Replacing "Non-consensus and Right" with "Differentiated and Good" for Emerging VC Managers

I meet so many emerging managers who reference the "be non-consensus and right" post without focusing on the most important piece - being right.

A group of hikers traversing a fairly challenging path - in the distance, you’ll see a lone hiker who is way up the face beyond the group (generated by Midjourney)

In my work at Precursor Ventures and Screendoor Partners, I get to talk to many people starting brand-new venture capital funds. I really enjoy hearing what inspires people to start new venture funds and the market opportunity that they see to create something new in a world that can feel crowded when looking from the outside in. The venture capital industry benefits from new managers with new ideas and strategies that could yield top returns, so I always make time to hear people out and help them where I can.

Almost every conversation I have with a new venture capital manager quickly gets to their core thesis or strategy. Whether they explicitly reference it or not, many people I meet reference the Howard Marks' axiom about finding investment opportunities that are both non-consensus and right. The basic version of this argument is that to make money in venture capital, you have to invest in companies that are non-consensus at the time of the investment and turn out to be right. If you want a good synopsis of this argument, I would encourage you to read this blog post by Andy Rachleff - it’s the one I see cited most often (it’s also referenced in this interview with Marc Andreessen here). If you want a more complete articulation of the argument, I’d encourage you to read this memo on the Oaktree Capital site - it’s worth a read if you’re an aspiring investor.

The “be non-consensus and right” advice makes sense, particularly for new firms entering the venture capital business. In most markets, the consensus right opportunities are available to many people, and most people think they are good ideas. It’s hard to make money investing in ideas that everyone thinks are good and are readily accessible to everyone; the returns get eaten away as people crowd into the trade.

I’ve sat with this idea for a long time, and I don’t think this advice about being non-consensus and right makes as much sense in today’s venture capital environment as it did before. I’ve noticed a few things that cause me to question that idea:

• Venture capital is not like the public markets. Venture capital is not a stock-picking exercise; it’s about having founders choose to take your capital over someone else’s. Strong founders (as judged by the venture market) have options and can choose whose money they take.

  • In the last few years, I’ve met quite a few emerging fund managers who do not need to focus on non-consensus opportunities; their networks and personal brands allow them to compete for and win opportunities that are consensus-right opportunities that also turn out to be good investments. They beat out established, well-known firms that are well-positioned to win those same opportunities. I would never encourage those fund managers to be non-consensus for non-consensus sake, as that would be a waste of their time and talent. I think it’s good for our industry that new firms emerge that challenge the status quo and compete for the most competitive opportunities.

• The timetable for when ideas and markets go from non-consensus to consensus feels much shorter than it used to be. When I first got into venture capital in the early 2000s, the idea that companies would rent software under the SaaS model instead of purchasing it on-premises and paying for support took a long time to take hold. While SaaS was a non-consensus idea, the early believers in SaaS (see Emergence Capital and others) had time to exploit this market inefficiency before people caught on. When you compare the time it took for SaaS to catch on and become consensus compared to the skepticism-to-hype-to-realism cycles for things like mobile, fintech, crypto, web3, and genAI, it feels like the time to exploit non-consensus ideas is shortening. The existence of large AUM, multi-stage firms in our industry means that anything that starts to become consensus will have a dedicated team focused on that trend at every large firm in the industry. You can still make money by being early on a trend, but the window to exploit that insight is shrinking.

• In the last few years, being “non-consensus” got conflated with being contrarian. I don’t think contrarian and non-consensus are the right thing. Being contrarian is a fundamentally oppositional positioning; you are framing what you do in opposition to the status quo. Many things in the venture business have been tried and do not work; being contrarian on those things is of little value and maybe borders on being contrarian for contrarian’s sake. There are so many ways a new manager can be non-consensus: sourcing in places that other people don’t look, offering a different package of advice and capital to founders, domain expertise in an emerging area, access to networks that aren’t connected to the VC ecosystem, focusing on founders in new or misunderstood markets, and the list goes on and on. There is no need to focus on being contrarian (and definitely not a smug contrarian) unless there’s a strong need to do so.

With all that being said, the biggest thing I find I have to remind people is that the most important thing about being “non-consensus and right” is the part about being right. In the end, being right is what matters. That’s how you make money in venture capital, and that’s how you build your reputation and brand.

I tend to end most of my meetings with new managers by asking them a simple question that helps me understand how and why they think they will win over time. How are you differentiated from everyone else in the market, and how will you win the opportunities that you should win given your strategy? I find it helps me better understand a new manager’s perspective on their own competitive advantage and strategy. The best managers I meet have a good story about why they are differentiated and good. I think that’s what helps you win today, more than being non-consensus and right.

Thanks for reading this post. Feel free to leave a comment below if you have something to share!