Is Non-Consensus Investing Overrated?

25:03I like people talked about the like triple, triple, double, double, double thing for a while of getting from a millionaire to 105 years. And that seems so antiquated now, right? Like the bus company's doing like one or two years. I think in the flip side, the kind of the endurance, like how long those companies in during last -and -grow feels like much more of a question mark. Because in the triple, triple, double, double, double, like if you get 100 million ARR and there was no in the coast, you probably just keep growing. And now it feels like you could get a hundred or then you drop to 50 because something else would be better with the better product.

25:33So, you know, I think there's like the growth is amazing and then the modes are weaker. And so I think there's a counterbalance there. And I'm not sure how to evaluate it because I've invested that much of that stuff. I agree. On the deep tech side, I definitely see areas with a lot of hype from time to time. Like we, for example, we invested in defense a lot three, four years ago and then we kept working with basically pause for a year and a half or two because after Ukraine and Israel, prices just went up like two, three, four times. But the company fundamentals didn't change. And then it started being an opportunity cost of like, should I invest in this defense company up 40 when there's this really great energy company at 15.

26:11And so I think the fence was kind of like that. I think Bio has a lot of ups and downs. I think in robotics, humanoids are probably like one of the most hyped areas where the evaluations just get crazy before there's any revenue. So I think that I actually, I feel like it kind of lost the thread in the original question. But no, this is great. I mean, I was honestly just wondering like how you thought about this current way of you to do the great survey of the set of the waves. I actually agree. I would say like for the consensus areas like humanoids, like we end up, not explicitly avoiding them because once you have a few companies that are raised like hundreds of millions, whether they end up being great outcomes or not, I think it's pretty hard for someone to start something new with like, you know, near zero resources and team.

26:54Yeah, you know, it's interesting when you do the humanoid. So I think there's all sorts of types of investing and they're all pretty valid. One type of investing is humanoys are clearly interesting. Big companies are clearly interested in it. So why don't you back a bunch of good teams in worst case they get acquired? And I think that's totally legitimate, but that's not how I think at all. For me, the company has to make sense as a standalone business at scale. So things like humanoys are tough for that just because the unit economics right now or just so unknown, like competing with the human bodies a very, very hard thing to do.

27:33And then of course you can be like, okay, well, we'll put it where human beings can't go like a car factory, but then all of a sudden now, you're building a manufacturing company. So you've verticalized heavily, and the company has to look at kind of whatever sector that the robot's going into and it's more constrained. And I don't understand the competitive set, and yada, yada, yada. So I just feel like, from my standpoint, the idea that this is very buzzy and hot in the industry for big companies and it may have an M &A. I don't know how to invest that way. I just don't know how to handicap that.

28:09And so the way that I tend to view these things, I mean, like for AI, for better or for worse, like you actually have great unit economics. I mean, everybody knows kind of like, when we always talk about the open AI's and the anthropics, but do we talk like the 11 labs, for example, or mid -journey? I mean, these are just famously model companies where the unit economics are great, or grow very quickly. And so I understand that. But I think there's kind of been this weird, and this happens, you know, a lot where people take the example of these model companies and they apply it to totally different spaces where you don't have the proof points, you don't have the economic case and they kind of apply it.

28:49And that's one thing I don't know how to do. So certainly I don't believe, you know, we should all just follow like the common consensus around areas to invest in. But I do think that there's gonna be a pool of capital and it's gonna come to just look a certain way. And if you don't consider that when you're investing, I think life will be a lot more difficult. Yeah, I agree. I'm sort of on the side here on the humanoid stuff. I think what I've seen over the last 10, 15 years is if the market is big enough, it really distorts VC investing. Because it used to be that you'd look at a market. You're like, oh, it's a two billion a year market.

29:26if there's a 1 % chance they could capture, it'll be worth this much. So true. So let me justify a seed price. If the market's like $5 trillion of human labor or something, like any price makes sense, right? But then I think that really just starts with how much values are in this. The most boneheaded partner meetings were like, well, yes, it is cold fusion, but this is the largest market ever. So on the off chance it works. I'm like, this is an engineering man. This is like laws of physics. I'm not sure that a good software founder is going to bend the laws of physics. But yeah, I think I totally agree.

