It's dangerous to do non-consensus investing.
That's a dangerous idea.
If you're alone in your view, you may just be missing something.
Eventually, you have to get to consensus.
If you're dependent on capital markets, it's very hard to keep the company alive if nobody wants to fund it.
Peter Thiel once had a line which was like the faster and higher the up round, the more you should invest, because it's working.
Most companies fail from indigestion, not starvation.
Is non-consensus investing overrated or is it still the secret to venture returns?
Today on the podcast, I'm joined by A16Z general partner, Marcin Casado and Leo Pulevitz from Humba Ventures to unpack a debate that lit up VentureX.
Should founders and VCs chase consensus or run from it?
They explore what consensus even means in practice, how market efficiencies shape venture outcomes, the dangers for founders for being too far outside of consensus, and why some of the biggest winners in tech history looked non-consensus at first.
Let's get into it.
So Martin, it looks like you've helped spark a little bit of an existential crisis on Venture Twitter.
And I thought we'd all come here to talk about it.
Great.
Super.
I'm excited to be here.
Why don't we recap, Martin, from your perspective?
What were you saying in that tweet?
What were you trying to say in that tweet?
Then we can get into the great back and forth that you and Leo had and get into the conversation.
So let me paraphrase the tweet.
The paraphrased version of the tweet is, it's dangerous to do non-consensus investing.
Like, that's a dangerous idea.
The impetus of the tweet which, by the way, wasn't well thought out, which I think a lot of the viral tweets happen to be not well thought out is you know, I've been an investor for 10 years.
I've done almost 200 investments, either as like running the fund or being directly involved.
And it seems being blinkered to how VCs view companies is actually quite dangerous because you're so dependent on follow-on capital.
And actually it reminds me a lot of being an academic.
I used to write a lot of papers and, like you, do all of this great research.
But when you wrote the paper, if you didn't actually think about how the program committee would view it, like it wouldn't get accepted, right.
It felt very similar to that.
And so that was the origins.
But I want to be very clear.
I did not say and I would never say consensus investing is a good idea.
I'm just saying not being aware of consensus is a bad idea.
And I think, the last thing I'll say on this.
I think that my underlying belief is early markets are actually pretty darn efficient, a lot more efficient than people realize.
And so if you're alone in your view, you may just be missing something.
Leo, we're stoked to have you join us as a friend, fellow venture nerd.
What was your reaction?
Yeah, I mean I actually agree with a lot of what Martin just said, which is, eventually you have to get to consensus, whether it's when you're investing or later, because otherwise, if you're dependent on capital markets, it's very hard to keep the company alive if nobody wants to fund it.
I would say, like for me, and maybe we invest like a tick earlier, more like towards pre-seed and seed.
But for me, a lot of my best investments have been more on the non-consensus side.
Not in terms of I had some crazy good insight and nobody else had it and like I'm just brilliant, but more like these companies often struggled in the early days because before there's proof points, it's not obvious that it'll be a good idea.
And then, once they get good, the valuation skyrocket so fast that like you could still get good multiples, but they're just much lower than the early stages.
Yeah.
And then there was sort of broader commentary on looking at a list of big winners over the last 15, 20 years and say hey, what was consensus?
Which were consensus?
Which were non-consensus?
And then, Martin, what were kind of your reactions to that sort of broader commentary?
Well listen, I mean again.
It wasn't meant to be a technical tweet where like, the wording was exact.
And so like like, on the face of it, it's almost like an ill-defined statement, because we don't know what consensus means.
Right.
And so then everybody picks apart the consensus.
But here's my reaction to the list of, like the Airbnbs and this and that which is, I think we need to be very careful not to conflate a company having a hard round with market consensus right.
Like if you look at the list like Keith Rabois put out, which is great, and I love Keith.
I mean, these are like MIT founders, known spaces.
I'll bet.
If you took the median value of their raises over the lifecycle of the company, I'll bet they're way above market.
Many of the companies were YC companies.
And so I just think it's so easy to come up with these anecdotal oh, this one company had a tough raise, when that's definitely not within the spirit of what I was trying to say, which is, Markets are actually quite efficient.
If the market's efficient and it's a good company, the price is going to be high.
And if you don't recognize that, then you're probably beating yourself as opposed to the market right.
And so, like it really comes down to you, shouldn't be looking for good deals with respect to other investors?
You should be looking for good companies.
And price shouldn't sway you from that.
I mean, that's really at the heart of this.
And so I just don't think that list – unless you actually run the numbers, which we haven't done.
I just don't think it demonstrates that the idea that consensus is important is wrong at all.
