Does successful venture investing require exploiting market inefficiencies rather than following consensus behavior?

Sumeet Gajri · Jan 17, 2020

The only way to earn above-market returns is to make non-consensus decisions and be right, which is hard because most people predict the future with models built on historical data that non-consensus events break from

A non-consensus event is by definition something most people fail to predict, so it most likely departs from the accumulated historical data; and the more something differs from the present, the harder it is to believe or act on

49:02 20VC: Portfolio Construction, Optimising SPVs, Opportunity Investing "Between Rounds", Being Distribution-Centric Over Product-Centric and Capital Concentration Within Funds With Sumeet Gajri, Chief Strategy Officer @ Carta

Katherine Boyle · Oct 1, 2020

Venture is a mimetic field, and letting go of what other investors are doing and which sectors are hot in order to invest on your own conviction is a true competitive advantage

Many young investors chase hot deals because others call them hot; abandoning that lets you invest in things others overlook, as with Anduril in 2017 when almost no traditional firm looked at defense

13:22 20VC: What Is Founder Narrative Fit and How to Detect and Invest In It, How To Avoid Consensus Thinking When Investing, Price Sensititivity; When To Pay Up vs Stay Disciplined & From New York Times To General Catalyst; Why Venture and Journalism are Not S

Will Quist · Sep 12, 2022

Seed managers should concede the consensus game at the earliest stages and instead go a click further out on the believability curve than other investors, for reasons defensible to themselves

That is the point of venture classic — the job is to hold a belief system a click beyond where others will go

Scope: at the earliest stages

14:11 20VC: Why 95% of Venture Capital is Not Really "Venture Capital" | The Five Core Levers Needed To Assess Risk and Price a Startup | The Future of Venture; Who Wins, Who Loses, What Happens to the Crossover Funds with Will Quist, Partner @ Slow Ventures

Julio Vasconcellos · Sep 23, 2022

The best venture returns still come from non-consensus and right investments, not from chasing what the market is already chasing

Building a company that will be massive in ten years requires bottom-up thinking and going into companies no one else wants, which is where the truly massive returns come from

Scope: acknowledges some may consider this view outdated

32:02 20VC: Why Greed is the #1 Enemy of Venture Returns, Why Not Enough VCs Play to Win and Lessons from Scaling to $100M and 1,200 Employees and Then Cratering with Julio Vasconcellos, Founder @ Atlantico

Satya Patel · Jan 30, 2023

The industry also forgot that it pays to be nonconsensus and right rather than to chase momentum deals

Everyone piled into companies with momentum because others were investing, and that looked good only because the bull market ran longer than expected

37:14 20VC: Homebrew's Hunter Walk and Satya Patel on Why $100M is Not Enough To Execute a Seed Strategy Today | Why They Decided not to Raise New External Funds | Where Are We in the Cycle & What is Truly F***** | Why Founders Should Take Secondaries Earlier

Frank Rotman · Aug 11, 2023

Competing to win consensus-obvious companies produces a poor risk-return trade-off because the winner necessarily overpays.

By the time you price a deal everyone thinks is good, you've paid away the return.

11:24 20VC Roundtable: NEW FORMAT: Why the Seed Investing Model is Broken, How to Make Money at Seed Moving Forward; Who Wins and Who Loses, Why Venture Value Add Platforms are BS and Failed and Why There Will be an IPO per Week in H2 2024

Mike Maples · Sep 20, 2023

Nonconsensus opportunities must exist, otherwise active investing has no reason to exist and one should just buy the index

You only make money by knowing something the market doesn't; the business exists because of inefficiencies and finding them is the job

Scope: says a prepared mind is required to receive an entrepreneur's insight

8:11 20VC Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI, Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i

Eric Paley · Sep 20, 2023

In none of the last twenty years has the most valuable company born in a given year come from that year's hottest investment theme

Founder Collective ran an analysis pairing each year's hottest theme with the most valuable company founded that year — e.g. OpenAI was founded in 2015 when direct-to-consumer commerce was the hot theme

Scope: acknowledges he may be slightly off on details from memory

9:03 20VC Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI, Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i

Mike Maples · Sep 20, 2023

Seed investors exist to take chances with entrepreneurs before the rest of the market is ready to, and that is where seed alpha comes from

10:48 20VC Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI, Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i

