Harvard's Judgment Professor: The Curse of Optionality, and the One Habit That Builds Better Judgment

Reza Satchu (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 can replace that person with a fire performer. There's something much more sinister when a founder or a leader accepts underperformance, which is that it massively negatively impacts the entire culture.

Rachel Warren (0:35)

That was Reza Satchu, 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 of that fooling himself, 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 founder, investor. What are some of the hardest lessons you've learned as a founder?

Reza Satchu (1:21)

So I will tell you, 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. 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 a leader accepts under performance, which is that it massively negatively impacts the entire culture.

Which is suddenly people are like, well, he's not holding everyone to the same standard. Or well, so I'd say to you that, but of course firing someone is a hard thing to do. You don't want to do it. 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 is so necessary. 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. Not wanting to deal with the difficulty of firing someone. As I said, it's not just the singular person's performance, it's the cultural impact of that.

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. 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 oftentimes, look, my world is founding businesses, but I've hired lots of people from larger organizations.

Not always, but often, they've had a very hard time working in a more resource-constrained environment.

Rachel Warren (3:48)

Interesting. 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, both?

Reza Satchu (4:09)

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?

Rachel Warren (4:25)

Right.

Reza Satchu (4:26)

So let me play both sides. I hope I haven't hoodwinked anyone, but I've seen both sides of it. 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. Meaning, you can't pretend to be someone else, you need to be authentic.

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. 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. That effectively, this is inevitable.