For Early Stage VCs, Non-consensus is Too Risky, Consensus is Too Boring, but Pre-consensus May Be Just Right.

Temporal or structural? That's a question many pose about the growth of the largest venture capital firms into multi-multi billion dollar investment managers and the increasing concentration of dollars in outlier companies regardless of their stage. For purposes of this post I'm going to argue it might not matter, because (a) we're definitely not returning to cottage industry status regardless and (b) any 'correction' will likely take place over a period of time broader than a single fund cycle of deployment. That is to say, the semi-truck is hurtling down the highway with such force and velocity that its speed is going to remain the same for a while, whether it hits some obstacles in its path or finds itself unmolested.

There are many venture capitalists embracing the notion of consensus investing right now, some with glee, others with a 'it's the game on the field' shrug. Regardless, the incentives at an individual level are very much pushing in this direction. Try as we might, Satya and I have failed to get excited about leaning into an full blown 'access' strategy for Homebrew - that is, put our supporting checks into anointed companies while remaining stage agnostic and totally indifferent to whether you get to help out/learn along the startup. It's just not why we got into this business. Doesn't mean we don't find ourselves involved with some of these 'rocketships' but it's a byproduct of our strategy, not a change in our strategy.

At the same time, it's increasingly difficult to be truly non-consensus, which to me means, you are not only participating in a funding round that's far from 'oversubscribed,' but that you are willing to fund the subsequent round(s) as well. My observation is there's not enough diversity of investment interest among major VCs for you to take a company you've backed to market and get it funded if it isn't in (or edging close to) the mainstream consensus buy box. So if you really want to play in this non-consensus world as an early stage institutional VC you need to (a) be willing to over-concentrate your funds in a few companies by writing multiple checks and/or (b) help them access investment capital which isn't coming from traditional venture firms [or find the minority of these who have a prepared mind for something different].

That's why I stress 'pre-consensus' to many emerging managers - can you be a click ahead of the bigger firms, but not too far ahead? Your pre-seed or seed investment needs to 'ripen' into consensus within 6-24 months and if you can nail this motion, you'll have epic returns (or at least markups). What percentage of skillful pre-consensus is actually being early to a trend versus having the ability to incept a trend? My opinion is it's biased towards the former, but the latter is non-zero - especially if you're backing founders who can spin a narrative and sell well alongside your own similar efforts.

Is this a framework? A mindset? Simply semantics? I don't know but I've been stressing it to people who ask me whether there's anything to do besides be a consensus investor these days.

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