非共识投资被高估了吗？

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 that 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.

So, Martín, it looks like you've helped spark a little bit of an existential crisis on venture Twitter and in VC, and I thought we'd all come here to talk about it.

Great. Super excited to be here.

Why don't we recap, Martín, 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.

Let me paraphrase the tweet. The paraphrased version of the tweet is: it's dangerous to do non-consensus investing. That's a dangerous idea.

The impetus of the tweet—which, by the way, wasn't well thought out, as I think a lot of viral tweets happen to be—was that I've been an investor for 10 years. I've done almost 200 investments, either running the fund or being directly involved. It seems that being blinkered to how VCs view companies is actually quite dangerous because you're so dependent on follow-on capital.

It reminds me a lot of being an academic. I used to write a lot of papers, and you do all of this great research, but when you write the paper, if you don't actually think about how the program committee will view it, it won't get accepted. It felt very similar to that.

I want to be very clear: I did not say, and I would never say, that consensus investing is a good idea. I'm just saying that not being aware of consensus is a bad idea. I think the underlying belief is that early markets are actually pretty darn efficient, a lot more efficient than people realize. 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 and fellow venture nerd. What was your reaction?

I actually agree with a lot of what Martín just said, which is that eventually you have to get to consensus, whether it's when you're investing or later. Otherwise, if you're dependent on capital markets, it's very hard to keep the company alive if nobody wants to fund it.

For me—and maybe we invest a tick earlier, more toward pre-seed and seed—a lot of my best investments have been on the non-consensus side. Not in terms of having some crazy-good insight that nobody else had and being brilliant, but more because these companies often struggled in the early days. Before there are proof points, it's not obvious that they'll be a good idea. Once they get good, the valuation skyrockets so fast that you can still get good multiples, but they're much lower than at early stages.

Yeah, I had a few quibbles with some of the names on that list. Some people put Anduril on it, and it certainly was a controversial investment, but Palmer Luckey was a second-time founder with a billion-dollar exit. Trae is phenomenal, and this is in the shadow of Elon, who shows that you can already create these defense-tech companies.

If that's our definition of non-consensus, it just shows how insular we are as a community. It's almost an indictment of us that we even make this list.

And wasn't the seed round at around $100 million or something? It was a very expensive—

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 are also rounds that are maybe non-consensus at $10 million or something, but then become super-hot rounds at $50 million or $100 million and then become $10 billion or $100 billion companies.

Even if you invested at that consensus round, you 10x-ed, or could have 100x-ed. So it sort of gets at the idea of, “Hey, if it's a hot deal, that must mean it's not good.” No. Peter Thiel once had a line that was like, “The faster and higher the up round, the more you should invest,” because it's working.

I would love to do a correlation analysis. Actually, Leo and I had what I thought was a very interesting discussion about trying to figure out how you'd actually measure this and how you'd actually throw some data at it. We have an analyst working on it now. The data isn't ready yet.

I have a new one, actually, that I want to test with you, Leo, as a good thing to test. I'll bet 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. If that's the case, it would suggest that the market's actually pretty efficient, because it's almost inductive that the previous round knew that the next round was going to be hot.

Well, I guess so. I do agree with that. I think the question for me is: where is there more opportunity?

If the 5 hot companies keep having great rounds and then there are 10,000 not-hot companies, but 100 of them 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?

Maybe even further than that, 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, and that the market is actually very efficient, and that drives most of the returns—then the next obvious question is: if that's the case, then the market isn't that efficient because it underpriced the company, right?

If the majority of returns are in high-priced rounds and the market has underpriced the company, then that seems like a contradiction. But risk-adjusted, that's not necessarily true. It could still be priced right because there's still a chance it goes to zero.

So I guess my sense is that until we run the numbers, we're not going to quite know the answer. 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, right? Not how did this one company do, but how did this portfolio of companies that raised really quick follow-on rounds or had 10 term sheets at the Series A end up doing over time?

There are even cases in my portfolio where a super-hot company from an investor standpoint had so many term sheets, but the business didn't work out at the level that you would expect. The outcome was still really good.

On some level, even independent of the productive asset, human opinion about it matters. So there are almost 2 ways you can slice this conversation. One of them is that the asset is what's productive and produces the value, right? And the market will determine whether that's valuable or not.