Yeah, and I think there are a few quibbles I had with some of the names on that list.
Like some people put Andrill, and it certainly was a controversial investment, but you know, Palmer Luckey.
I mean, second-time founder, billion-dollar exit, Trey, who's phenomenal.
You know, this is in the shadow of Elon, who shows that you can already create...
These defense tech companies.
I mean, if that's our definition of non-consensus, it just shows how insular we are as a community.
I mean, it's almost an indictment of us that we even make this list.
And wasn't the seed round at like 100 or something?
It was a very expensive early round.
Every round was super expensive.
I'm not sure an ex-Unicorn founder would ever be non-consensus, really.
Yeah, it is interesting because there's also sort of you know, there are rounds that are maybe non-consensus at 10 million or something, but then become super hot rounds at 50 or 100 and then become 10 billion companies or 100 billion companies.
And even if you invested at that consensus round, you 10x or 100x.
And so it's sort of in the face of, hey, if it's a hot deal, that must mean it's not good.
Peter Till once had a line which was like the faster and higher the up round, the more you should invest, because it's like working.
Yeah, I would love to do a correlation analysis.
Actually, Leo and I had, I thought, a very interesting discussion on trying to figure out how you'd actually measure this, how you'd actually throw some data at it.
We actually have an analyst working on it now, like the data isn't ready yet.
So I have a new one.
Actually, I want to test this with you, Leo, on a good thing to test.
So I'll bet the best prediction of a, the best correlate of a high up round outside of the business, is the fact that the previous round was hot.
I think that's probably true.
And if that's the case, it would suggest that the market's actually pretty efficient, because it's almost inductive that, like the previous round, knew that the next round was going to be hot.
So I do agree with that.
I think the question for me is like, where is there more opportunity?
Because if the five hot companies keep having great rounds and then there's like 10000 not hot companies, but 100 of them will become hot over time.
Even though the odds of becoming hot are low.
Most of the hot companies end up coming from the not-hot batch right.
Right.
So the question comes down to is it easier to spot the company nobody sees or get into the company?
That's obviously good.
And maybe even further than that, which is to what extent do even high-priced rounds underprice hot deals?
Because, if I'm right, if the view is correct that hot deals are hot because they're good companies, not like, actually the market is very efficient and that drives the most of returns, then I think the next obvious question is well, if that's the case, then the market isn't that efficient because it's underpriced.
The company right.
If the majority of returns are in high price rounds and the market has underpriced it.
But I think, risk adjusted, that's not necessarily true, which is it could be still price right because there's still chances it goes to zero.
So, I guess my sense is until we run the numbers, we're not going to quite know the answer.
But I think a lot of these theories prove out pretty anecdotally.
And I think maybe that's the problem.
There's kind of an anecdote for every theory.
Yeah, I think the basket analysis is probably the most interesting one.
How did this one company do?
But how did this portfolio of companies that raised a really quick follow-on or had 10 term sheets at the Series A, how did those end up doing over time?
There are even cases in my portfolio where a super hot company from an investor standpoint so many term sheets.
The business didn't work out at the level that you would kind of expect, but the outcome was still really good.
And so in some level even independent of the productive asset, like human opinion about it matters right.
So there's almost two ways you can slice this conversation.
One of them is like the asset is what's productive and produces the value, right?
And the market will determine if that's valuable or not.
So that's kind of this productive asset view.
And that's kind of the one that I hold, which I think that actually investors are very smart.
I think that they know which companies are good and then they pay for those.
That's kind of my view, but that's a productive asset view.
But there's another view, which is independent of whether the company is good or not.
There are things that people think are good.
And so you're almost like playing to like the human perception of the company independent of the underlying business.
And I would say, again, anecdotally, until we run the numbers, we won't know.
That also seems to be a bit true.
Yeah, so I've been in venture for like 12, 13 years now.
I've definitely seen this in sectors where like sectors fall in and out of favor, right?
We have, like e-commerce was hot and then it was dead, and then, like Dollar Shave Club got acquired and it was hot again.
And it's like e-commerce.
I think the fundamentals didn't change that much year to year but, like the valuations and the like, appetite for investing and maybe starting companies changed a lot year to year.
And so that to me is sort of an indicator like it's not just the fundamentals, there are all these other like forces, as you mentioned.
Yeah, totally.
Yeah.
One other part to your tweet Martin, that I think was underappreciated was sort of the risk to founders of being seen as non-consensus in the same way that, because founders need to raise money and they need to raise, follow on funding within 18 to 24 months, sometimes even sooner.
