VCs only investing in 'non-consensus' propositions

A founder's 'insight' is the core ingredient for startup creation. The insight reveals a unique market opportunity that the founder believes they can exploit.

The world's most successful VC's know that the biggest returns are often associated with insights or ideas that seem to defy conventional wisdom - what PayPal founder turned investor Peter Thiel calls a “secret” in his book, Zero to One.

These are the breakthrough ideas that have the potential to create a "category winner" and for a VC to ultimately "return the fund", perhaps several times over.

Such secrets must process special attributes, but what are they?

Benchmark Capital co-founder Andy Rachleff has been a long-time exponent of perhaps the best known model.

“Investment can be explained with a 2×2 matrix. On one axis you can be 'right' or 'wrong'. And on the other axis you can be 'consensus' or 'non-consensus'. Now obviously if you’re wrong you don’t make money.

"The only way as an investor and as an entrepreneur to make outsized returns is by being right and non-consensus.”

In other words being 'right' and 'consensus' is not enough.

So, how does a founder know if they are building a non-consensus proposition?

VC perceptions

Consensus ideas are usually about making things better, e.g. cheaper, faster, smaller. Whereas non-consensus ideas are about making things different.

Consensus means that the business opportunity is already known in the market - the competitive landscape is heating up and some investors have already made their moves.

Most VC's will say you simply can't make any kind of return in this 'follow the crowd' scenario as the company will never make a big enough impact. The danger is that early competition just signals a race to the bottom.

Marc Andreessen, whose VC firm a16z has invested in some of the biggest startup success stories, puts it starkly: “If something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment.

"And let me translate ‘non-consensus’: in sort of practical terms, it translates to crazy. You are investing in things that look like they are just nuts...It has to be something where, when people look at it, at first they say, ‘I don’t get it, I don’t understand it. I think it’s too weird, I think it’s too unusual."

Pattern-breaking ideas

Understanding non-consensus or pattern-breaking ideas lies at the core of the venture model. Founders must learn how to create them and investors must figure out how to spot them.

One VC who has studied the topic more than most is Mike Maples, Founding Partner of Floodgate Ventures. Maples sees true pattern-breaking ideas as the confluence of 3 underlying forces.

He says these forces are more important than the resultant idea, which is ultimately embodied in the product. His priority as an investor is to understand these forces and how they work together.

The 3 forces are: Inflections, Insights, and Living in the Future. They combine to create what he calls his 'Inflection Theory'.

Inflection Theory

The theory is expressed as follows:

"Inflections, along with Insights that harness them, empower startups to develop pattern-breaking ideas that radically change how people live. Founders discover these powerful insights by Living in the Future."

To summarise the forces:

• An Inflection is an external event that creates the potential for radical change in how people think, feel, and act. Like a surfer needs a wave, a pattern-breaking idea needs an inflection. 
  
• An Insight is a non-obvious truth about how one or more inflections can be harnessed to radically change human capacities and behaviours. A surfer can’t control waves in the ocean, but a skilled surfer can control their surfboard once they have found a wave worth surfing.
  
• Most pattern-breaking insights come from Living in the Future and building what’s missing in the future rather than trying to think of a startup. Living in the future best tilts the odds in your favour for finding outlier startup ideas. 

A pattern-breaking idea is built on top of these three forces to propose a radically different offering (manifested in the product). Founders iterate to success by revising their pattern-breaking ideas while staying true to their initial insight.

Pivots

Maples doesn’t classify the idea itself as one of the three key forces. This is because so long as the underlying forces are real and powerful and the insight is valid, the idea may change several times before the founder finds success.

This helped Maples understand what had confused him for so long about pivots. After many years as a successful investor (he was on the Forbes Midas List of Top 100 VCs for eight years in a row) he noticed that 85% of his exit profits came from startups that had pivoted.

The pivots had worked not as a completely random outcome - it was because the underlying insight was right and powerful enough to deliver a breakthrough.

By iterating the product’s implementation and honing in on the right target customers, what seemed somewhat random now made more sense. 

