The Best Deals Look Weird
Naval: In investing, you want to be non-consensus right. You want to be right when everybody else is wrong. If you’re right when everybody else is right, you won’t make enough of a return. If you’re wrong, you won’t make any return.
The best deals have something broken, strange or different
The best deals are weird. They always have something broken, strange or different about them.
They’re socially unacceptable, outside the norms of venture capital or too niche to be interesting. The founder doesn’t fit the normal mold, or they’re in the wrong city. Or they have a cap table problem. And so on.
That doesn’t mean you should only invest in weird deals. It’s like the old saying, “There’s a fine line between genius and madness.” The genius and madman both seem crazy until the genius is validated. One out of 100 turns out to be a genius; the other 99 turn out to be crazy.
You have to be iconoclastic enough to recognize genius founders without being so low in judgment that you let in all the crazy ones too.
Patri Friedman is making weird investments
The way portfolios are constructed, you may be better off investing in a lot of crazy deals than a lot of decent looking deals.
To give a recent example: Patri Friedman started a fund called Promonos Capital. He’s investing in experiments in governance: new city states, towns and localities. These are places where people are taking local government into their own hands and doing experiments in governance.
This seems impossibly difficult to do. The history with seasteading in Honduras doesn’t look great. But all you have to do is stumble into the next Singapore or Hong Kong—whether it’s virtual or physical—and you have something that can create trillions of dollars in wealth and change the way people live.
Promons benefits from two things. First, they have a unique brand because nobody else is doing that. Everybody interested in this space knows to go to them. Second, the vast majority of their investments are going to look mad—but the few genius outliers should have huge returns because they’re non-consensus investments.
Similarly, Founders Fund, Steve Jurvetson and a variety of other people built their brands by being willing to fund weird deals long before anybody else.