And so if everyone's passing on you, people are bragging about how other investors don't want to do your deal.
That's not going to be super helpful to you in your next round.
I actually think the most interesting aspect of the tweet was like the sociological study that followed of like how different people interpret it.
Like the tweet itself was pretty banal, right?
It's just kind of non-statement.
It's almost tautological.
But like different constituencies viewed it very differently.
So, like I would say, relatively inexperienced investors kind of used it as an opportunity to be like oh, Andreessen Hortz, consensus invests, which anybody that knows anything about our investment knows is just totally not true.
Even my own portfolio, many of the top deals I've done, nobody else was in the deal, et cetera right.
So this is a statement about consensus investing.
So that was one cohort.
There was another cohort, like Leo and Keith, who have a lot of data and they've had a lot of really interesting things to say and they ended up in great discussion.
I think there's still a lot more to do there.
But most of the founders...
And I got a bazillion DMs were like, you're totally right.
So the founders clearly feel this tension that it's dangerous to be non-consensus because they have to cater to VCs and they know it and they see the pattern match responses.
They deal with this all of the time.
And so from a founder perspective, it's like You almost have to be non-consensus to have alpha in the actual product market, but you have to look consensus when you're raising.
And I think that's actually probably right.
I think this is probably one area where I differ a bit.
I think there's benefits to being non-consensus because from the company side, I think when the money's hard to raise, you tend to be more frugal with it.
Because I think when it is hot and you're raising subsequent rounds very quickly, the assumption of things will go perfectly.
If anything slows down, it's like now you can't raise any more capital all of a sudden, right?
And I think if you're in the mentality of growing quickly and spending, I think that's pretty hard.
On the flip side, if you're not consensus, it tends to be like you tend to be more cash efficient, tend to be more frugal out of necessity.
I think the other side is depends on the form of like consensusness, but sometimes there's also like much softer diligence.
I think the worst form of consensus I've seen is like, oh, Sequoia and Andreessen did this round.
Let me just do a 2x markup in two weeks because I want to be in the same company.
And then there's no diligence there.
It's just like, oh, this is hot, let me do it.
But I think then maybe we're looking like, is it actually a good business?
Sequoia and Andreessen, we all make good investments and bad investments.
And so it's like maybe this is one of the bad ones and you're just marking it up because you want to be in the hot deal.
And that ends up not being good for anyone.
Yeah.
I think this is a tremendously important and good point.
I tend to believe now that most companies fail from indigestion, not starvation, which is they just raise too much money too easily.
They don't listen to the actual market, which is the customer base.
And as a result, they just have a bunch of bad practices. end up running out of money.
And I think that there's a lot to that.
I actually think in 2021.
If you just did a study of that cohort, the companies that had these, you know these billion dollar bees.
If you remember, that time was totally crazy.
I'll bet that's probably one of the biggest wipeouts of capital.
So I definitely think like consensus investing is definitely very dangerous.
And only leaning into this from a founder is definitely dangerous.
But I also think the flip side is true, which is you're totally blinkered to it.
I think your life is pretty tough.
And there's a broad question as to like of the companies that do win, how many of them are sort of competitive rounds versus not competitive rounds.
And sort of what is the duration between them being non-competitive rounds and then becoming non-competitive?
And what percentage are really able to?
And one question I have is like, is the market getting more efficient over time?
A lot more investors.
We should be getting smarter as an asset class on how to evaluate these companies.
A lot more capital.
Are we getting better?
And if so, what does that mean?
Oh, I'd love to hear Leo's view on this.
It's something I've been thinking about for a while.
My take would be that for non consensus companies it's getting more efficient, because the more investors there are, the more likely you are to find at least one or two that like what you're doing.
I think for the consensus companies, it's starting to get more inefficient, right?
Which is like when you have 10 term sheets, you get you know five X the market, like what the maybe the price, the fair value should be.
Um, And then it's great for the founder and maybe against a little bit more of a house of cards if things go south at all.
But it's not necessarily great for investors, because you might have to pay 2 3, 4x over the actual intrinsic value of a company or the likely future value of a company in order to get in.
But that would be actually efficient, right?
It's just the price is actually approaching the return profile.
From a market standpoint, that'd be efficient.
I mean, it sucks from an investor standpoint because prices go up.
Yeah, that's what I'm saying, right?
Like for founders, it's getting like hyper-efficient or maybe, like you know, like there's such an imbalance for like the really hot companies that you know maybe your price gets bit up way past where it should be.
And similarly, like for non-consensus companies, it's the opposite right, we're like there's not enough investors, so your price is lower than it should be perhaps right um, but i, i think there's like like, there's for me like those two are kind of opposite, opposite ends of the spectrum.
