Magical Thinking?

Many things in life are quite difficult to understand, a long list that is getting shorter through scientific advances. But after thousands of years of living in a complex world that we mostly did/do not understand, we have developed various coping mechanisms, magical thinking being one of them. From Wikipedia, magical thinking “is the attribution of causal relationships between actions and events which cannot be justified by reason and observation” — think religion, superstitions, etc.

To give a simple example from a domain that I know something about, 150 years ago we had both the “aether” (proved not to exist only in 1887) and Maxwell equations (1861) for electromagnetism. Today issues are not that fundamental, science continues to make progress, some fields of human activity are more advanced, others less so. We’ve had management theory for almost a century, and still management thinking needs to be very disciplined to deal with the multifaceted complex issues we see daily in a modern corporation. The fact that there are literally thousands of management theory books offering advice and recipes proves my point — we do not have many conflicting ways today to explain electromagnetism or peptic ulcer (at least not after 1982).

Which brings me to my current list of problems that keep me awake at night — financial technology (fintech) innovation and investing in fintech startups. For the past 15 years I have been deeply involved in technology innovation, both with startups and in the corporate world (banks and IBM), and I read many books describing best practices, promoting theories, etc. I tried to apply many of those “lessons learned” to what I did and do, and developed my own methodology, my own way of thinking and making decisions about managing technology innovation teams, startups, and investing in fintech startups. At the same time I am fully aware that, like everybody else, I can fall into the magical thinking trap, and experience does not equal truth.

A recent example was humbling. I am an admirer of Clayton Christensen and re-read his disruptive innovation book many times. And even the guru got a rebuke — see here for an eye-opening rebuttal of the main theory of disruptive innovation.

I like to say that if do not have strong opinions, you do not have an opinion at all. So it was instructive to read the Informilo piece “The $100 million club” where Ben Rooney interviews several bank corporate VCs (including “hard-nosed” me), and we have each quite different views on how to invest in fintech. To make money through investments, or make money for the sponsor bank though strategic investments?

My view is that there is an intrinsic link between the impact that a company will have on the financial services industry, and its valuation:

On the other end sits Russia’s Sberbank. Mircea Mihaescu, Managing Director, SBT Venture Capital. took a rather harder-nosed approach. “We won’t invest in anything that does not have a potential for a huge return on investment,” he says. “We don’t want to invest in something that may help Sberbank be a player in a niche that will bring in $3 million in revenue. That’s a lifestyle company. We are not interested in those. We are interested in large impact companies — that goes hand-in-hand with huge returns.”

At some moment in time we will know who was closer to the truth, for now everybody is doing his job, and the ones benefitting are the hundreds of fintech entrepreneurs who do not care about theory — and build successful companies.