30:00I also feel like, I don't want to harp on this too much, but like, unit economics is so important. I mean, like, what is the story for autonomous vehicles? Right? The story for autonomous vehicles is that even after the industry's put a hundred billion dollars in it, a hundred billion, the unit economics are still, you know, let's call it on par with Uber. Let's Does that make sense for venture investment? It's really, really hard to build a stand alone business for those types of economics. I mean, Google can do it, sure, and Tesla can do it, sure, but can start up X to it, no. And so you're either playing for, this is a great company that got acquired, which a lot of that happened and people made good money, but like that's again, that's not saying that, you know, to start up, or you're building picks and shovels, like, like applied intuition where you're like, you're building software for this market.

30:56But I do think that a lot of investment dollars do follow these spaces where there really is no thesis on the ultimate new economics. And I think you're exactly right. I just think that there's this kind of market -tam sloppiness that says, well, if the market's invented it, then the expected payout is high. That's also invented it. That's also invented it, exactly right, yeah. Yeah. When I look at my portfolio, I see both. There were some, you know, of the winners, you know, pave and scale were non -consensus, non -competitive, you know, unproven, but very talented founders and then, and then on the work consensus competitive, Jack Altman and Kasser were.

31:38How is, how is scale non -consensus at, at, at seed? You know, Alexander Wang was 18. It's a total known space. He's phenomenal. The A was done by Volpe who's amazing. I mean, I just feel like this is a very narrow definition of non -consensus. For nearly most of the rounds, it was competitive. So yeah, I can agree that Dan Levine, Dan Levine was, I mean, come on. These are like the best investors in the world. I just mean to say that I brought the example to say that the castors' round was almost an order of magnitude more expensive. And I think what people have been late to really internalize and what Aisin Z was super early to internalize was just the outcomes are order of magnitude bigger.

32:27Maybe two orders of magnitude bigger and so you can get seeded like returns at order of magnitude or even two orders of magnitude more expensive. So remember YouTube, Instagram, we're considered very expensive acquisitions at just a few billion dollars. And a few years, we're going to have more trillion dollar companies. And so once we truly internalize the outcome expansion on the order of magnitude, I think it makes sense to Leo's earlier point that it would beg the argument of like, okay, but can you have 1 ,000 X -like returns? And not just what we used to consider seed pricing, but maybe at Series A or maybe even Series B.

33:02Well, this is a very interesting question because you actually do run into fun mechanics as an actual price modulator in this discussion, right? So you're exactly right. So again, I'll go back to my company. So my company is acquired for $1 .2 billion. We have, let's call it, you know, less than 10 million in ARR, right? So does that make any sense? And a lot of people are like, this is totally crazy. This makes no sense. Except for what I left, you know, the run rate of the three and a half years later, like the RenRate was, you know, $600 million within VMware who acquired the company. And then right now it's, you know, let's call it two billion, right?

33:39It was actually at one point in time, I think it was 40 % of the growth of VMware, like the business unit that I ran, that was part of the acquisition. So clearly it made sense to VMware. So as a result, you should say all the check sizes should be high for the winners because the outcome was so good. And this was, you know, this actually returned turned a lot of money to a lot of investors. The problem with that is I just think that that would mean fund sizes would be too large and you'd have to unlock different pools of capital, which by the way did start to happen during the soft bank and the tiger and the co -two era.

34:17So you could argue that all of their theseses were correct, right? Like soft bank was actually right and tiger was right and it was actually a macro issue that caused all the pullback and that's going to come back again. I mean, I think a very legitimate thesis, but I really feel the reason that prices don't continue to go up is more just access to LP capital. So, Leo, let me just try to make this a bit more concrete, which is I think what Eric said is correct, which is the outcomes are so big, it suggests that high prices, like the prices are too low that we actually pay. I think the prices, you know, the fact that we get the returns we do suggests the prices are too low.