Right? So that's this productive-asset view, and that's the one I hold. I think that investors are actually very smart. I think they know which companies are good, and then they pay for those. That's my view. But that's a productive-asset view.

There's another view that's independent of whether the company is good or not. There are things that people think are good, and so you're almost playing to the human perception of the company, independent of the underlying business. I would say, again, anecdotally, until we run the numbers, we won't know, but that also seems to be a bit true.

Yeah, I think I've been in venture for 12 or 13 years now. I've definitely seen this in sectors where sectors fall in and out of favor. E-commerce was hot, then it was dead, and then Dollar Shave Club got acquired and it was hot again. E-commerce didn't change that much year to year—I think the fundamentals didn't change that much—but the valuations and the appetite for investing and maybe starting companies changed a lot year to year. So to me, that's an indicator that it's not just the fundamentals; there are all these other forces, as you mentioned.

One other part to your tweet, Martín, that I think was underappreciated was the risk to founders of being seen as non-consensus. Founders need to raise money, and they need to raise follow-on funding within 18 to 24 months, sometimes even sooner. So if everyone is passing on you, or 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 the sociological study that followed of how different people interpreted it. The tweet itself was pretty banal, right? It's just a nonstatement. It's almost tautological. But different constituencies viewed it very differently.

Relatively inexperienced investors used it as an opportunity to say, “Oh, Andreessen Horowitz consensus-invests,” which anybody who knows anything about our investments knows is just totally not true. Even in my own portfolio, many of the top deals I've done had nobody else in the deal. So that was one cohort. There was another cohort, like Leo and Keith, who have a lot of data and have had a lot of really interesting things to say. That ended up in a great discussion, and 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.” The founders clearly view or feel this tension: it's dangerous to be non-consensus because they have to cater to VCs, and they know it. They see the pattern-matching responses; they deal with this all the time. From a founder perspective, 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. I think that's probably right.

I think this is probably one area where I differ a bit. I think there are benefits to being non-consensus. From the company side, when money is hard to raise, you tend to be more frugal with it. If the next round is less certain, there's less of a “it could crumble at any moment” aspect, because when things are hot and you're raising subsequent rounds very quickly on the assumption that everything will go perfectly, if anything slows down, suddenly you can't raise any more capital.

If you're in the mentality of growing quickly and spending, I think that's pretty hard. On the flip side, if you're consensus, it tends to be that you're more cash-efficient and more frugal out of necessity.

I think the other side is that it depends on the form of consensus. Sometimes there's also much softer diligence. The worst form of consensus I've seen is, “Oh, Sequoia and Andreessen and Humba are in this round. Let me just do a 2x markup in 2 weeks because I want to be in the same company.” There's no diligence there. It's just, “This is hot; let me do it.”

Maybe you're overlooking whether it's actually a good business. Sequoia and Andreessen and Humba all make good investments and bad investments, so maybe this is one of the bad ones, and you're just marking it up because you want to be in the hot deal. That ends up not being good for anyone.

I think this is a tremendously important and good point. I tend to believe now that most companies fail from indigestion, not starvation: 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 have a bunch of bad practices and end up running out of money.

I think there's a lot to that. If you looked at the 2021 cohort, the companies that had these billion-dollar B's—if you remember that time, it was totally crazy—I’ll bet that's probably one of the biggest wipeouts of capital. So I definitely think consensus investing is very dangerous, and only leaning into this for a founder is definitely dangerous.

But I also think the flip side is true: if you're totally blinkered to it, I think your life is pretty tough. There's a broader question as to, of the companies that do win, how many of them are competitive rounds versus noncompetitive rounds, and what the duration is between them being noncompetitive rounds and then becoming competitive. What percentage are really able to do that?

One question I have is: Is the market getting more efficient over time? With a lot more investors, we should be getting smarter as an asset class about how to evaluate these companies, along with a lot more capital. Are we just getting better? And if so, what does that mean?

Well, 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 1 or 2 that like what you're doing.

I think for consensus companies, it's starting to get more inefficient. When you have 10 term sheets, you get 5x the market value of what the fair value should be. That's great for the founder and maybe makes it a little more of a house of cards if things go south at all.