Studying the underlying forces at play, we see why they are so powerful:

1. Inflections - the external event

An Inflection is an external event or mechanism that creates the potential for radical change in how people think, feel, and act. It is at core of that favourite investor question, "Why now?"

Maples cites the inclusion of a GPS chip in the iPhone 4s as a good example of an inflection. This chip allowed smartphone applications to pinpoint users’ locations within one-meter accuracy.

Before this change, creating a widespread peer-to-peer ridesharing network would have been nearly impossible, as riders and drivers would have struggled to locate each other precisely. The embedded GPS chip in the iPhone 4s created the potential for radical change, which startups like Uber and Lyft capitalised on. 

The GPS chip is an example of a Technology inflection. So too is the more recent development of AI GPUs and other novel processing systems that are enabling the AI revolution.

And there are other forms of inflection, including Regulatory (e.g. sudden measures introduced during Covid) and Societal (e.g. the advent of the internet and social media). Whatever form they take, they all create the impetus for disruptive change.

2. Insights - the non-obvious truth

An Insight is a non-obvious truth about how one or more inflections can be harnessed to radically change human capacities and behaviours. Unlike inflections, which are externally driven change events, insights come from the creative minds of startup founders.

In the ridesharing example, Maples notes that companies like Uber and Lyft had the insight that the availability of GPS locators in people’s smartphones made it possible for people to share rides the same way Airbnb made it possible to share housing.

A powerful insight contradicts conventional wisdom, which means lots of people will usually disagree with it. To capture Andreessen's sentiment, most people thought it was crazy that people would want to stay in a stranger’s house or ride in a stranger’s car. How wrong they were.

Maples says that it’s actually a positive sign if lots of people disagree with your insight. If everyone agrees with your insight, it’s more likely you have an idea that’s already embraced by the consensus.

This also suggests you're playing a game by established rules. These games favour incumbents, which will later put you at a disadvantage.

The best insights polarize people. Most are uninterested and hostile to them, while a subset of people (including certain visionary VCs) will be “rabidly excited about them.”

3. Living in the future

This is the least appreciated component, but it is the enabling force. It is the source of inspiration - the genesis of the insight.

This lies at the heart of the founder's story. It is the place from which their problem/solution thesis gradually emerges.

Maples provides 3 classic scenarios for prospective founders:

• Some live in the future and build what they personally want to use based on what’s missing in their own experience. Think Steve Wozniak when he designed the first Apple personal computer.
  
• Some work with customers who live in the future and build what their customers find is missing. This is often the case with founders that leave the corporate environment frustrated that their present company is failing to address - or even recognise - emerging needs or opportunities.
  
• Some intentionally catapult themselves into different futures. This explains why certain entrepreneurs jump into unusual roles to give themselves exposure to new opportunities. Or why some VCs exit their firms to create new startups themselves.
  
  Maples cites the case of Maddie Hall, who founded Living Carbon. She didn't rush into brainstorming startup ideas. Instead, she spent a year at the side of OpenAI CEO Sam Altman as his Chief of Staff. This opened her eyes into whole new worlds of opportunity.
  
  

Avoiding the comparison trap

As we highlight above, being non-consensus or pattern-breaking lets a startup compete based on being different, rather than being better. This allows founders to avoid the comparison trap.

Yet many founders - if they were being brutally honest - would admit that their offering is just better, not different. And perhaps that’s no surprise. True insights are rare. They are not borne out of following the rules but reinventing the rules. This often comes from a highly non-conformist attitude, which VC investors prize.

Being different is where the power of true innovation lies. This is the core value-creation enabler.

And this is where the startup advantage sits: If customers attach high value to what is different, you are less likely to get trapped in a comparison that makes you replaceable.

And this buys a startup the biggest advantage of all: time.

As Maples said back in his original 2016 post, Finding Billion Dollar Secrets: "It is extraordinarily difficult for a tiny, undercapitalised, understaffed company with zero customers and no market awareness to identify and exploit a new opportunity fast enough to leave all competitors behind.

"As soon as a business opportunity becomes apparent to even a small number of people, the odds begin to work against the startup...[but] being non-consensus and right affords the startup the time and runway to survive, adapt, and succeed after trial and error without fatal consequences." 

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