Yeah, this is a great question.
I totally agree.
This is a great question.
So I think we can all acknowledge that there's a failure mode where the consensus gets bubbly and then companies raise too much capital and then there's a bunch of wipeouts, right.
So that has always happened.
That will always happen.
So that's just part of the market.
We, I think, can also all agree that there's parts of the market where there's probably unnecessary pessimism.
Like so.
For example, right now, during this AI craze, like you know, in my area of traditional infra or of infra, a lot of the traditional companies that you know two years ago would be great.
They can't even raise right now just because they're not in the sweet spot.
And so I think that will always be an aspect of the market too.
But in general...
For the mean investment.
I do feel like the market, over time, has gotten a lot more efficient, meaning you know we can deploy more dollars with more regularity and the price is converging on what will ultimately be a fair price.
You know, this is acknowledging both of these failure modes on either side of this.
We're seeing one right now.
I mean, it's the reality.
I mean AI.
You know there's AI companies that clearly are raising, you know, speculative money where nobody even really understands the business model.
And there's great companies that can't get invested.
So we're seeing this right now.
But I will still say the reality is OpenAI has grown tremendously and Anthropic has grown tremendously and Cursor has grown tremendously.
And so, like, there is some underlying market signals to fuel the chaos.
I think part of it's like if you ever look at vintage year data for venture funds, it's probably a good way to see how consensus and not consensus do over time.
Because when you look at the dot-com bubble years, I think the median fund was terrible.
And I think it's just like, hey, everyone overpaid and then the companies weren't worth that.
And so even though everything was high, it didn't do well.
And then a lot of the funds didn't do well.
And if you look at the Airbnb, Uber, 2010-ish era, it's kind of the opposite.
I think the top quartile funds crush it.
It's because the market was pessimistic.
And so if you're willing to invest and you had a different opinion, you did really well.
And now it's probably somewhere in the middle.
Maybe I'll just go through my own startup, just as kind of a single anecdote to frame the conversation a little bit right.
So, you know, I did my PhD at Stanford.
I was a classic, you know.
Take the research, do a startup know we had so many term sheets before we had any idea what we were doing, you know, and it was like the hottest thing ever and um and, and it was great and so we did a seed fund.
Actually, andy radcliffe, you know benchmark andy radcliffe joined my board and you know we rose at the time which would have been a super, super high priced kind of seed round, which is 10 million post.
This is in 2007.
Um, You know, then the market tanked in 2008 and we still didn't know what we were doing.
And, you know, it was just a bunch of researchers, and so we couldn't raise any money at all.
I mean, Sequoia very famously, you know, gave us a black eye, and, you know, we couldn't raise...
And then, you know, as we started to come out of the recession Andreessen Horowitz NEA Lightspeed, a few got very interested.
And then we had a pretty hot round again.
Andreessen was actually over the market price, even though the business wasn't quite working, but it was signs of life.
Then we had an incredibly hot round because it started working.
And then when we actually sold the company, I mean, you know, it returned a fund.
You know it was one of the highest acquisitions on multiples of revenue at the time in enterprise software.
And so you kind of asked the question, was the initial flurry of interest warranted or not?
Because it turns out, like, we were probably a month from going bankrupt.
And we actually didn't know what we were doing.
And the company definitely wasn't working.
And actually, what we had pitched at that time didn't make any sense.
Like, we were like, we're going to change, you know, switch hardware, which didn't make any sense.
And so there's one view that's like, The market was over-exuberant.
You were lucky.
There's another view that says actually the initial conditions were there to do it.
I just feel like, if you run the data, it just seems that the companies that have good outcomes did have sufficient interest along the way, because there are enough signals to do it.
I think, at least on my side, for a lot of the pre-seeds and seeds I've done, I went back, I think, over my top 10 investments, maybe six or seven or eight took them months to raise a seed round.
And a lot of times, a lot of passes, they were all down to the wire.
But then they ended up doing better over time.
I think that transition from non-consensus to consensus ended up being really important.
Because if you never transition, it's really hard.
And if you're always consensus, that's great for you.
But one thing I noticed that was interesting is a lot of the companies that struggled.
Obviously, some of them just go to zero.
Right, because they struggled, because the business isn't that great, people recognize it.
Um, but the ones that did well, a lot of times the gap between like the c and a or the a and b was literally like 20x or 50x right, and so i think part of it's like, as an investor, you can still get good returns at like the series a or b in those companies.
