Weekly Briefing Note for Founders 31/10/24

30th October 2024
CATEGORY:

How 'non-consensus' startups capture massive markets

The world's most successful VCs know that the biggest returns are often associated with insights or ideas that defy conventional wisdom. This is why investors must be contrarians to outperform the market.

Contrarian investors are looking for breakthrough ideas that have the potential to create a 'category winner' and for this investment to ultimately 'return the fund', perhaps several times over.

In our earlier piece, 'VCs only investing in 'non-consensus' propositions', we said that breakthrough ideas must possess special attributes. We described these using a simple model courtesy of Benchmark Capital co-founder Andy Rachleff:

“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.

'Right' means you can make some money as the idea is valid. But because so many other companies and investors have also piled in (i.e. 'consensus') no clear category leader can easily emerge and deliver an outsize return.

Founders looking to apply the same investor mindset to test their own ideas must therefore answer a key question with brutal honesty: Is what I am building 'non-consensus'?


What counts as non-consensus?

When describing non-consensus propositions, investors often quote consumer-focused examples such as AirBnB, Uber, Facebook etc. Over the early years of these success stories, it gradually became clear that the founder had used a radical, breakthrough idea to create a brand-new category that no-one had ever considered before.

In other words, they created a new market.

But what about DeepTech or HardTech companies that are pioneering an obscure technology breakthrough? Don't these also count as non-consensus? And if so, aren't investors also bound to jump at them?

Well, it depends...

  • When pioneering technology enables a NEW market, it almost goes without saying that this is a non-consensus idea (even though it may not necessarily be 'right'!).

  • But when pioneering technology is applied to EXISTING markets it can be far less clear. In such cases investors often perceive that they are looking at a 'consensus opportunity' simply because it targets an exisitng market. But this may be a very short-sighted view.

Let's look at these two scenarios to understand how we can more broadly apply the non-consensus definition to both new AND existing markets.


Creating brand new markets

Here are some examples of technologies that are creating new markets. They rely on pioneering innovations that have the potential to open up a whole range of use cases.

  1. Quantum Computing: Companies like Oxford Quantum Circuits and Nu Quantum are developing quantum computers and networking infrastructure technologies that solve complex computations far beyond the reach of traditional computers, creating new markets for high-level computational services for industries like pharmaceuticals, cryptography, and finance.

  2. Brain-Computer Interfaces (BCI): Startups such as Neuralink are pioneering BCIs that could lead to new markets around human-technology integration, with applications in medical therapy, neuroprosthetics, and eventually, enhanced human cognition.

  3. Bioprinting: Companies like Organovo are exploring bioprinting, which prints living cells to create tissue-like structures. This technology could open a new market for tissue engineering, organ printing, and pharmaceutical testing.

  4. Space Resource Utilisation: With companies like Planetary Resources, the potential to mine resources from asteroids could launch new markets for rare minerals and water in space exploration and manufacturing.

  5. Augmented Reality (AR) for Immersive Training: AR technologies, used by companies like Magic Leap, are developing a new market for immersive training solutions, particularly in fields like medicine, engineering, and complex industrial processes.

But a word of caution: Even when propositions that create new markets turn out to be "non-consensus and right" that doesn't mean to say they are easy to fund, especially in the early stages.

In new markets, there may only be a very small pool of potential customers at first. Market timing is therefore a source of acute investor anxiety. The hope is that this can be offset by the enormous scale of the potential market and the startup's unique ability to address it.

Until the market begins to open up, it is not clear if the proposition is 'right'.


Better vs Different

Before looking at examples of how existing markets can be disrupted, we need to expand our definition of 'non-consensus'.

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

Consensus ideas also suggest there is at least one incumbent. If the incumbents have been around for a while or can easily deploy many more resources than your startup, why would any investor gamble on your product winning? Even if it was 'better', the ability to maintain this edge could be short-lived.

But sometimes the idea can be so much better than incumbent solutions that it has disruptive power. The market already exists, but it is the new solution that is 'non-consensus' or 'different'. As a result, the market drops the current approach in favour of the new.

And if the current solution has been highly optimised over a long period of time, even a modest improvement in a critical capability can sometimes have a highly disruptive effect on an established market - as you will see below.


Disrupting existing markets

Here are some examples of technologies that are disrupting and capturing existing markets. The 'solutions' they are creating are completely transforming and redefining the category in which they sit.

  1. Sustainable Plastic PackagingBockatech has pioneered a new manufacturing technology that reduces - by up to 50% - the amount of plastic used in injection moulded packaging. The resultant products have even better insulation and reuse capabilities than those with 2x the plastic content and can also be manufactured using the same production equipment. This is transforming food service, FMCG, industrial and healthcare markets that are urgently seeking greater sustainability.

  2. Robotic automation in warehousing and logistics, especially in e-commerce and retail. With e-commerce giants like Amazon leading the way (after the acquisition of Kiva Systems), robotic automation in warehouses has transformed the supply chain industry, which is a multi-trillion-dollar market.

  3. AI in Medical Diagnostics: AI applications in healthcare, such as Viz.ai which uses AI for faster and more accurate stroke detection, are transforming diagnostics. This improves patient outcomes and challenges traditional diagnostic methods.

  4. Drones in Healthcare LogisticsZipline uses drones to deliver blood and medicines to remote areas, disrupting conventional logistics models in healthcare by offering quicker, more flexible delivery options.

  5. Blockchain in Financial Services: By enabling secure and decentralised transactions, blockchain technology is upending traditional banking by offering faster, more efficient, and transparent financial transactions. It’s influencing areas like payments, lending, and supply chain finance.

There are also clear benefits from being able to immediately tap into big, established markets. Foremost is that there is a ready pool of potential customers. Provided they can be accessed, the startup does not have to focus significant resources on creating the market.

All this means that non-consensus ideas are not exclusively the preserve of new markets. If they are disruptive enough, they can potentially capture huge, existing markets by displacing incumbents.


Avoiding the comparison trap

When the strategy is to disrupt existing markets, founders must ensure that prospective investors do not perceive that they are looking at a 'consensus opportunity'.

Investors must quickly be shown just how radically non-consensus the breakthrough idea truly is - and how it enables a huge market to be captured.

As we know, being non-consensus means a startup is competing based on being different, rather than being better. The key here is to avoid the 'comparison trap'.

For example, if we show the investor a side-by-side feature comparison table, we are forcing a direct comparison. The psychology of this is dangerous. This implies we are just better, not different.

On the other hand, a quadrant chart, showing how we are driving new market segmentation allows us to position the business in more strategic terms. This shows we are different, not just better.

If the axes of this quadrant chart reflect the key decision-making criteria of customers, it attaches high value to these differences. And if these differences are unique and carefully protected (the know-how or IP is tightly secured) you can explain why you will become the "category winner".


Weird and unusual

Marc Andreessen, whose VC firm a16z has invested in some of the biggest startup success stories, has offered his own definition on non-consensus that opens the door further:

“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."

In many DeepTech and HardTech startups targeting established markets, this is precisely what these amazing founders are doing. They are pioneering the weirdest and most unusual technologies to create non-consensus solutions. They are disrupting huge markets and transforming entire industries that thought the status quo would never change.

Until it did.



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