Mike Maples · Sep 20, 2023

The seed job is hard but not complicated: find non-obvious insights early, back the entrepreneurs who can realize them, and refuse to accept the conventional rules as given — the job is the great deal others don't yet see, not the hot deal

The opportunity to find inefficiency always exists

11:15 20VC Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI, Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i

Mike Maples · Sep 20, 2023

Patience is a form of arbitrage: seeking inefficient markets while everyone else regresses to the mean chasing what's hot is the source of venture returns

When everybody else is playing the popular game, being patient and playing a different game is where the inefficiency lies

13:02 20VC Roundtable: Is the VC Model Broken? The Biggest Disconnect Ever Between TVPI & DPI, Why Market Size is Dangerous, Why "Go Fast" is Terrible Advice, The Dangers of Raising Large Rounds at High Prices & Why Next Year Will See the Biggest Hiring Spree i

Saam Motamedi · Jul 15, 2024

'Playing the game on the field' is a bad investing mantra; investors must have independent thinking

Playing the game on the field would have cost investors dearly at many points in this generation and prior ones; if you do play it, you'd better be right

48:09 20VC: Why We Are in a Bubble & Now is Frothier Than 2021 | Why $1M ARR is a BS Milestone for Series A | Why Seed Pricing is Rational & Large Seed Rounds Have Less Risk | Why Many AI Apps Have BS Revenue & Are Not Sustainable with Saam Motamedi @ Greylock

Imran Khan · Aug 26, 2024

Markets tend to make a fool of the greatest number of people, so any widely held belief should at minimum be questioned

Consensus positions are where the crowd is most likely to be wrong

Scope: sometimes the consensus is right

57:13 20VC: Why the IPO Market is not Closed | Why Revenue Multiples are BS and Founders Need to Change | Advice From Jack Ma, Jamie Dimon and Evan Spiegel | Lessons from Taking Snap & Alibaba Public with Imran Khan

Nick Chirls · Sep 6, 2024

The core question in an early-stage investment is what you believe about a market, product or category that the market doesn't care about yet

That non-consensus belief is what the investment is actually underwriting — e.g. with Bison Trails the belief was that proof of stake was as good or better than proof of work

38:20 20VC: Why VC is a Ponzi Scheme Today | Why Most VCs are Bankers | Why Big VCs Ruin Startups | Why Incentives in VC are Broken | Why American Dynamism is a Tool for VCs to Raise Money with Nick Chirls, Asylum Ventures

Mamoon Hamid · Oct 21, 2024

Venture is a big echo chamber and the information circulating in it is not an edge, because knowledge everyone shares is no longer arbitrage

People mistake echo-chamber information for knowledge and knowledge for arbitrage, but shared knowledge can't be arbitrage

41:09 20VC: Kleiner Perkins' Mamoon Hamid on Investing Lessons from Leading Rounds in Figma, Slack and Rippling | Lessons Building a Generational Defining Firm with Kleiner Perkins | AI: Where Value Accrues, Startups vs Incumbents & Scaling Laws

Mike Maples · Jan 6, 2025

You must play the game that's on the field but shouldn't play it the way everyone else does; if you're not finding inefficiencies you should question why you're in the business

Returns come from exploiting inefficiencies rather than copying consensus behavior

0:00 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

Mike Maples · Jan 6, 2025

Venture is not a less attractive investment category; the problem is that many investors have forgotten the right goal, and to the extent seed investing becomes an efficient market it cannot be a good business — so anyone who can't find inefficiencies shouldn't be a seed investor

Active investing only works where there are market inefficiencies; acting like an efficient-market operator makes 100x first checks impossible

16:13 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

Mike Maples · Jan 6, 2025

Even in a new, exciting technology cycle you must play the game on the field but not the way everyone else plays it — if you aren't finding inefficiencies you shouldn't be investing

Investors are paid to find opportunities that make money; nobody is interested in indexing an overpriced seed market and that isn't a good business

Scope: their AI investing was governed by a specific set of conditions about what they would and wouldn't do

22:49 20VC: How To Do a 10x Seed Fund in 2025 | Three Frameworks to Evaluate Startups an Founders | Lessons from Losing Billions Missing Airbnb and Pinterest & Investing Lessons from Charlie Munger with Mike Maples @ Floodgate