But it's just, I think it's so different to invest at the seed, where there's like a thousand X, versus like the A at a billion, where now maybe there's still like a 10 X or 20 X, which is very different.
So I've got a question for you Leo, because I think that you play a bit of a different game than we do, which is so if you have a seed which is, let's call it, non-consensus.
And again we're using this very vague definition of a consensus but, like you know, they're having a tough time raising.
You're the only person putting money in.
Do you have a theory on how it will be consensus, or is your belief that the underlying productive asset is going to do very well and that, by definition, is consensus?
Do you see the question?
So the question is, is it this is just true belief in the underlying business?
Like like, like the ultimate.
I mean the ultimate sign of success is just the business is really working.
So are you like, for the next raise, the business will definitely be working?
Or do you have some other theory on what will attract the investors?
I'd say it's often the latter.
And it's especially true these days because I'm investing more in deep tech companies.
And so it's very rare to see oh, there's an asset that's going to be working here at the Series A, because usually the asset's still going to be being developed at the Series A or maybe Series B.
I think what I'm looking for is like there's maybe not enough here for somebody to write a five or 10 or 20 million check, but the company has milestones that I think if they hit them then it would become, you know, sort of consensus enough to merit a check of that size.
And then I'm basically trying to evaluate like, okay, the company has these milestones.
Do I think they could hit them or not?
And also if they hit them, are they compelling enough?
But I think that's sort of the big, you know, investment wager.
Yeah.
Yeah, so in this case, you do think about what the follow-on thing is going to want to see.
You have reached a conclusion for the current round that is non-consensus.
Yeah, and I would say the consensus piece is part of it, in that I definitely meet companies where they're like we're raising 3 right now, it'll help us do these milestones, and then we think we can raise 10.
Then there's other ones where, you know, it's like we're raising three, now we're gonna hit these milestones, and then we want to raise like a 50 to 100 million dollar series a and that's actually a much harder bet right, because you're saying like you have to assume they're going to be consensus um, by the time the next they raise the next round and it's going to be like a top five percent series a.
And that's a hard bet to take for the companies where the capital needs are more modest or they have like a more tranched roadmap planned.
I think it's a little bit easier to you know to predict like hey, would these milestones be enough to raise 10?
Like a lot of times I don't know if it'll be enough to raise 100, like probably not.
But 10 feels like pretty feasible if you do the things you think you're going to do with this three.
As your view on this shifted in the last.
Do you find this AI wave to be different than previous waves or fairly similar?
Probably a bad person to ask.
I actually haven't invested much in AI because of the deep tech angle.
Maybe like 10-15% of my companies are pure AI.
Others obviously use it in some way, but that's not the product.
Well, how about deep tech then?
Because I think that's also pretty different than what we were all investing in five years ago.
So maybe on the AI side, and I'll touch deep tech next.
I think AI is interesting to me because on the one hand, I've never seen faster growth.
People talked about the triple triple double double, double thing for a while of getting from a million AR to 105 years.
And that seems so antiquated now, right?
The best companies are doing it in one or two years.
Yeah.
I think, on the flip side, the endurance, how long those companies endure and last and grow, feels like much more of a question mark.
Because in the triple triple double double, double era, if you hit 100 million ARR and there was no one close to you, you'd probably just keep growing.
And now it feels like you can hit 100 and then you drop to 50 because someone else came out with a better product.
I think there's like, The growth is amazing and then the moats are weaker.
And so I think there's a counterbalance there.
I'm not sure I'd evaluate it because I've invested that much of that stuff.
On the deep tech side, I definitely see areas with a lot of hype from time to time.
For example, we invested in defense a lot three, four years ago.
And then we kept looking.
We basically paused for a year and a half or two because after Ukraine and Israel, prices just went up two three, four times.
But the company fundamentals didn't change um, and then it started being an opportunity cost of like should i invest in this defense company at 40 when there's this really great, you know, energy company at 15 um?
And so i think defense was kind of like that.
I think bio has had a lot of ups and downs.
I think in robotics, like humanoids are probably like one of the most hyped areas where the valuations just get crazy before there's any any revenue um, so i think that actually i feel like i kind of lost the thread in the original question, but um No, this is great.
I was honestly just wondering how you thought about this current wave.
You did a great survey of a set of the waves.
I actually agree.
I would say for the consensus areas like humanoids, we end up not explicitly but implicitly 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 near zero resources and team.
Yeah.
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 humanoids 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 humanoids are tough for that, just because unit economics right now are just so unknown.
Competing with a human body is a very, very hard thing to do.
And 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 verticalize heavily and the company has to look at 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, you know, in the industry for big companies and it may have an MA.
