Recently I’ve been thinking about what makes a strong competitive advantage in a world where individuals and firms are increasingly leveraged and specialized. The top several dozen venture investors basically monopolize the industry. About 20 firms — 3% of the venture universe — earn 95% of the returns.)
The common value-add or differentiating dimensions are a great network, positive signaling effects, insightful operating experience, or the willingness to invest at the highest price. But it’s not clear that the majority of investors move the needle.
These are all useful from the perspective of founders. The tough part as an investor is that there are few unfilled niches. You’ll run into tough competition on all of the above features. So what’s left? From your perspective, does value-add even matter that much when VCs still pass on many amazing deals?
I think that worldview is the most underrated and robust advantages you can have over other investors.
An interesting thread in politics and psychology these past few years has explored how people change their minds. Example: ideas from Jonathan Haidt’s The Righteous Mind and Arnold Kling’s The Three Languages of Politics have made their way into the mainstream. The core insight here is that people rarely change their minds. Opinions on different issues aren’t individual beliefs based on separate analyses — they’re products of a single underlying worldview. If an idea doesn’t fit your worldview, you’re unlikely to accept it on its merit rather than break up an otherwise consistent and unified understanding of how things work.
This makes VC hard because the best deals are, almost by definition, outliers that don’t easily fit into any worldview. So having a worldview that’s more accommodating to a wide variety of ideas should let investors make the right picks which is historically very hard (see Airbnb and Robinhood examples linked above.)
Perhaps we should focus less on building a network or thought leadership or industry experience, and more on learning worldview-expanding (or, ideally, -shattering) ideas. Less of entrepreneur Eric Reis or How To Win Friends and Influence People, more of polymath Robin Hanson or The Sovereign Individual.
That’s the core point I want to make. As a quick and currently-relevant example, different investors seem to view Tesla through different lenses. Many tech investors I follow hold a big-picture worldview more in tune with what works for VCs. If the macro-trend of electric vehicles is there and the team is right, it’s worth betting on. Other investors, often public equities and bonds people, take a more grounded approach. Tesla is likely structurally unprofitable compared to other manufacturers that are quietly waiting for the right timing, plus their financials are comparable to GM right before it went bankrupt in 2008. One portfolio manager I know called the Tesla bond issue one of the worst he’s seen in recent memory. Luckily for Tesla, more optimistic investors controlled enough capital to purchase the issue anyway.
Of course these are total oversimplifications of each stance, but the point I’m making remains. I think investors make decisions on a case-by-case basis, but with significant bias from worldview. Or maybe worldview-veto is a more accurate descriptor of what’s going on.
There are a number of other interesting threads here such as the problem of demonstrating that you have the right subjective worldview to actually have an edge. Networks, operating experience, etc, are inherently more provable. (This relates to the Thiel contrarian philosophy: if others buy-in to your perspective, it’s not an edge.)
Another question is whether all this matters. You can’t go to an LP when fundraising and just say “I make the best decisions because I have a better wholistic model for how the world works.” The other value-add metrics also act as a positive signal. I named this blog Heuristically Speaking for a reason!