34:55So the question is, is why are the prices too low? And I think the answer is, is like, we just don't have the dollars to place all of those bets. And a number of people have actually questioned exactly this, very famously. Soft -bank question this, tiger question this, and so they rose these, you know, raised these, you know, insight question this, they raised these huge funds, and they deploy a lot of capital. And those experiments had very mixed success. But I'm, it's not obvious to me that the reason they had mixed success is because the prices were too high. I mean, there's a lot of reasons why those could not have worked, including kind of macro cycles and also the fact that none of them were Silicon Valley insiders.

35:33None of them were, you know, traditional early -stage investors, et cetera. So there's a very reasonable question, which is, you know, maybe someone should just go run the Tiger Strategy again, but as a Silicon Valley insider. Well, in some ways, you know, there's the failure cases to some degree, but in some way, you know, I mean, thrive, raise bigger funds, founders fund raise bigger funds, we raise bigger funds. The winners are also multi -states raised bigger funds. It just could be that this is just a market being efficient. Actually, the reason that more money is going into this and the funds are getting larger is because the opportunity set is larger, and this is just a market working its way out.

36:10But Leo, you're very quiet. This is actually pretty controversial statement. So I want to make sure that. I guess I'm not sure what you mean by we should be paying more. Do you mean that like you think the current prices are still like well below where they should be? And I guess if so, like I'm horrific off the Varic statement, which I thought was right, which is, which is venture capital has been a top returning asset class. And you can look at individual investments. If you just take the top 10 % of funds, they return so much money. So there is an argument that even with these high prices, they're still underpriced.

36:52And put it differently, Leo, it's like a seed fund may say, oh, I'm not going to invest in something at 50 post or 100 post because I don't think there's a thousand ex potential. I don't think a thropic is going to be a hundred billion dollar company or open AI is going to be a hundred billion dollar company or whatever it is, but it turns out it is. Like it turns, you know, what we used to think about it. I think you're very not to say open -ass, going to be a hundred billion dollar company, right? Exactly. Yes. I mean, a few years ago, you know, and so it doesn't seem like we've sort of truly internalized that this is the norm, that there's going to continuously be a hundred billion dollar, you know, outcomes.

37:32If not. Or that the market just continues to grow. And therefore, it necessitates larger fund sizes. I mean, I would say probably the venture market was what, 100th to size 20 years ago? Probably something like that. It's kind of what I was going to think about. Yeah. And we did think a few years ago that there'd be a great contraction in the article. That 2021 was a blip and that, you know, it would sort of write size back to where it used to be. And it doesn't seem to be the case that it's going to 2010 levels. I'm not sure if you guys have the data on you, but when I talk to our team, when I talk to thrive, it seems that people think no more capital is just going to keep entering.

38:14That's just because companies stay private longer too. But I think the actual number of $100 billion plus companies in the last 20 years is pretty small. I don't know the exact number, but it's like 10 or 15 or maybe 20 or something. So it's like, you really betting you can get like the one every year or two that gets there. If you're, you know, let's say you're doing a series A like a billion posts or something right? And you want a hundred X even ignoring delusion. You'd have to bet that there's more of them and that more of them going to happen and that there are also more ways of getting liquidity from from them as well.

38:53But but also just but that also kind of suggests purely by the numbers that the most important and thing is just being in one of those and not... If you can, the most important thing is being in one of those independent of price. That's the higher -der -bit. So I think, I mean, I generally agree, right? Like, if you're in the best company of the year, I don't think ownership matters that much. I don't think the price matters that much. If it's gonna be the best company, it's like 10 years forward. I guess to your earlier point where, you know, if venture funds had more money, they'd do higher valuations.