It's also not necessarily great for investors, because you might have to pay 2x, 3x, or 4x the actual intrinsic value—or the likely future value—of a company in order to get in.

But that would actually be efficient, right? It's just that the price is approaching the return profile. From a market standpoint, that would be efficient. I mean, it sucks from an investor standpoint because prices go up.

Yeah, that's what I'm saying. For founders, it's getting hyper-efficient. Maybe there's such an imbalance for really hot companies that your price gets bid up way past where it should be. Similarly, for non-consensus companies, it's the opposite: there aren't enough investors, so your price is lower than it should be, perhaps.

For me, those 2 are kind of the opposite ends of the spectrum.

Yeah, this is a great question. I totally agree. We can all acknowledge that there's a failure mode where consensus gets bubbly and then companies raise too much capital and there's a bunch of wipeouts. That has always happened, and it will always happen. That's just part of the market.

I think we can also all agree that there are parts of the market where there's probably unnecessary pessimism. For example, right now during this AI craze, in my area of traditional infra, a lot of the traditional companies that 2 years ago would have been great can't even raise right now just because they're not in the sweet spot. 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. We can deploy more dollars with more regularity, and the price is converging on what will ultimately be a fair price. This is acknowledging both of these failure modes on either side.

Yeah. And we're seeing one right now. It's the reality. There are AI companies that clearly are raising speculative money where nobody even really understands the business model, and there are great companies that can't get invested. We're seeing this right now.

But I will still say the reality is that OpenAI has grown tremendously, Anthropic has grown tremendously, and Cursor has grown tremendously. So there are some underlying market signals to fuel the chaos.

Yeah. I think part of it is that if you ever look at vintage-year data for venture funds, it’s probably a good way to see how consensus and non-consensus do over time. When you look at the dot-com bubble years, I think the median fund was terrible. It was like, hey, everyone overpaid, and the companies weren’t worth that. Even though everything was hot, it didn’t do well, and a lot of the funds didn’t do well.

Then, if you look at the Airbnb and Uber, around-2010 era, it’s kind of the opposite. I think the top-quartile funds crushed it because the market was pessimistic, and if you were willing to invest and had a different opinion, you did really well. Now it’s probably somewhere in the middle.

Maybe I’ll just go through my own startup as a single anecdote to frame the conversation a little bit. I did my PhD at Stanford. I was a classic “take the research and do a startup” person. We had so many term sheets before we had any idea what we were doing. It was the hottest thing ever, and it was great.

We did a seed round. Andy Rachleff from Benchmark joined my board, and we raised what at the time would have been a super-high-priced seed round: $10 million post-money. This was in 2007. Then the market tanked in 2008, and we still didn’t know what we were doing. It was just a bunch of researchers, so we couldn’t raise any money at all. Sequoia very famously gave us a black eye, and we couldn’t raise.

As we started to come out of the recession, Andreessen Horowitz, NEA, Lightspeed, and a few others got very interested, and then we had a pretty hot round again. We raised at a price that was actually over the market price, even though the business wasn’t quite working. There were signs of life. Then we had an incredibly hot round because the company started working.

When we actually sold the company, it returned the fund. It was one of the highest acquisition multiples of revenue at the time in enterprise software. So you kind of ask the question: Was the initial flurry of interest warranted or not? It turns out we were probably a month from going bankrupt, we didn’t know what we were doing, and the company definitely wasn’t working. What we had pitched at that time didn’t make any sense. We were like, “We’re going to change switch hardware,” which didn’t make any sense.

There’s one view that the market was overexuberant and we were lucky. There’s another view that says the initial conditions were there to do it. I just feel like if you run the data, it seems like the companies that have good outcomes did have sufficient interest along the way, because there were enough signals to do it.

On my side, for a lot of the pre-seeds and seeds I’ve done, I went back and I think maybe 6 or 7 or 8 of my top 10 investments took months to raise a seed round. A lot of times there were 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. If you’re always consensus, that’s great for you.