I don't know how to invest that way.
I just don't know how to handicap that.
And so the way that I tend to view these things.
I mean, like for AI, for better or for worse, like you have great unit economics.
I mean, you know, everybody knows kind of like, and we always talk about the open AIs and the anthropics.
But if you talk like the 11 labs, for example, or mid-journey, I mean these are just famously model companies where the unit economics are great.
They grow, you know, very quickly.
And so I understand that.
But, you know, 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.
And 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.
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 an aside 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 and you're like oh, it's a 2 billion a year market.
If there's a 1% chance they could capture it, they'll be worth this much.
That's so true.
So let me justify a seed price.
If the market's like $5 trillion of human labor or something, any price makes sense, right?
But then I think that really distorts how much value is there.
The most boneheaded partner meetings were like well yes, it is cold fusion, but this is the largest market ever, so the off chance it works.
I'm like, this isn't 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.
I also feel like... I don't want to harp on this too much, but unit economics is so important.
I mean, what is the story for autonomous vehicles?
The story for autonomous vehicles is that, even after the industry has put 100 billion in it, 100 billion the unit economics are still you know, let's call it on par with Uber.
Let's just call it that, right?
And so does that make sense for venture investment?
It's really, really hard to build a standalone business with those types of economics.
I mean, Google can do it, sure, and Tesla can do it, sure, but can Startup X do 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 the startup um.
Or you're building picks and shovels like applied intuition, where you're building software for this market.
But I do think that a lot of investment dollars do follow these spaces where there really is no thesis on the ultimate need in 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 infinitive, then the expected payout is high.
Right, also infinite, which i also invented, exactly right.
Yeah, when i look at my portfolio, i i see both uh, there were some, you know, of the winners.
Um, you know, pave and scale were non-consensus non-competitive, on you know unproven but very talented founders, and then, and then on the more consensus competitive, jack altman uh, and and casser, how is?
How is scale non-consensus At seed?
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.
I mean, 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 casters round was almost an order of magnitude more expensive.
And I think what people have been late to really internalize and what he was super early to internalize was just the outcomes are order of magnitude bigger.
Um, maybe, maybe two orders of magnitude bigger.
And so you can get seed like returns at you know order of magnitude or even two orders of magnitude more, more expensive.
I mean remember YouTube, Instagram were considered, you know, very expensive acquisitions, that at a you know, just a few billion dollars.
And, you know, in a few years we're going to have more trillion dollar companies.
And so um, once we truly internalize sort of the outcome uh expansion, the order of magnitude, i think it makes sense to leo's earlier point that then it would beg the argument of like okay, but can you have you know a thousand x like returns at, and not just what we used to consider seed like pricing, but maybe at series a or maybe even series b?
Well, this is a.
This is a very interesting question because you actually do run into fund mechanics as uh, as an actual, you know, price modulator in this discussion, right?
So you're exactly right.
So again, I'll go back to my company.
So my company was acquired for $1.2 billion.
We had, let's call it, you know, less than $10 million in ARR, right?
So does that make any sense?
No.
And a lot of people are like, this is totally crazy.
This makes no sense.
Except for when I left.
You know the run rate of the three and a half years later, like the run rate was, you know, 600 million within VMware who acquired the company.
And then right now it's, you know, let's call it 2 billion, right?
It 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 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 SoftBank and the Tiger and the CodeTwo era.
So you could argue that all of their theses were correct, right?
Like SoftBank 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, that's, 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 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.
So 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.
SoftBank questioned this.
Tiger questioned this.
And so they raised these insight questions.
They raised these huge funds, and they've deployed a lot of capital.
And those experiments had very mixed success.
But 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.
None 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.
Well, in some ways, you know, there's the failure cases to some degree.
But in some way, you know, I mean, Thrive raised bigger funds.
Founders Fund raised bigger funds.
We raised bigger funds.
The winners are also, you know, Multistate raised bigger funds.
It just could be that this is just the market being efficient.
Like, 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 the market working its way out.
But Leo, you're very quiet.
This is actually a pretty controversial statement.
So I want to make sure that like... I guess I'm not sure what you mean by we should be paying more.
I'm riffing off of Eric's statement, which I thought was right, 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 percentile of funds, they return so much money.
So there is an argument that even with these high prices, they're still underpriced.
And 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 X potential.
I don't think Anthropic is going to be a hundred billion dollar company, or OpenAI 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.
I think if you compare it now to, say, OpenAI, it's going to be a $100 billion company, right?
Exactly.
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 100 billion.
You know outcomes.
If not.