Harry Stebbings · Aug 22, 2022

The best investors have the willingness to be lonely for long periods of time

Scope: endorsing a quote he admires

37:12 20VC: Why Market Always Wins Over the Founder & Why I Do Not Do Market Sizing | Why it is not the Best Time to be Investing but it is the Best Time to Have a Fund & The Type of Deals to do Today | Why The Best Founders Have 100 Year Plans with Wes Chan, C

Wesley Chan · Aug 22, 2022

Doing contrarian deals means accepting years in the wilderness before vindication, which is a price worth paying

Eight years after the Canva deal the same people who passed at Series A now say they can't believe they passed

37:21 20VC: Why Market Always Wins Over the Founder & Why I Do Not Do Market Sizing | Why it is not the Best Time to be Investing but it is the Best Time to Have a Fund & The Type of Deals to do Today | Why The Best Founders Have 100 Year Plans with Wes Chan, C

Terrence Rohan · Feb 5, 2024 · hedged

In ten years the seed market will look much like it does today, just with more of everything we currently see

Scope: allows for some robotic/API tooling at the margins

83:18 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

David Tisch · Feb 5, 2024

The consolidation of large multi-stage firms will not dramatically change how the seed market works, because a $10M, $50M or $100M fund that backs the right company can still generate an amazing financial return

As long as seed rounds exist, a small fund hitting the right company produces outstanding returns, and the seed market remains driven by randomness

Scope: assumes seed rounds continue to exist; randomness is neither easy nor predictable

83:48 20VC: The Biggest Misconceptions & Hardest Truths About Seed Investing Today; Why The Best Founders Don't Need You, Why Uncapped SAFEs Are Good, Why Reserves Are Bad, Why Signalling is BS, Why Price Doesn't Matter with David Tisch & Terrence Rohan

Hussein Kanji · Jan 20, 2025

To succeed as a venture firm you must invest off-piste and contrarian for big outcomes, but the market must recognize you were right within a year or two for you to get credit.

returns come from outlier, contrarian bets, but the industry only rewards positions it can validate quickly

6:34 Contrarian bets need market recognition within a year or two for credit

Harry Stebbings · Jan 6, 2025

The San Francisco seed market is now the most efficient market; the inefficiencies that existed when Floodgate was founded are gone and neither he nor Mike operates in an inefficient market today

16:54 Sf seed market has become fully efficient no inefficiencies left

Mike Maples · Jan 6, 2025

It is a mistake to think of startups as a 'market' at all; although more companies are fully priced today than when Floodgate started, there will always be around thirty great startups a year to be found by seeing what others don't see

Startups aren't a homogeneous market to be priced; the game is puzzle-solving — spotting what others miss or getting into things not everyone can access

17:07 Startups are not a market great companies can always be found by seeing what others miss

Pat Grady · Jul 8, 2024

There are no bonus points for being contrarian — whether an investment is a narrative violation or the prevailing view is irrelevant.

The goal is only to help daring people build legendary companies and generate exceptional net multiple returns for LPs; being 'contrarian and right' is a currency for looking smarter than everyone else, not for returns.

14:07 Contrarian identity is irrelevant to returns only net multiple outcomes matter

Cyan Banister · Oct 19, 2020

The early stage ecosystem is currently unoptimized because of an abundance of early stage capital, and it will take years to see which strategies actually work

22:26 Abundance of early stage capital currently leaves the market unoptimized taking years to resolve

Jason Lemkin · Sep 20, 2023 · hedged

SaaS was a nonconsensus category ten years ago and it is unclear whether any large category — vertical SaaS, B2B, payments, fintech — is nonconsensus today

When he started, top-tier firms had barely done SaaS and there were very few billion-dollar-plus SaaS exits, whereas now cloud is enormous

7:30 Uncertain whether any major category today remains nonconsensus like saas once was

Terrence Rohan · Feb 5, 2024

Any differentiation a seed investor has is really just a market inefficiency, and if it is attractive enough others will copy it until the edge disappears

Attractive inefficiencies get filled by competitors, which erodes the edge

84:34 Seed investor differentiation is just inefficiency that erodes once copied

David Tisch · Feb 5, 2024

The seed market will never become efficient

Starting a company is inherently messy and ugly — it takes blood, sweat, tears, vision and hunger — and a founder with a dream only cares about getting going, not about the efficiency of the financing market

85:20 Seed market will never become efficient because company building is inherently messy