One thing I noticed that was interesting is that a lot of the companies that struggled obviously just go to zero because the business isn’t that great and people recognize it. But for the ones that did well, a lot of times the gap between the seed and Series A, or the Series A and Series B, was literally 20x or 50x. I think as an investor, you can still get good returns at the Series A or B in those companies, but it’s so different to invest at the seed, where there’s like a 1,000x, versus at the Series A at $1 billion, where maybe there’s still a 10x or 20x. It’s just very different.

So, I’ve got a question for you, Leo, because I think you play a bit of a different game than we do. If you have a seed, which is, let’s call it, non-consensus—and again, we’re using this very vague definition of consensus—but they’re having a tough time raising and you’re the only person putting money in, do you have a theory on how it will beat 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 this just true belief in the underlying business? The ultimate sign of success is just that the business is really working. So are you betting that, for the next raise, the business will definitely be working, or do you have some other theory on what will attract investors?

I’d say it’s often the latter. I’d say that’s especially true these days because I’m investing more in deep-tech companies. At seed, it’s very rare to see an asset that’s going to be working by the Series A, because usually the asset is still going to be developed at the Series A or maybe the Series B.

What I’m looking for is that there’s maybe not enough here for somebody to write a $5 million, $10 million, or $20 million check, but the company has milestones that I think, if they hit them, would make it consensus enough to merit a check of that size. Then I’m basically trying to evaluate, okay, the company has these milestones—do I think it could hit them or not? And if it hits them, are they compelling enough? I think that’s the big investment wager.

Yeah, yeah. So in this case, you do think about what the follow-on thing is going to want to see. You’ve reached a conclusion for the current round that is non-consensus.

Yeah. And I would say the consensus piece is part of it. I definitely meet companies where they’re like, “We’re raising $3 million right now. It’ll help us do these milestones, and then we think we can raise $10 million.”

Then there are others where it’s like, “We’re raising $3 million now, we’re going to hit these milestones, and then we want to raise a $50 million to $100 million Series A.” That’s actually a much harder bet, because you’re saying you have to assume they’re going to be consensus by the time they raise their next round, and it’s going to be a top 5% Series A. That’s a hard bet to take.

For the companies where the capital needs are more modest, or they have a more tranche-based roadmap, I think it’s a little bit easier to predict, like, hey, would these milestones be enough to raise $10 million? A lot of times I don’t know if it’ll be enough to raise $100 million—probably not—but $10 million feels pretty feasible if you do the things you think you’re going to do with this $3 million.

Has your view on this shifted? Do you find this AI wave to be different from previous waves, or are they fairly similar?

I’m probably a bad person to ask. I actually haven’t invested much in AI because of the deep-tech angle. Maybe 10% to 15% of my companies are pure AI. Others obviously use it in some way, but that’s not the product, I’m sure.

Well, how about deep tech, then? I think that’s also pretty different from what we were all investing in 5 years ago.

Maybe on the AI side—and I’ll touch on 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 $1 million to $100 million in 5 years, and that seems so antiquated now. The best companies are doing that in 1 or 2 years.

Yeah.

I think on the flip side, the endurance—how long those companies endure, last, and grow—feels like much more of a question mark. In the triple-triple-double-double-double era, if you hit $100 million in ARR and there was no one close to you, you’d probably just keep growing. Now it feels like you could hit $100 million and then drop to $50 million because someone else came out with a better product.

I think the growth is amazing, and the moats are weaker, so I think there’s a counterbalance there.

I agree. Yeah.

On the deep-tech side, I definitely see areas with a lot of hype from time to time. For example, we invested a lot in defense 3 or 4 years ago, and then we kept looking but basically paused for a year and a half or 2 years. After the Ukraine and Israel thing, prices just went up 2, 3, or 4 times, but the company fundamentals didn’t change.

Then it started being an opportunity-cost question: Should I invest in this defense company at $40 million when there’s this really great energy company at $15 million? I think defense was kind of like that.

I think biotech has had a lot of ups and downs. In robotics, humanoids are probably one of the most hyped areas, where the valuations just get crazy before there’s any revenue. I feel like I lost the thread in the original question, but—

I was honestly just wondering how you thought about this current wave. You did a great survey of the set of waves, and I actually agree.

I would say that, for consensus areas like humanoids, we end up not explicitly but implicitly avoiding them because once you have a few companies that have raised 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 a team.