39:26I mean, it sounds like then you could do the higher valuation today to the right because you could just be like, hey, if we just want to get in this one, we'll pay twice the price and get half the ownership or something, right? But you also need a diversified portfolio. You need enough companies. No, you need the fun size to run that. This is why I think a lot of this comes back to fun size. I mean, even in the Andreessen portfolio, I'm just thinking off the top. We have three companies that are at the 100, before companies at the 100 billion dollar mark, right? I mean, they're Stripe, Databricks, Coinbase, Opening Eye.

39:54And so they're not that rare. You guys have awesome coverage. I mean, like, like, I think I guess the course is like, how many more could you name though from the last, like, you know, 15 years? My guess is not every 15, not like 100, right? Yeah, yeah, yeah, yeah. I mean, 20 billion plus, there's a lot. And that used to be so rare. An enterprise software used to be an ad is that nobody ever broke, you know, 20 billion or 10 billion, right? And it all to networks was at 15 and we were like, this is crazy. Now there's so many of them that have. And so maybe with a hundred billion year right, but in the world that I live in, the amount of like deck of corn is probably an order of magnitude more than what it was 10 years ago.

40:36And on the face of it, that would argue for an order of magnitude higher, fun size. If you want to play the strategy of being in the winner, I mean, there's clearly multiple strategies. But if you want to, again, I don't know the, Yeah, for me, the key question, I don't know the answer. I wonder what the numbers is. If you take a dollar of earnings, like a dollar of earnings for a venture capitalist, did that come from a company that raised that high prices or not? And I would guess the answer is yes, just because the winners are so outsized. I mean, I'm like, I hope that there's like multiple ways to play it, right?

41:13Which is if the outcomes are 10x bigger, you can have a 10x bigger fund. And basically run the same playbook, keep the same ownership and like a big outcome still returns the same amount of the fund. You can also do like more investments that like you know a fraction of the ownership and then each investment maybe moves the needle less but you have a higher chance of hitting like you know the spike of the year or the uber of the year. Yeah yeah that's yeah so I think I think there's definitely different models I could work here. Yeah that's a good point. Yeah no you're right. I want to make a few few related points here.

41:42So one is I remember someone I don't want to quote tweeted, Martine's tweet and said, this is a sign that the asset class is dead, or the idea of a more efficient market. And I think what that really means is more that individual's firm is, if an individual firm can't compete and win deals in an efficient market, they're going to lose. And so I think my second point, which is, I think there's a lot of venture capital, Leventure Capitalist identity is tied in being non -consensus, in being able to see things that others can't see because it's hard to win against all these other much bigger, much more well -funded players.

42:25And for that reason, the less one used the terms, because that's the non -consensus, because it's so core to people's identity. And more one used the term like, either it's a hot round or it's not a hot, you know, it's competitive round or not competitive. And I think another way of framing that, it's not perfect, is the company working, or is not working at the point of investment. And let me add something to it, which is if something is working, then it's okay, it's like, what is the price and what is the potential return multiple, and how does it work with your threshold, et cetera. There's some things that are competitive and not working, but have an incredible founder or people, you know, whatever.

43:05It's early enough that people believe the division, and so you're still paying that price based on what you think. And then there's lots of things that are not working or not obviously working. But we've chosen to do less, I believe, consumer things that are pre -tracked. So it's basically it's like, do you wanna invest in things that are traction, or no traction? And there's failure modes with both. But it's a not every hype thing, not a competitive thing has traction, of course. But it's just another way of framing this to be I'm curious to feel free to quibble with my framing. I think I saw the same quick to eat.

43:39I probably somewhere in between. I don't think venture is dead. I think it gets a lot more fun if it's purely consensus. The reason is I think in a purely consensus world, like it all just comes down to the cost of capital. Right? And so if my LPs want 5X and yours want 2X, you could pay two and a half times higher prices. and the company's not better is just like, oh, like your cost of capital is lower, so you're gonna win all the time. But also, it's like, we all see the same value, it's the same value, it's like, who wants the smallest return that gets into business? And that just feels less exciting to me.

