Consensus and right

Tren Griffin has a good collection of quotes on the argument around how to make money when investing.

Andy Rachleff (former partner at Benchmark) is quoted: “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.”

For venture capital backed startups I think A16Z partner Alex Rampbell’s comment better captures what is needed: “Again, you have to be right because if you’re wrong, not going to work. But the challenge with being non-consensus right is if you think, “Okay, this is a very, very interesting field. It’s going to require a hundred million dollars of capital for this business to actually get to the promised land and get enough customers and get enough revenue and get enough scale. I’m going to invest in their $10 million Series A, which means they’re going to eventually need to raise another $90 million in many successive rounds.” And this is a crazy, crazy idea that nobody except for me on planet earth believes in. Well, then who’s going to lead the Series B? This is the challenge. So it’s fine if you’re a non-consensus and then it trends towards consensus, but if the investment is non-consensus long enough, that’s actually great for public markets, typically. It’s not great for the private markets because you tend to need somebody else to believe and actually coalesce around what is your consensus.”

In my mind a founder raising capital should always want investors to see the startup as consensus and right (i.e. many firms believe “this will be a winner and therefore I want to invest”), as that should lead to the highest valuation and best terms.

An early-stage venture investor can live with non-consensus and right, if the startup can reach milestones before the next funding round that makes it consensus and right (as Alex Rampell argued).

Author: Henrik Torstensson

Partner at Alliance VC. Investing in Nordic early-stage tech startups.

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