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...
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.
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.
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.
Let's talk!
To subscribe to our Newsletter click here