not represent the positions of speakers’, sponsors’, or guests’ organizations.

Family Business Audiocast™