Harvard's Judgment Professor: The Curse of Optionality, and the One Habit That Builds Better Judgment
Motley Fool Hidden Gems Investing
In this episode, Harvard Business School lecturer and six-time founder Reza Satchu discusses the critical role of judgment in leadership and
Key takeaways
- Reza Satchu identifies waiting too long to fire underperforming staff as a major mistake that negatively impacts entire company cultures.
- The three-word framework for raising capital effectively is authenticity, momentum, and inevitability.
Main topics
- Leadership mistakes and culture
- Frameworks for raising capital
Notable quotes
My biggest mistakes have been waiting too long to fire people.
Conclusion
The episode provides a profound look at how intentional commitment and
Transcript preview
Speaker 2 (0:02) My biggest mistakes have been waiting too long to fire people. Like, no question. And it's not just what you think. It's not just that that person is underperforming and you could replace that person with a higher performer. There's something much more sinister when a founder or leader accepts underperformance, which is that it massively negatively impacts the entire culture. Speaker 3 (0:35) That was Reza Satu, Harvard Business School senior lecturer and six-time founder on the hardest lesson of his career. I'm Motley Fool analyst Rachel Warren. Last week in part one, Reza and I covered why judgment beats intellect in the age of AI, whether judgment can be taught, and his billion-dollar walkaway deal in student housing. This week in part two, we'll get into what it actually takes to raise capital without fooling yourself, why capital allocation is the sharpest test of a CEO's judgment, the curse of optionality, and the single habit that Reza wants every investor to build to train their own judgment muscle. We hope you enjoy. You are both a serial entrepreneur as well as, you know, founder, investor. What are some of the hardest lessons you've learned as a founder? Speaker 2 (1:20) So I will tell you, and this is, it's not even close, and it's a harsh thing to say, but it's just my truth, which is, My biggest mistakes have been waiting too long to fire people. Like, no question. And it's not just what you think. It's not just that that person is underperforming and you could replace that person with a higher performer. There's something much more sinister when a founder or leader accepts underperformance, which is that it massively negatively impacts the entire culture. Okay, which is suddenly people are like, well, he's not holding everyone to the same standard. Or well, you know, so I'd say to you that, but of course, firing someone is a hard thing to do, right? Like you don't want to do it, right? Like, I mean, every time I fire someone, I remember the look in their eyes. I remember thinking about their family. I remember the part I would have played in it that I misjudged the role or the hire or whatever it may be. So it's something that's very painful, but it's so necessary. And the cost of not doing it and waiting is far greater than I think most people calculate it to be. So certainly if I think about my greatest mistakes, it's been waiting too long, waiting for perfect information to make an obvious decision when it comes to firing, like not wanting to deal with the difficult. of firing someone. And as I said, it's not just the singular person's performance, it's the cultural impact of that. And so, look, this obviously falls under a broader bucket, which is like human beings have an instinct to wait for too much information before they make a decision. But I think when it comes to firing, I'd say my personal view is I've waited too long on those. And oftentimes I've waited too long to pull the trigger on people who on paper looked perfect, right? Like meaning they looked great on paper. And so you just were like, okay, they're going to figure this out. And, you know, oftentimes, look, my world is founding businesses, but I've hired lots of people from larger organizations. Speaker 2 (3:38) Not always, but often they've had a very hard time working in a more resource constrained environment. Speaker 3 (3:47) Interesting. You know, going back to this idea of storytelling, it's obviously vital for raising capital, but it can be a bit dangerous in some cases if leaders or company leaders starts believing their own hype. So how do you assess? whether a leader possesses, say, the intellectual honesty to separate their grand vision from a current operational reality, whether that's the business, the industry, you Speaker 2 (4:08) know, both. So let me take both sides of it. Let me sort of say, what does it take to raise capital? Okay, like what are the traits that it takes? And how do you as an investor make sure that you're not being hoodwinked by it? Okay. So, so let me, and I play both sides. I mean, I hope I haven't hoodwinked anyone, but I've seen both sides of it. Okay. So, so let's just say I have three words I use, and this is specifically for founders, but I think you can extrapolate it for others as to when you're raising capital, what you need. So the first thing you need is authenticity. No one's going to give you their money if they don't trust you. Okay. Meaning you can't pretend to be someone else. You need to be pure. You need to be authentic. Okay. Two is you need to have momentum. There needs to be things that are happening fast and people can see that there's action and you're getting customers or whatever it may be. The third one is perhaps the most important and the hardest, especially for a founder, is you need to convey a sense of inevitability. So authenticity, momentum, and inevitability. So what does inevitability mean? Inevitability is not arrogance. What inevitability means is that you believe. in your heart that this business is going to fly with or without whoever you are pitching. Okay. Meaning you have a mindset, which is not that you are begging for money, but a mindset that you are the prize and that you're giving your investor an opportunity to make money. Okay. And that, that effectively this is inevitable. Okay. Okay. But you can, now to your question, you can imagine why that could lead to, you know, someone. pitching something that that framework can lead to nefarious behavior. Okay. So, so what I say, what I, what I'm always looking for. So I do think leaders should have those three traits. Meaning I do think if you're going to ask people for money, you better believe that it's going to happen. Okay. If you haven't convinced yourself, that's a problem. Okay. So what I'm looking for is a sense of humility. within that inevitability framework. And also what I love seeing is founders, leaders, addressing the inevitable negatives in their business, like the inevitable risks and starting with that. Like I love it when a founder or leaders, and you don't lose any inevitability when you do that, frankly, because every business has risks associated with it. And what you get as a founder is you get to actually articulate the narrative around that risk. So from my perspective, I am always looking for someone because when I get pitched and it's all sunshine and roses, I'm just like, this is ridiculous. But if I'm getting pitched by someone who, yes, believes it's inevitable, but is also talking about all the competitive threats and the technological issues and how they're going to deal with it and what their plan is, knowing that it might change, that to me is a much more authentic. proposition and for me feels much more believable because they know what the issues are. So just tell me what the issues are and let's figure out how you're going to solve them because there's no business without issues. So I think I don't want to make it as trite as lead with the bad news. I would just say that I do respect leaders who articulate in a very clear manner the inevitable risks that they're facing. And take the opportunity to address them and have a real conversation about it. Speaker 3 (7:42) Yeah, I think it was Warren Buffett who once said that capital allocation is a CEO's most important job. When you look at a leadership team's or a leader's capital allocation history, what is a pattern that maybe tells you they're playing a long-term game rather than just managing short-term expectations? Speaker 2 (8:01) Yeah, so look, I think it's funny, right? Because capital allocation at the core is... the sharp edge of judgment, meaning that is where judgment is most shown by a CEO, right? So meaning when we talk about how you evaluate it, what you just identified is how is it demonstrated from a CEO's perspective? There's no better way for you to evaluate a CEO's judgment than to see the capital allocation decisions they've made, okay? So I