To invest is to embrace an unpredictable future, filled with risks and uncertainties. To navigate this uncertainty, which sits atop a complex and ever-changing market landscape, prudent investors seek ways to make informed decisions that can drive returns and mitigate against potential losses.
The principles of excellence in scientific research, it turns out, align remarkably well with best practices for rigorous investment decisions, whether the investment is in a science-based enterprise or something else.
We have identified four principles of scientific excellence and show how they can be applied to investment decisions.
Don’t trust your first answer
In scientific research, obtaining consistent results from multiple independent experiments using different methodologies is essential to establish the validity and reliability of findings. A common rookie mistake by a scientist-in-training is to accept the results of a first experiment as “true” — especially if those results confirm the researcher’s beliefs or hopes about what their research might show!
Pursuing multiple independent paths to explore a question, like using a mix of imaging techniques, molecular characterization, and functional readouts such as model system experiments, can help mitigate against “understanding too quickly” and jumping to conclusions. A particularly powerful approach for scientists is to step outside of their comfort zone to use tools and techniques that may be new or are being borrowed from an unfamiliar discipline — perhaps in collaboration with another researcher, who can also act as a thought partner in analyzing and interpreting the results.
Similarly, when it comes to making an investment decision, relying solely on one’s initial impression or approach to evaluating an opportunity can lead to incomplete, biased, or incorrect conclusions. A founder who makes a strong first impression in a pitch meeting — a very controlled type of “experiment” — might come across quite different in reference checks with peer co-workers. An innovative new technology that demos well in one setting could fail when subjected to different inputs, initial conditions, or even user types.
To mitigate these risks, effective due diligence demands exploring multiple independent paths to arrive at an investment decision. Such diligence can include conducting thorough research using various sources, analyzing different financial metrics, studying industry trends, and considering expert opinions. By gathering diverse perspectives and cross-validating information, investors can gain a comprehensive understanding of the investment opportunity and reduce the risk of making hasty or misguided decisions.
Perturb the system to make sure you understand it
Scientific researchers often perturb the systems they are studying by altering the inputs, conditions, or other variables. That allows them to observe the system in a variety of different states.
A biologist studying cell growth, for example, might try a range of different culture media, temperature, and environmental conditions to learn what factors have the greatest impact on the cell’s processes and outcomes. A geneticist might take the perturb principle a step further and systematically edit the genes in a model organism as one approach to finding out what each gene does.
By poking at the system and seeing how it responds, a researcher can more rapidly and more thoroughly come to an understanding of its internal workings than by simple passive observation alone.
This principle can be applied to sound investing. Rather than taking a company’s pitch or plan at face value, investors can ask probing questions, dig deeper, and challenge assumptions (others’ and their own) to ensure a thorough comprehension of an investment opportunity. By looking ahead and asking “What if?” questions, investors can actively seek out potential risks, weaknesses, or hidden factors that may affect the investment’s future course and outcome.
This can involve stress testing the financials, conducting sensitivity analyses, and simulating worst-case scenarios. We don’t recommend attempting to systematically edit a founder’s genes, but trying to break their demo or financial model — with their consent, of course — to better understand its workings and limitations can be a constructive and revealing way to perturb the system.
Embrace statistics as an ally against human biases
Scientific research often relies on statistical analysis to draw meaningful conclusions from data and to counter the inherent biases of human perception. A researcher whose work suggests that a certain gene is more highly expressed in their system of interest might be more likely to pick out that gene’s sequence by eye in experimental data (an example of confirmation bias). Data points on a graph might appear to confirm a linear relationship or a correlation that would be consistent with the researcher’s hypothesis. But quantitative analysis skillfully applied can show whether any perceived relationships or differences are real — that is, statistically significant — and unlikely to be random or a product of the researcher’s interpretation.
In vetting an investment opportunity, quantitative analysis can play a similarly powerful role in counteracting subjective biases and improving decision-making. By employing models, metrics, and statistical tools, investors can more objectively evaluate investment opportunities, assess risk-return trade-offs, and identify patterns and trends that may be obscured by human bias. Techniques such as regression analysis, Monte Carlo simulations, and portfolio optimization models can help investors make data-driven decisions based on rigorous analysis rather than relying too heavily on gut feelings, a priori beliefs, or emotional responses.
Pursue fundamental impact over current trends
Humans have a natural tendency to follow trends, jump on bandwagons, and sometimes engage in uncritical groupthink. Scientists are no exception. Sometimes the forces that compel a researcher to pursue “trendy” science are financial (such as subjects for which grant funding is available) and sometimes they are more personal (to garner the acknowledgment and praise of scientific peers). But scientific research is characterized by long timelines and what is hot today may not be so exciting or important tomorrow.
Science that provides the greatest impact derives not from pursuits of popularity but rather by achieving clarity about unmet human needs and by cultivating an ability to make connections between different scientific disciplines. The solutions to complex problems often come from the least expected places: high-throughput inexpensive DNA sequencing, for example, was enabled by technologies developed in the semiconductor industry, and the solution to human genome editing came from bacterial immune systems.
Likewise, evaluating investment opportunities through the fundamental lens of value creation and potential impact can identify routes to real returns while mitigating downside risks such as inadequate diligence periods or valuation inflation associated with hot areas of investing. Chasing trends might lead to near-term wins, but those wins can be undermined or washed out entirely when the market moves on to the next hot topic.
High-quality investment opportunities are more likely to come from teams that think deeply about unmet needs and seek fundamental change on a more distant horizon. Visionary investors are the ones whose companies ultimately change the world and improve the human condition.
Putting it all together
Principles of excellence for rigorous scientific research can serve as valuable guidelines for conducting rigorous and meticulous due diligence in pursuit of sound investment decisions. By embracing the idea of pursuing multiple independent paths, perturbing the system for a deeper understanding, embracing statistics to counter inherent human bias, and pursuing fundamental impact over current trends, investors can enhance their decision-making processes and avoid common pitfalls in the pursuit of attractive returns and successful investment outcomes.
Rigorous and thorough due diligence is essential for investors to effectively navigate the uncertainties of the financial markets and take prudent risk in pursuit of more attractive returns. By applying these key principles of scientific research, investors can approach investment decisions with a more structured and systematic mindset, leading to more informed choices. And original thinking less driven by biases and trends will enhance the likelihood that investors’ choices will make significant and positive impact in addition to financial returns.
Jenny Rooke, Ph.D., is the founder and managing director of Genoa Ventures, with nearly two decades of experience in venture investing and a background in genetics and biotech. Carolyn Bertozzi, Ph.D., is a professor of chemistry, chemical & systems biology, and radiology at Stanford University and winner of the 2022 Nobel Prize in Chemistry for her work in bioorthogonal chemistry and click chemistry. This essay was adapted from a Genoa Ventures video conversation between the two authors.