Yeah. I think there are all sorts of types of investing, and they’re all pretty valid. One type of investing is: humanoids are clearly interesting, and big companies are clearly interested in them. So why don’t you back a bunch of good teams, and worst case, they get acquired? 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.

Things like humanoids are tough for that, just because the unit economics right now are so unknown. Competing with a human body is a very, very hard thing to do. Then, of course, you can say, “Okay, well, we’ll put it where human beings can’t go, like a car factory.” But then all of a sudden, you’re building a manufacturing company, so you verticalize heavily. The company has to look at whatever sector the robot is going into, and it’s more constrained. I don’t understand the competitive set, and so on.

From my standpoint, the idea that this is very buzzy and hot in the industry for big companies, and that it may have an M&A outcome—I don’t know how to invest that way. I just don’t know how to handicap that. The way that I tend to view these things is, for AI, for better or for worse, you have great unit economics.

Everybody knows that we always talk about OpenAI and Anthropic, but if you talk about ElevenLabs, for example, or Midjourney, these are famously model companies where the unit economics are great. They’re growing very quickly, and so I understand that. But I think there’s been this weird thing—and this happens a lot—where people take the example of these model companies and apply it to totally different spaces, where you don’t have the proof points or the economic case. That’s one thing I don’t know how to do.

Certainly, I don’t believe we should all just follow the common consensus around areas to invest in. But I do think that there’s going to be a pool of capital, and it’s going to want companies to look a certain way. If you don’t consider that when you’re investing, I think life will be a lot more difficult.

Yeah, I agree. I have an aside here on the humanoid stuff. What I’ve seen over the last 10 or 15 years is that, if the market is big enough, it really distorts VC investing. It used to be that you would look at a market and say, “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.”

So true. So let me justify a seed price. If the market is $5 trillion of human labor or something, any price makes sense, right? But then I think that really distorts how much value there is. The most boneheaded partner meetings were: “Well, yes, it is cold fusion, but this is the largest market ever. So, on the off chance it works…” I’m like, “This isn’t engineering, man. These are the laws of physics. I’m not sure that a good software founder is going to bend the laws of physics.”

I totally agree. I also feel like—I don’t want to harp on this too much—but unit economics is so important. What is the story for autonomous vehicles, right? The story for autonomous vehicles is that even after the industry has put $100 billion into it—$100 billion—the unit economics are still, let’s call it, on par with Uber. Let’s just call it that, right?

Does that make sense for venture investment? It’s really, really hard to build a standalone business with those types of economics. Google can do it, sure, and Tesla can do it, sure, but can startup X do it? No. 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 again, that’s not saying that the startup itself is a great business. 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 follow these spaces where there really is no thesis on the ultimate unit economics. I think you’re exactly right. I just think that there’s this kind of market-TAM sloppiness that says, “Well, if the market is inflated, then the expected payout is high.”

Also infinite.

That’s also infinite. Exactly right, yeah.

When I look at my portfolio, I see both. Some of the winners—Pave and Scale—were non-consensus, non-competitive, unproven, but very talented founders. Then, on the more consensus, competitive side, there were Jack Altman and Casser [?].

Wait, how is Scale non-consensus?

At seed, Alexander Wang was 18.

It’s a totally known space. He’s phenomenal. The A was done by Vulp who's amazing. I just feel like this is a very narrow definition of non-consensus.

Sure. For nearly all of the rounds, it was competitive, so I can agree with that.

Dan Levine—I mean, come on. These are some of the best investors in the world.

But I just mean to say that I brought the example to say that Casser’s [?] round was almost an order of magnitude more expensive. I think what people have been late to really internalize, and what a16z was super early to internalize, was just that the outcomes are an order of magnitude bigger—maybe 2 orders of magnitude bigger. So you can get seed-like returns at an order of magnitude, or even 2 orders of magnitude, more expensive.

I mean, remember, YouTube and Instagram were considered very expensive acquisitions at just a few billion dollars. In a few years, we’re going to have more trillion-dollar companies. Once we truly internalize the outcome expansion—the order of magnitude—I think it makes sense to Leo’s earlier point that it would beg the question: okay, but can you have 1,000x returns at not just what we used to consider seed-like pricing, but maybe at Series A or maybe even Series B?