44:13Yeah. I mean, that's exactly right. I'm gonna, I'll get a little bit philosophical on this, but like the thing that I've always, that's always bugged me about PE investing and public market investing is it just doesn't care about productivity really. I mean, it does to some degree, but I just like, you know, if you're in a large public company, like I was, you realize that the public market's really care about predictability over innovation. For sure. I mean, and so innovation has stifled so much. And in fact, it kind of, It kind of causes large companies to protect themselves through kind of in -compensy and monopolistic practices and everything else just because they're not allowed to be aggressive on growth, right?

45:04So I feel like it's almost this negative force on progress and innovation. And I don't want to be too dramatic about it, but I just feel like, I'll bet if you draw a dollar at random that gets invested, 90 cents of that dollar goes into keeping incumbents alive and or predictability and not to growth. I'm a huge believer in creative destruction, man. I'm like, fuck, man, get him out of the way, less investment growth. So I love the idea of Ventra as an asset class getting more efficient. And I love the idea of more money going into it because the entire thesis is growth. you never invest in the I don't.

45:48I mean, I'm sure you don't. I never invest on downside laws. I don't care. You only invest on upside. And so to me, more dollars going into ventures, only a positive for humanity. And again, I don't think I'm just on two grand deals, but I do feel it's just a net positive. Well, so maybe on that front, I think it's a really interesting perspective. I feel like a lot of the more from a company perspective, the investor perspective, I feel like a lot of the most disruptive products for maybe non -consensus at the time. Totally. Where you start with no buttons on the iPhone or you got like Uber instead of taxi, it's a stranger driving.

46:25And those are the ones where I think if you're like, I'm going to build a taxi company, but it's like 20 % more efficient. Like, probably could be a big business, but not quite the same level of disruption and growth as like, you take a big bet and you might very high chance you're wrong, but if you're right, like you're going to be in a really good position. Yeah. And this is so critical. I'm glad you brought it out. I really believe the best companies themselves are non -consensus to customers. I just think that the investing market is different than that. They kind of understand that. And therefore, a comment on investors being consensus is very different than a product or being consensus.

47:05That makes sense. Investor sentiment, I think, is actually much smarter than people think. Like I think like the adage is VCs are dumb. Like, you know, they just, you know, Chase trends and all of that is true. But the reality is is as a group, we have identified a cohort of companies that are quite disruptive and invested in them and price them. And those, the companies themselves tend to be actually quite non -consensus to the actual consumer to the market. I do want to build, Martin, on your point, because I think it's so interesting just to comment on how not everyone's incentives are totally aligned here, especially between sort of what's good for the individual and what's good for the ecosystem.

47:47And so in the sense that, yeah, if you're an individual VC, you don't want more capital, or if you're a founder, you don't want more founders in your space. But to your point, competition is, and to people who are saying competition is bad, you don't want competition, but competition is what fuels incredible product. It's like the Darwinian process, like this is how we get a bigger startup outcomes, a startup ecosystem, having more value, incredible products for customers and users. This is how we solve cancer, man. More money goes into VC and we invest in companies and as opposed to investing in dying companies, this ability to retain their place, 100%.

48:24Like all the finance needs to change. And I think VC's are trying to straddle sort of, you know, LPN incentives, founder incentives, their own incentives and there is some overlap and there's magic there, but it's also just worth acknowledging that not every individual person is aligned and that's okay. I also do still very much believe in the in the barbell that there will be, you know, these big, these big, you know, sort of massive funds that continue to, to, to, to win an invest in compound value and also these, you know, smaller, focused, concentrated, expertise for the deeps who absolutely crush it.

48:58And we all work together. So, so Leo, we're going to run, we're going to run the numbers. I was trying to get it done by now, but there's a lot to do. that the numbers are fuzzy. I just want to walk through what we're going to be looking at and then maybe we'll schedule another podcast once the numbers are out to actually discuss it. So one of the numbers we're going to look at is if you look at, if you cohort companies into winners and not winners, call it, looking to whether on average for that company, the rounds were priced just above or below median for other companies at a similar stage.