Or that the market just continues to grow and therefore it necessitates larger fund sizes.
I mean, I would say that probably the venture market was, what, 100th the size 20 years ago?
Yeah, probably something like that.
It's kind of wild to think about.
Yeah.
And we did think a few years ago that there'd be a great contraction in the asset, that 2021 was a blip and that, you know, it would sort of right 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 talked to our team, when I talked to Thrive, it seems that people think no more capital is just going to keep entering.
I think that's just because companies stay private longer too, right?
Yeah.
Uh, 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 I bet it's like 10 or 15 or maybe 20 or something.
So it's like, you're really betting you can get the one every year or two that gets there.
Let's say you're doing a Series A at a billion posts or something and you want 100x, even ignoring dilution.
You 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 them as well.
But that also kind of suggests, purely by the numbers, that the most important 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.
And that's the higher order bit.
I generally agree.
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 going to be the best company 10 years forward.
I guess to your earlier point where if venture funds had more money, they'd do higher valuations.
It sounds like you could do the higher valuation today too though, 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 because?
But you also need a diversified portfolio.
You need enough companies.
No, you need the fund size to run that.
This is why I think a lot of this comes back to fund size.
I mean even in the Andreessen portfolio I was just thinking off the top of my head we have three companies that are at the hundred, four companies at the hundred billion dollar mark.
I mean, there's Stripe, Databricks, Coinbase, OpenAI.
And so they're not that rare.
You get some awesome coverage.
I mean like I guess the question is like how many more could you name though, from the last, like you know, 15 years?
My guess is 115, probably not, like, 100, right?
Yeah, yeah, yeah.
I mean, 20 billion plus, there's a lot.
And that used to be so In enterprise software.
It used to be an adage that nobody ever broke.
You know 20 billion or 10 billion, right?
And Paul Alta Networks was at 15, and we were like, this is crazy.
And now there's so many of them that have.
And so...
Maybe with $100 billion, you're right.
But in the world that I live in, the amount of like decacorns is probably an order of magnitude more than what it was 10 years ago.
And on the face of it, that would argue for an order of magnitude higher fund 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, for me, the key question, I don't know the answer.
I want to run 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 at high prices or not?
And I would guess the answer is yes, just because the winners are so outsized.
I mean, I will say there's like multiple ways to play it, right?
Which 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, this pipe of the year, the Uber of the year.
Yeah, yeah.
Yeah, so I think there's definitely different models that could work here.
Yeah, that's a good point.
Yeah, no, you're right.
I want to make a few related points here.
One is I remember someone quote tweeted Martin'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 that individual's firm is.
If an individual firm can't compete and win deals in an efficient market, they're going to lose money.
And so it relates to my second point, which is I think there's a lot of venture capital.
Venture 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.
And for that reason I less want to use the terms consensus and non-consensus, because it's so core to people's identity and, more important, I want to use the term like either it's a hot round or it's not.
You know, it's competitive round or not competitive.
And I think another way of framing that it's not perfect is is the company working or is the company not working at the point of investment?
And let me add some nuance to it, which is, if it's um if, if something is working, then it's okay.
It's like you know what is the price and what, you know what is sort of the, you know potential return, multiple and how does that work with your threshold, et cetera.
There's some things that are competitive and and and not working um but have an incredible founder or or people you know.
Whatever it'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 there's lots of things that are that are not working, or or um are not obviously working.
And we've chosen to do less, I believe, consumer things that are pre-traction.
So basically, it's like, do you want to invest in things that have traction or no traction?
And there's failure modes with both.
And not every hype thing, not every competitive thing has traction, of course.
But it's just another way of framing this debate.
I'm curious.
Feel free to quibble with my framing.
I think I saw the same quote tweet.
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, 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.
It's just like, oh, like your cost of capital is lower, so you're going to win all the time.
But also it's like, we all see the same value.
Everyone sees the same value.
It's just like, who wants the smallest return that could suck business?
And that just feels less exciting to me.
Yeah.
I mean, it's...
That's exactly right.
I'll get a little bit philosophical on this, but 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 markets really care about predictability over innovation for sure.
I mean, and so innovation is stifled so much.
And in fact it kind of causes large companies to protect themselves through kind of incumbency and monopolistic practices and everything else, just because they're not allowed to be aggressive on growth right.
So 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, you know 90 cents of that dollar goes into like keeping incumbents alive and or, you know, predictability and not to growth.
And I'm a huge believer in creative destruction, man.
I'm like, fuck, man, get them out of the way.
Let's invest in growth.
And so I love the idea of of venture as an asset class getting more efficient.