Well, this is a very interesting question because you actually do run into fund mechanics as an actual price modulator in this discussion, right? You’re exactly right. I’ll go back to my company. My company was acquired for $1.2 billion. We had, let’s call it, less than $10 million in ARR, right? So does that make any sense? No. A lot of people were like, “This is totally crazy. This makes no sense.”

Except when I left, the run rate 3 and a half years later was, let’s say, $600 million within VMware, which acquired the company. And then right now it’s, let’s call it, $2 billion. It was actually, at one point in time, I think it was 40% of the growth of VMware—the business unit that I ran that was part of the acquisition. So clearly, it made sense to VMware.

As a result, you should say all the check sizes should be high for the winners because the outcome was so good, and this actually returned a lot of money to a lot of investors. The problem with that is I just think 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, Tiger, and Coatue era.

You could argue that all of their theses were correct, right? SoftBank was actually right, and Tiger was right, and it was actually a macro issue that caused the pullback, and that’s going to come back again. I think that’s 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, Leo, let me try to make this a bit more concrete. I think what Erik said is correct: the outcomes are so big that it suggests the prices we actually pay are too low. So the question is, why are the prices too low? I think the answer is that 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 Insight questioned this. They raised these huge funds and deployed a lot of capital. 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.

There are a lot of reasons why those could not have worked, including macro cycles and also the fact that none of them were Silicon Valley insiders. None of them were traditional early-stage investors, et cetera. So there’s a very reasonable question: maybe someone should just go run the Tiger strategy again, but as a Silicon Valley insider.

Well, in some ways, there are the failure cases, to some degree, but in some ways—I mean, Thrive raised bigger funds, Founders Fund raised bigger funds, and we raised bigger funds. The winners have also been multistage and have raised bigger funds. It could just be that this is the market being efficient: the reason 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, and this is actually a pretty controversial statement. I want to make sure that—

Well, I'm not sure what you mean by “we should be paying more.” Do you mean that you think the current prices are still well below where they should be?

I'm riffing off of Erik's statement, which I thought was right: venture capital has been a top-returning asset class, and you can look at individual investments. If you just take the top 10th percentile of funds, they return so much money. So there is an argument that even with these high prices, they're still underpriced.

And to put it differently, Leo, a seed fund may say, “Oh, I'm not going to invest in something at $50 million post-money or $100 million post-money because I don't think there's 1,000x potential. I don't think Databricks is going to be a $100 billion company, or OpenAI is going to be a $100 billion company, or whatever it is.” But it turns out—what we used to think—

I'm comparing—not to say OpenAI is going to be a $100 billion company. Exactly. Yeah, exactly. I mean, a few years ago, and so—

It doesn't seem like we've truly internalized that this is the norm, that there are going to continuously be $100 billion outcomes, if not—

Or that the market just continues to grow and therefore necessitates larger fund sizes. I would say that probably the venture market was 1/100th the size 20 years ago.

Yeah, probably something like that. It's kind of wild to think about.

Yeah. We did think a few years ago that there'd be a great contraction in the asset class, that 2021 was a blip, and that it would sort of right-size back to where it used to be. 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 talk to our team, when I talk to Thrive, it seems that people think, no, more capital is just going to keep entering. I think some of that's just because companies stay private longer, too, right?

Yeah.

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 10 or 15, or maybe 20 or something. So you're really betting you can get the 1 every year or 2 that gets there. If you're, let's say, doing a Series A at a $1 billion post-money or something, right, and you want 100x, even ignoring dilution.

Well, you'd have to bet that there are more of them, that more of them are going to happen, and that there are also more ways of getting liquidity from them as well. Martín, you—

But that also kind of suggests, purely by the numbers, that the most important thing is just being in 1 of those. The most important thing is being in 1 of those, if you can, independent of price, and that's the high-order bit. So I think I generally agree, right? 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 would 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,” right?

You also need a diversified portfolio. You need enough companies.

No, you need the fund size to run that strategy. This is why I think a lot of this comes back to fund size. Even in the Andreessen portfolio, I was just thinking off the top of my head, we have 4 companies at the $100 billion mark, right? There's Stripe, Databricks, Coinbase, and OpenAI, so they're not that rare. You guys have awesome coverage. I guess the question is, how many more could you name from the last 15 years? My guess is 10 or 15, probably not 100, right?

