Be Non-Consensus Right

You have to work from first principles and make up your own mind

Nov 04 2019

Naval: Most of what we say on this podcast is consensus knowledge, or wisdom. Experienced VCs will say, “Duh. Of course, that’s obvious.” But it’s not designed for them.

Be non-consensus right

At the same time, the real money in this business is made by being non-consensus and right: being correct when everybody else disbelieves. This happens all the time. For every deal that Sequoia does, it’s possible that Benchmark, Andreessen or somebody else passed on it. For every deal that Andreessen does, maybe Sequoia didn’t want to pay as much, so they passed on it.

There’s a large universe of investment-grade deals that even the top VCs and angels don’t agree on. Many of these go on to be successful. And then there are the consensus deals that all the top VCs agree on and try to pile into—and sometimes those end up being flameouts.

Don’t learn how to invest from the commentariat  

Don’t learn angel investing from journalists and the average commentator on Facebook, Hacker News or Twitter. These people may be well meaning, but they don’t know what they’re talking about.

Everyone piles onto Theranos as an example of Silicon Valley excess. The reality is Theranos wasn’t backed by any good Valley investors; it raised from out-of-market investors for good reasons. The media built up its founder to be the next Steve Jobs because they were looking for a heroine. The media built her up, and the media took her down. To any sophisticated investor, that deal smelled bad from a mile away.

The media’s been hating on Mark Zuckerberg and Facebook since the start. And yet, here it is, a company worth several hundred billion dollars and everyone surrounding it is fabulously wealthy. What Facebook does for society is a different conversation, but the fact that it’s a successful business is undeniable. That journalists have called for its death all along is also hard to deny.

The larger the herd, the lower the returns

To be successful in this business, you have to make up your own mind. You have to work as much as possible from first principles. You have to ignore the herd. The larger the herd you listen to, the worse your returns will be. If you go with the consensus and average thinking, you will get average returns—and average returns right now are 1% in treasury bills.