2021 (end of year)
4 very short ideas
Similar to last year, I thought it would be a useful exercise to try and recap some of the ideas that I have spent the most time thinking about this year.
1. EXPLORING VS. OPTIMIZING
When should we explore opportunity sets and when should we optimize around a specific opportunity? This has become top-of-mind both as it relates to where to invest and also how to build a career more broadly. Spending time in the “wrong” category may only yield you a local maxima, but moving around categories too often means you will never reach any peak. Early in your career, I suspect finding the right category is more important, but at what point do you shift over? I’m not sure.
2. MARKETS >> COMPETITION
Numerous times in the past two years I have been excited about a specific market or category, but the competitive landscape felt crowded and undifferentiated. I have come out of it believing that competitive dynamics are less important in many software categories. While the difference between a #1 and #2 player can be significant, the right markets can produce 2-3 fund-returning companies1. I also think it’s easier to identify the best markets than it is to distinguish a #1 and #3 player early on. In later stages, this dynamic may change and I suspect late-stage investors should be more concerned with competitive dynamics.
3. CONSENSUS AND RIGHT
The traditional wisdom has been that venture capital is about being non-consensus and right because if you were consensus and right, the returns would be competed away. This is wrong. In a field governed by power laws, it’s far more important to be right than anything else. In today’s environment of abundant capital, consensus deals tend to attract capital and scale quickly. Winning competitive consensus deals can be even more lucrative than finding non-consensus deals. The best example is Hopin, a virtual events software company. They raised right before the pandemic and immediately came consensus when remote work became the norm, but that has not stopped them from becoming a $7.75B company less than 2 years after their seed round.
4. STEEP UPROUNDS AND UNDERVALUATION
From Peter Thiel’s Reddit AMA, “the steeper the up round, the greater the undervaluation”, has continued to ring true. The primary reason is that the best companies receive multiple term sheets and are not always selecting the highest valuation. They may opt to choose a fund with specific expertise, resources, or brand and take a discount on what the top bidder might offer them. The more competitive the round, the more likely it is that companies can optimize on factors other than valuation. The conclusion is similar to the last idea: winning competitive deals is extremely valuable.
I’ll caveat this is not the case for businesses with very strong winner-take-all dynamics (eg marketplaces, social networks, open source).