Yeah.

Yeah, $20 billion-plus—there are a lot. In enterprise software, it used to be an adage that nobody ever broke $20 billion or $10 billion. Palo Alto Networks was at $15 billion, and we were like, “This is crazy.” Now so many of them have broken it. Maybe with $100 billion, you're right, but in the world that I live in, the number of decacorns is probably an order of magnitude greater than it was 10 years ago. 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.

There are clearly multiple strategies, but if you want to—again, I don't know. For me, the key question, which I don't know the answer to and want to run the numbers, is: If you take a dollar of earnings for a venture capitalist, did that come from a company that raised at high prices or not? I would guess the answer is yes, just because the winners are so outsized.

I mean, there are multiple ways to play it, right? If the outcomes are 10x bigger, you can have a 10x bigger fund and basically run the same playbook, keep the same ownership, and a big outcome still returns the same amount of the fund. You can also make more investments with a fraction of the ownership, and then each investment may move the needle less, but you have a higher chance of hitting the Stripe of the year, the Uber of the year.

Totally. Yeah, yeah. That's—

Yeah. So I think there are definitely different models that could work here.

Yeah, that's a good point. Yeah. No, you're—

All right. I want to make a few related points here. One is, I remember someone quote-tweeted Martín's tweet and said, “This is a sign that the asset class is dead,” or something—the idea of a more efficient market. I think what that really means is that an individual firm is going to lose if it can't compete and win deals in an efficient market.

My second point is that I think a lot of venture capitalist identity is tied to being non-consensus, to 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. For that reason, I want to use the terms “consensus” and “non-consensus” less, because they're so core to people's identity, and use terms like, “Either it's a hot round or it's not a hot round; it was a competitive round or it wasn't competitive.”

I think another way of framing that, which isn't perfect, is: Is the company working or is the company not working at the point of investment? Let me add some nuance to it. If something is working, then it's okay. It's like: What is the price, what is the potential return multiple, and how does it work with your threshold, etc.?

There are some things that are competitive and not working but have an incredible founder or people, whatever. It's early enough that people believe the vision, and so you're still paying that price based on what you think. Then there are lots of things that are not working or not obviously working. We've chosen to do fewer consumer things that are pre-traction. So it's basically: Do you want to invest in things that have traction or no traction? There are failure modes with both, but it's another way of framing this debate. I'm curious—feel free to quibble with my framing.

I think I saw the same quote tweet. I'm 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 cost of capital, right? If my LPs want 5x and yours want 2x, you could pay 2.5x higher prices. The company isn't better; it's just, “Oh, your cost of capital is lower, so you're going to win all the time.”

But also, we all see the same value. Everyone sees the same value. It's just who wants the smallest return to win the business. That just feels less exciting to me.

Yeah.

I mean—

That's exactly right. I'm going to get a little bit philosophical on this, but the thing that's always bugged me about PE investing and public-market investing is that it just doesn't care about productivity, really. I mean, it does to some degree, but 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, so innovation is stifled so much. In fact, it kind of causes large companies to protect themselves through 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. I don’t want to be too dramatic about it, but I just feel like if you draw a dollar at random that gets invested, I’ll bet 90 cents of that dollar goes into keeping incumbents alive and/or predictability, and not to growth.

And I’m a huge believer in creative destruction, man. I’m like, “Get them out of the way. Let’s invest in growth.” So I love the idea 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 to grow. You never invest on downside loss—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.

So to me, more dollars going into venture is only a positive for humanity. 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, I think it’s a really interesting perspective. I feel like, more from a company perspective than an investor perspective, a lot of the most disruptive products were maybe non-consensus at the time.

Totally.

Right, where you start with no buttons on the iPhone, or you have Uber instead of a taxi—it’s a stranger driving. And those are the ones where, if you were like, “I’m going to build a taxi company, but it’s 20% more efficient,” it probably can be a big business, but not quite the same level of disruption and growth as when you take a big bet. You might have a very high chance you’re wrong, but if you’re right, you’re going to be 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 from that. They kind of understand that, and therefore, a comment on investors being consensus is very different from a product being consensus. Does that make sense?