49:39So this will say whether it's relatively high priced for winners or not. And then the other one, which is even more difficult to determine, is given actual returns, are the bulk of the returns from companies that were on average high priced or not. And I think these two numbers will give us a sense to whether the market is actually pretty smart about the value and the price. You should not look for price arbitrage if you're looking for returns. Is that sound fair? Yeah, I think that sounds fair. I definitely agree with the not looking for price arbitrage fees because I will say from me personally, my best investment's have been ones on average that took a while to raise their seat down.

50:26A lot of people didn't get it and like it. But on the flip side, some of the biggest misses are also the ones where it's like, we liked everything except the price. And like we thought it should be a 10 and some, you know, a sim big fund gave them a term sheet of 20 and we passed. And then now it's a 10 billion dollar company. Somebody that was like, maybe that was not a good fast. Yeah. You know, you know, honestly, as we go through this conversation, it does strike me that, uh, I think a lot of this is honestly just we have a bit different perspectives. I got, I have to deploy a lot more money than you do, right?

50:55I'm a, uh, series A investor who needs to basically cap out 30 to 40 million and in order to have a significant position. And so I may have to be a bit more concerned about this than you do at the early stage. And I'm sure stage does color this conversation quite a bit. Yeah, everything you're saying is totally sensible to me. So that's what I think there's any disagreement. It was definitely something I was thinking about, which is like I think if every check you write has to be at least 100 million, I think it's actually very hard to do on consensus. Right, because there's not a lot of companies that hit a stage where you do not sign a million, but it's still not clear if it's a good company or not.

51:30And I think the earlier you go, if it's like $30 million checks 10, 5, 1, I think you get more and more of a category. We're lucky you have the option and you could do either one assuming you have access to the consensus opportunities. Leo, I'm curious. And you know, you guys have absolutely crushed it at seed with some, you know, Robinhood and Flexport, etc. But I'm curious what you think of Romtons sort of thesis that multi -stage has one seed more or less in the last like 10 years that when you look at a lot of the big winners, they were done from multi -stage firms at seed. I'm curious one, if you agree with that sort of reading of history, and then two, if you think that's, well, definitely you probably don't.

52:08They get, they get, it's like they go forward. I actually thought this was an interview. It's our role. What's the difference between the question? And did multi stage win seed or more seed than seed firms win seed? Obviously, there's some, you know, first round sues that, you know, like lots of great seed firms. But when you look at the aggregate of, of, of, you know, of winners, do they have a multi stage of seed or not? That's what Rampton's argument is they had a multi stage seed. And that's why he co -invests with multi stage as a whole strategy. And then just, you know, passes and, you know, isn't the future necessarily.

52:42What do we think about the future? So, I mean, I haven't looked at, I haven't regressed the analyze like the $10 billion, $50 billion dollar outcomes for over the course of suicide, I think we've invested in like 10 or 12 unicorns roughly. Maybe like a third of those or quarter those had a series and investor at seed. And I'm not really counting like sometimes I was like, oh, this series and investor did a 50K check in the YC round or something. I like, I mean, like actually took half the round or more. So most of them still were seed only or like seed funds dominated at the early ground and then they went to Multistage very quickly after that.

53:20But so my experience, I think there's a subset of seed where I don't know if I'd say Multistage funds won, but they have a very strong advantage where if it is a founder that previously built a business that exited for a hundred million and they're in the space that they know super well, that's going to get done at 40 instead of 20 or 80 instead of 20 post. and chances are it's going to be a multi -stage and not like a boutique seed firm. So I think for that segment, like, multi -stage has not won, but I think it's probably like the predominant, like the majority of the time they have a big leg up.

53:52I think for the other ones where it's plus obvious, it tends to be much more seed -dominated. Or seed -fund -dominated. Yeah. Martin Leo, this has been a great conversation. Thanks for listening to the A16Z podcast. If you enjoyed the episode, let us know by leaving a review at ratethispodcast .com slash A16Z. We've got more great conversations coming your way. See you next time. As a reminder, the content here is for informational purposes only. Should not be taken as legal business, tax, or investment advice, or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any A16Z fund.

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