A CONTRARIAN’S GUIDE TO VENTURE INVESTING FOR THE 2020S – Part I.

BLUF (Bottom Line Up Front)

• Be clear: We do not know what the next big thing will be.
• First-principles thinking still holds (i.e. we want to find those ideas that are both “non-consensus” and “right”).

 

Disclaimer: if you are looking for investment ideas about specific companies and verticals/industries here, you will be disappointed. This article is more of a reminder — what pitfalls to avoid, when investing with a contrarian (or “trarian”, a con-contrarian, if you will) mindset.

 

We Don’t Know What’s Next

On a beautiful Friday afternoon in Palo Alto, CA, Carl Eschenbach spoke to a group of Stanford students about Sequoia and the current/emerging trends in tech. Carl was prepared, charismatic, and generous with students’ questions. When asked about the coming wave in Silicon Valley/the world in general, Mr. Eschenbach told the students a “boring” truth — we don’t know. [1]

At the risk of stating the obvious, let me repeat this, no one knows what the next big thing will (not) be. Sequoia does not pretend to know. Neither should you and I.

Much like when investing in common stocks, assuming that one can predict the behavior of the market is ludicrous. And especially dangerous is any crowded trade that is founded on such a belief. (Case in point — one would recall the implosion of short volatility trades back in February this year [2], which started out as a benign and even clever idea.)

So, porting this lesson to ventures, are there any traps lying around? Be extra cautious of any wise-sounding skepticism, e.g., another AI winter will come, blockchain is over-hyped, … Yes, there is much froth and noise in those areas; that does not mean tossing the proverbial baby out with the bath water is the smart act here. The opportunity cost may be dear.

A contrarian’s first job is always be humble, keep his head cool, and his keen eyes out for fake contrarian wisdom.

 

How to Be Non-Consensus, and Right

Reid Hoffman had a crazy idea that people would want another social network. And not just any social network, but one where you would use your real name, real professional identity, to plug into a professional network. This turned into Linkedin.

Justin.tv had a crazy idea that people would want to stream others playing video games online. And that it could be a monetizable model. This turned into Twitch.tv.

You see a pattern here.

Image courtesy [3]: https://disruptionobserver.wordpress.com/

As Andy Rachleff, or Peter Thiel, or Ray Dalio would put it [4], the “secret” to outperform is to stick to first principles, that is, identify those change events that are not yet obvious (be it some technology shift, or a regulatory story, something that should have far-reaching impact and where the eventual winners would have unfair advantages); in other words, you need to find ideas that are both “non-consensus” and “right” at the same time.

One example of a tentative hypothesis may be, that enterprises can skip over their big data and data science gap, and start executing AI across all lines of businesses. (Yes, the underlying consensus assumption is that firms have to have big data infrastructure and capability, and likely an army of data scientists, to be able to extract and capture value.)

Once again, there is no guarantee any non-consensus idea will be right; if there were any hard and fast rules, they are there to be broken. (However, there are valid lagging indicators and leading activities to study — worthy of a Part II. on this topic).

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[1] Carl Eschenbach, Talk at Stanford MS&E238

[2] https://www.marketwatch.com/story/short-volatility-etf-plunges-over-60-in-after-hours-trade-2018-02-05

[3] https://disruptionobserver.wordpress.com/2016/07/03/non-consensus-and-right-an-essay-on-investing/

[4] http://www.isegoria.net/2017/12/non-consensus-and-right/