There was a recent longform tweet by Ed Suh (see below), a VC at Alpine Ventures, that laid out one of the paradoxes of venture: everyone knows that early stage returns are maximized by being "non consensus and right” but in practice, there are strong incentives that push investors towards consensus or “hot” investments.
This got me thinking about how investors can actually make non consensus investments, without just paying lip service to the idea. I dove into the 1984 Ventures portfolio to find examples where we’ve been non consensus (and will hopefully be proven right in due course!). I found that there are repeatable strategies to be non consensus when picking founders, markets and business models/ideas.
Before diving into the strategies, I encourage you to read Ed’s post in full. But for those looking for the cliff notes, here is the TLDR on the incentives at play: 1) In the absence of exits (which typically take 7+ years to manifest), VCs use markups as a means of demonstrating progress 2) Hot companies in hot sectors get marked up the quickest 3) Hot companies are easier to sell internally to other partners in the fund and 4) Hot companies help a VC raise their next fund from LPs. In contrast, non consensus companies can seem weird, are often doubted by other investors (thus limiting access to follow-on capital) until the progress speaks for itself, and can take a long time to blossom. Nevertheless, the axiom remains that being non consensus and right maximizes returns.
Non consensus approaches to picking founders
- Strong founders who aren’t well networked with VCs
- Earlier this year, the founders of Revv sent us a cold email. Like most VCs, we were skeptical of the quality of the company since it came cold — after all, didn’t this imply that the founders weren’t able to successfully network their way into an introduction? However, once we investigated the opportunity, we realized that the founders had made impressive early progress, but simply weren’t yet networked in Silicon Valley. We led their seed round in March and they’ve since grown to over $1M ARR in 6 months
- A similar story played out with our investment in Exo Freight, a trucking marketplace led by twin brothers who had significant industry and startup experience, but weren’t connected to Valley VCs. After investing, we helped them get into YC and they’ve since gone on to raise a Series A. This opportunity came to us through a friend of the firm who realized it was a space (supply chain) where we liked to invest. Building a brand to get sent such opportunities is one of the most valuable things you can do as a venture firm.
It’s also one of the most de-risked ways to be non consensus, since it’s more akin to front running an opportunity that you are aware the market will be responsive to (rather than saying that only you understand the opportunity and everyone else is wrong) - Strong founders who you know personally, but aren’t well known by the market
- This relates to the above point, but tends to be limited to people you know well from school, college or previous shared work experience. Keith Rabois famously did this when investing in Faire — whose founders previously worked for him at Square and were on his soccer team — close to inception
This isn’t to say that you should completely avoid investing in founders who are well known by the market and hot commodities (we have made investments in that category that appear to be working well), but that those opportunities are typically hyper competitive and priced accordingly.
Meet Kurtis and Kris Tryber, identical twins who co-founded flatbed trucking startup Exo Freight. Both previously ran their own trucking brokerage and worked at a trucking startup before founding Exo. Kris is a full stack developer and Kurtis can sell: when they pitched us for their pre seed round, they already had $500K revenue and Walmart as a customer.
Non consensus approaches to picking businesses
- Having knowledge about a business model that others tend to misjudge can provide non consensus investment opportunities. However, this is a risky brand of contrarianism since most startup business models are well known to investors - implying that you are right and everyone is wrong. Nevertheless, misconceptions do exist from time to time
- As an example, many investors are reluctant to invest in lending businesses as they have concerns on their defensibility. Yet, funds like QED Investors - whose founding partners previously started Capital One - have leaned into the category given their prior history building a bank. Their intimate knowledge of the nuances of lending have led them to embrace a category others have eschewed
- Relatedly, focusing on business categories where others have doubts (e.g. on market size) - but those doubts can be overcome in time with compelling traction, can provide alpha
- There are many stories of VCs underestimating market size in the early days for companies like Uber (whose black cab focus was initially considered too niche) or Service Titan (selling SMB software to HVAC businesses was similarly considered too small). What VCs missed was that those companies had found and served desperate customers, and from there were able to expand into adjacent markets and products. Given the difficulties of sizing nascent markets, there exists an opportunity to make investments in businesses that may appear too small at first glance, but where a hair-on-fire problem has been identified. It’s often the case that the startup, if initially successful, will earn the right to solve problems in adjacent markets and expand their TAM (e.g. how Toast has moved from a POS tool into a CRM, ERP, lending and payments juggernaut)
- Similarly, there are businesses that aren’t classified as “pure tech” businesses, rather, are tech-enabled. This tends to apply to businesses that involve atoms, not just bits, and thus involve an element of human coordination. These business models can deter some investors, but can nevertheless be high margin and venture scale businesses, providing an opportunity for some investors
- Another approach to non consensus investing is the willingness to take a bet on something evolving within a business that others believe won’t happen
- For example, when we invested in Syrup Tech, they were part tech company part consulting firm. We predicated our investment on the company ditching the consulting services component and hiring a CTO. This leap of faith may have scared other investors off at the time of the investment. Since then, the company has executed phenomenally and has gone on to raise a seed and Series A
Nvidia’s data center revenue. A clear example of when market tailwinds propel a business, as well as the risks of sizing markets based on historical growth rates.
Non consensus approaches to picking markets
- A rising tide lifts all boats. This is particularly true in venture where riding the wave of a fast growing market can propel a startup to product market fit and beyond. What’s non consensus is getting the timing right on such tailwinds - either too early or too late won’t work.
If you are going to employ this strategy, you need to be aware of trends that others aren't yet clued into and take a portfolio approach (as only a subset of them will eventuate) - Prior to starting 1984 Ventures, our partner Ramy had previously explored starting an SMS marketing business for brands, which gave him an understanding of the high open rates for SMS (versus email). As such, when the opportunity to invest in Postscript - an SMS marketing business for Shopify stores - came around, he was able to focus his assessment on the team, as he had a feel for the market pull. Since investing, the company has grown 100x and gone on to raise an additional $65M
- Similarly, our healthcare partner Farzad is a practicing ER physician and previously started one of the first telemedicine companies. Through the former experience he had a front row seat to the trend of burgeoning consumer interest in nutrition, and through the second an awareness of the category’s suitability to telemedicine. So when we met Fay Nutrition — a consumer marketplace for nutritionists, covered by insurance — we already had conviction in the market. Fay has grown over 30x since our investment a year ago
- Investing in markets that were historically uninteresting, but due to a technological inflection or founder insight, are now interesting
- With the advent of LLMs, we’ve witnessed markets that were previously uninteresting to VCs (e.g. legaltech, gov tech, ed tech) become investable. However, given the distribution advantage that incumbents have, picking sectors to focus on becomes a critical calculus. To be non consensus in this era involves 1) thoughtfully picking niches without strong software incumbents, or 2) picking service industries previously under penetrated by software - and selling these industries work products, not just software
- “Non consensus and right” is a phrase popularized by Andy Rachleff, one of the founders of Benchmark Capital and Wealthfront (and an advisor to 1984 Ventures): https://confluence.vc/andy-rachleff-benchmark/
Above are just some of the ways we, at 1984 Ventures, have sought to make non consensus investments. Given that startup investments can take 10 years to exit, time will tell if we are right! Nevertheless, I’d love to hear thoughts from other fund managers if this resonates, or if they’ve found other strategies to be more effective - my email is samit@1984.vc if you want to reach out.