And I love the idea of more money going into it because the entire thesis is gross.
You never invest, I don't, I mean, I'm sure you don't, I never invest on downside loss.
I don't care, right?
You only invest on upside.
And so to me, more dollars going into venture is only a positive for humanity.
And again, I don't mean to sound too grandiose, but I do feel it's just a net positive.
Well, so maybe on that front, like, I think that's a really interesting perspective.
I feel like a lot of the more from a company perspective than an investor perspective.
I feel like a lot of the most disruptive products were maybe non-consensus at the time.
Where you start with no buttons on the iPhone, or you got Uber instead of taxi.
It's a stranger driving.
And 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 can be a big business but not quite the same level of disruption and growth as, like you know, 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, you know, 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.
Like, they kind of understand that.
And therefore a comment on investors being consensus is very different than a product being consensus.
Does that make sense?
Like...
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 or to the market.
I do want to build Martina 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.
And so in the sense that, yeah, you know, 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, like competition is...
And so people were 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 you know we get you know a bigger.
You know more.
A bigger startup outcomes startup ecosystem having more, more value.
Incredible products for 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, his ability to retain their place a hundred percent.
Like all, the finance needs to change.
And I think VCs are trying to straddle sort of LP 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 barbell that there will be these big, These big, you know sort of massive funds that continue to win and invest in compound value.
And also these, you know, smaller, focused, concentrated.
The boutiques.
The boutiques who absolutely crush it.
And we all work together.
So, Leo, we're going to run the numbers.
I was trying to get it done by now, but there's a lot to do.
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 gonna uh look at is, if you look at, if you cohort companies into winners and not winners, call it uh looking to whether, on average for any for that company, the rounds were priced above or below median for other companies at a similar stage right.
So this is gonna this will say whether you know is 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.
Does that sound fair?
Yeah, I think that sounds fair.
I definitely agree with the not looking for price over charge piece.
Because I will say, for me personally, my best investments have been ones, on average, that took a while to raise their seed round.
A lot of people didn't get it or didn't like it.
But on the flip side, some of the biggest misses are also the ones where it's like oh, we liked everything except the price.
And we thought it should be a 10.
And some big fund gave them a term sheet at 20 and we passed.
And then now it's a $10 billion company.
So maybe that was not a good pass.
You know honestly, as we go through this conversation, it does strike me that I think a lot of this is honestly.
It's just we have a bit different perspectives.
Like I have to deploy a lot more money than you do, right?
Like I'm a Series A investor who needs to basically cap out 30 to 40 million 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 I don't think there's any disagreement.
It was definitely something I was thinking about, which is, I think, if every check you write has to be at least 100 million, I think it's actually very hard to do it on consensus.
Because there's not a lot of companies that hit a stage where you invest 100 million but it's still not clear if it's a good company or not.
Yeah.
And 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 where you have the option and you could do either one, assuming you have access to the consensus opportunities.
Leo, I'm curious, and you guys have absolutely crushed it at Seed with some Robinhood and Flexport et cetera.
But I'm curious what you think of Romton's sort of thesis that multistage has won Seed more or less in the last 10 years, that when you look at a lot of the big winners they were done from multistage firms.
I'm curious, one, if you agree with that sort of, you know, reading of history.
And then two if if you think that's like well definitionally, you probably don't think it's unlikely going forward.
Yeah, exactly.
I actually thought this was an interview.
Did multistage win seed or more seed than seed firms win seed?
Obviously, there's, you know, first round SUSE, you know, like lots of great seed firms.
But when you look at the aggregate of, you know, of winners, do they have a multistage seed or not?
That's Romton's argument is they had a multistage seed.
And that's why he co-invests with multistage as a whole strategy.
And then just, you know, past isn't, you know, isn't the future necessarily.
What do we think about the future?
I haven't rigorously analyzed the $10 billion, $50 billion outcomes.
Over the course of SUSE, I think we've invested in 10 or 12 unicorns roughly.
Maybe a third of those or a quarter of those had a Series A investor at seed.
And I'm not really counting like sometimes.
It was like oh, this series investor did a 50K check in the YC round or something.
I mean, like actually took half the round or more.
So most of them still were seed only or were like seed funds dominated the early round.
And then they went to multistage very quickly after that.
So in 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 100 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 multistage and not a boutique seed firm.
So I think for that segment, like multi-stage hasn't won, but I think it's probably like the predominant, like the majority of the time, they have a big leg up.
I think for the other ones, where it's less obvious, it tends to be much more seed dominated or seed fund dominated.
Yeah.
Martin, Leo, this has been a great conversation.
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