Is Non-Consensus Investing Overrated?

Full Title

Is Non-Consensus Investing Overrated?

Summary

The podcast discusses whether non-consensus investing is overrated or the key to venture returns.

Hosts explore the dangers for founders of being too far outside market consensus and how market efficiency shapes venture outcomes.

Key Points

• It is dangerous to be too far outside of market consensus as an investor because dependence on follow-on capital makes it hard to keep a company alive if investors don't align.
• The market is generally efficient, and if a company is truly good, its valuation will reflect that, meaning deviating from consensus may mean missing something important.
• The debate over consensus investing is complicated by anecdotal evidence and the difficulty in precisely defining "consensus" in early-stage markets.
• Founders can face a dilemma: being non-consensus might be necessary for a disruptive product, but appearing consensus might be required to raise future funding.
• Consensual investing can be dangerous if it leads to a lack of diligence, with investors simply following popular trends without proper evaluation, leading to "indigestion" rather than "starvation" for companies.
• The efficiency of the market is debated, with some arguing that increased capital and investors lead to more efficient pricing, while others believe that "hot" deals are still underpriced relative to their ultimate potential.
• Companies that are non-consensus in their early stages may be more disciplined with capital due to the necessity of proving their model, whereas overly enthusiastic consensus can lead to rapid spending and potential failure.
• The increasing size of venture funds and the expansion of potential outcomes (e.g., trillion-dollar companies) influence investment strategies and the perception of what constitutes a "fair" price.
• A counter-argument suggests that being non-consensus can be beneficial for founders, leading to more frugal operations and a stronger focus on core business metrics due to less certainty in future funding.
• The definition of "non-consensus" can be fluid, with some arguing that companies led by experienced founders or in familiar sectors might appear non-consensus to outsiders but are, in fact, well-understood by informed investors.
• While consensus investing can lead to "hot" rounds that inflate valuations, a lack of consensus can mean a company's true potential is not yet recognized, creating opportunities for early investors.
• The venture market's increasing efficiency might mean that attractive pricing is less common, but the sheer growth of the market and the potential for massive outcomes still justify venture capital's focus on growth.
• The importance of unit economics is highlighted, particularly for deep tech and AI companies, where consensus can be driven by market hype rather than clear financial viability.
• The conversation touches on the idea that truly disruptive products are often non-consensus to consumers initially, but this is distinct from investor sentiment, which is seen as generally smarter than often assumed.
• The role of fund size and investment strategy (e.g., multi-stage vs. seed-focused) significantly impacts how VCs approach consensus and non-consensus opportunities.

Conclusion

Consensus and non-consensus investing each carry risks and potential rewards, and understanding market dynamics is crucial.

Founders face a delicate balance: being innovative enough to be non-consensus with customers while appearing consensus enough to secure funding.

The efficiency of the market is a key factor, with debates continuing on whether higher valuations accurately reflect true potential or lead to unsustainable bubbles.

Discussion Topics

• How can founders navigate the tension between being a non-consensus innovator and needing to present a consensus-friendly picture to investors?
• What are the long-term implications for market efficiency if the largest venture funds continue to grow and chase the same "hot" companies?
• Considering the cyclical nature of market sentiment, how can investors identify genuine opportunities in less-hyped sectors or technologies?

Key Terms

Non-consensus investing

An investment strategy where an investor takes a position that goes against the prevailing market sentiment or majority opinion.

Market efficiency

The degree to which market prices reflect all available, relevant information.

Upround

A subsequent funding round for a startup that occurs at a higher valuation than the previous round.

Indigestion

In a business context, this can refer to problems arising from too rapid growth, overspending, or taking on too much too soon.

Starvation

In a business context, this refers to a company failing due to a lack of resources, funding, or market demand.

Alpha

In finance, alpha is a measure of an investment's performance relative to a benchmark index. In venture capital, it refers to finding investments that outperform market expectations.

VC

Venture Capitalist, an investor who provides capital to firms exhibiting high growth potential in exchange for an equity stake.

Series A/B/C

Stages of venture capital financing, with Series A typically being the first significant round of external equity financing, followed by Series B, C, and so on, usually increasing in valuation and investment size.

TAM

Total Addressable Market, the total revenue opportunity available for a product or service.

Unicorn

A privately held startup company valued at more than $1 billion.

ARR

Annual Recurring Revenue, the predictable revenue a company expects to receive on a monthly or annual basis.

LP

Limited Partner, an investor who commits capital to a fund but does not participate in the day-to-day management of the fund.

Timeline