Investor sentiment, I think, is actually much smarter than people think. The adage is that VCs are dumb: they just chase trends, and all of that is true. But the reality is, as a group, we have identified a cohort of companies that are quite disruptive, invested in them, and priced them. Those companies themselves tend to be quite non-consensus to the actual consumer or to the market.

I do want to build, Martín, 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 what’s good for the individual and what’s good for the ecosystem. In the sense that, yeah, 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, competition is what fuels incredible products. It’s the Darwinian process at its best. This is how we get bigger startup outcomes, a bigger startup ecosystem, more value, and incredible products for customers and users.

This is how we solve cancer, man. More money goes into venture capital, and we invest in companies, as opposed to investing in dying companies’ ability to retain their place.

100%. All of finance needs to change.

And I think VCs are trying to straddle LP incentives, founder incentives, their own incentives, and there is some overlap, and there’s magic there. But it’s also just about 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, massive funds that continue to win and invest in compound value, and also these smaller, focused, concentrated, expert boutiques who absolutely crush it. 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.

One of the numbers we’re going to look at is: if you cohort companies into winners and non-winners, call it looking at whether, on average, for any given company, the rounds were priced above or below the median for other companies at a similar stage. This will say whether a company was relatively highly priced for winners or not.

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, highly priced or not? I think these 2 numbers will give us a sense of whether the market is actually pretty smart about value and 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-arbitrage piece, because I will say, for me personally, my best investments have been ones that, on average, took a while to raise their seed round. A lot of people didn’t get it; they 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.” We thought it should be at 10, and some big fund gave them a term sheet at 20, so we passed—and now it’s a $10 billion company. So maybe that was not a good pass.

Yeah. Leo, honestly, as we go through this conversation, it does strike me that I think a lot of this is honestly just that we have a bit different perspectives. I have to deploy a lot more money than you do, right? I’m a Series A investor who needs to basically cap out $30 million 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. 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.

I think if every check you write has to be at least $100 million, I think it’s actually very hard to do non-consensus. Yeah.

Right. Because there aren’t a lot of companies that hit a stage where you’d invest $100 million but it’s still not clear whether it’s a good company or not. And I think the earlier you go—if it’s $30 million checks, $10 million, $5 million, $1 million—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 what you think of Romin's thesis that multi-stage has won seed, more or less, in the last 10 years. When you look at a lot of the big winners, they were done from multi-stage firms at seed. I’m curious, first, if you agree with that reading of history, and second, if you think that’s likely going forward. By definition, you probably don’t think it’s unlikely going forward.

Can I join you guys?

Yeah, exactly.

I actually thought this was an interview. Sorry, what’s the next part of the question?

Did multi-stage win seed, or win more seed deals than seed firms won? Obviously, there’s First Round, Susa Ventures, and lots of great seed firms. But when you look at the aggregate of winners, did they have a multi-stage investor at seed or not? That’s RMT’s argument: they had a multi-stage investor at seed, and that’s why he co-invests with multi-stage firms as a whole strategy. And then the past isn’t necessarily the future. What do we think about the future?

I haven’t rigorously analyzed the $10 billion/$50 billion outcomes over the course of our history. I think we’ve invested in roughly 10 or 12 unicorns. Maybe a third or a quarter of those had a Series A investor at seed. I’m not really counting cases where sometimes the Series A investor did a $50,000 check in a Y Combinator round or something. I mean, they actually took half the round or more.

Most of them still were seed-only, or seed funds dominated the early round, and then they went to multi-stage very quickly after that. In my experience, I think there’s a subset of seed where I don’t know if I’d say multi-stage funds won, but they have a very strong advantage.

If it’s a founder who previously built a business that exited for $100 million and they’re in a space that they know super well, that’s going to get done at, say, 40 instead of 20, or 80 instead of 20 post-money. Chances are it’s going to be a multi-stage firm and not a boutique seed firm.

So I think for that segment, multi-stage hasn’t won, but the majority of the time they have a big leg up. For the other companies where it’s less obvious, it tends to be much more seed-dominated, or seed-fund-dominated.

Yeah, Martín, Leo, this has been a great conversation.