First Principles and Being "Non-consensus" in Ventures
Perspectives from three founders who have built companies from "0 to 1"
At Leonis Capital, we talk a lot about backing “non-consensus” founders. It’s in our past essay, on our website, and in our letter to future founders. Put another way, it’s in our DNA.
However, we still feel there is a greater misconception about “non-consensus” founders from the investor community - some feel “non-consensus” simply means diversity and immigrants, and some even think that those founders are the “misfits” who are unwanted by the “mainstream, top-tier investors”.
We think these misconceptions act not only as a great disservice to the founders we believe in, but also as giant dislocation for the proper investment valuation in early-stage investing.
So what makes a “non-consensus” founder?
By definition, the “non-consensus” founders are not popular because the majority of society doesn’t recognize their viewpoint just yet.
Why is a worldview important anyway?
The world progresses in such a way that at any day of the week, we have competing worldviews - either at an individual level, at a company level, or even at the country level. A strong worldview is a prediction of the future. And a winning worldview dictates how the world operates.
A worldview matters when it’s unique and strong.
Merely being the contrarians in the room is not enough- a person has to be non-consensus and eventually right. That applies to VCs1 and it certainly applies to founders who VCs back.
So perhaps a better way to call these founders is not just “non-consensus” but in essence, they are first-principles thinkers2. They focus on the fundamentals.
Humans care about what others care about - such as social proofs, press headlines, and all those vanity metrics3. However, first-principles founders tend to care about something more fundamental - the product, the customers, and the product-customer fit.
Why?
In the early days of company building, nothing is obvious, everything is chaos. The dynamics are both a confusing trap and an orderly beauty. If you are a subscriber to the Complexity Theory, then you might see nothing resembles closer similarity to a Complex Adaptive System than a living-breathing technology company.
Just like how species take the random but somehow correct evolution path, startups are usually doing the same thing - lots of product and market experimentations - through which, founders are expected to face lots of setbacks, lots of rejections, and even despair.
To no surprise, many founders would give up halfway, while the first-principles ones persist and persevere.
In the early days of Sleeper, Lowkey (Acquired by Niantic) and MaintainX, things are anything but obvious nor efficient (capital-raising wise). The same was true in the early days of Apple, Amazon, and Airbnb.
It’s almost like the law of gravity: the non-obviousness factor of the company creation journey is always there in the startup universe and such a factor often defines a company’s successes and its eventual enduringness.
So what makes a first-principles founder? Having the fortune of working with some in the early days, I’d like to share a few perspectives directly from them:
Nan Wang and his team have built Sleeper from an idea of childhood friends to a $500M company with its product ranked #3 in the app store. The journey is not without struggles - but the early “rejections” they received reinforced their core belief in designing a beautiful product and making the users happy.
We faced our fair share of doubters when starting Sleeper:
"There are already companies in your space that that have been doing it for many years, stealing share will be very difficult"
"Your competitors have a lot more money, they'll just either try to outspend you, or copy the features you built"
"Sports are too seasonal, it will take time and /or money to scale"
"My friends probably wouldn't use your platform, because we're too used to doing it the way we always have to change now"
Each of these ultimately proved to be true to some degree, but only partially - Yes, there were incumbents in our space with large legacy user bases. Many of these companies did have more money than us and tried to spend it defending their turf. Some eventually even tried to copy our features too, and so on...
However, we also had the core belief - rooted in first principles - that the most important thing about sports is that it is inherently meant to be social. We chose to see the opportunity in the market, rather than get bogged down by what everyone else was doing around us or why others failed before us. Instead, we set out to build a product rooted in this core belief, that we would use ourselves, and then go out and find others like us. The lesson we learned along the way is that while there may be numerous ways for your company to fail, the beautiful thing about startups is that you only need one way to succeed.
Nan Wang - Co-founder and CEO at Sleeper
Jesse Zhang and his team had built Lowkey straight from the college dorm. After a few years of company building, Lowkey was successfully acquired by Niantic. Looking back at the journey, here is what Jesse shares on the idea of “setbacks”:
"One way to get through setbacks is to not think of them as setbacks. It's just ordinary startup life, and startup life is hard. There's probably nothing super unique about your problems. Every founder has to go through it, and if you have confidence in yourself, you'll always be able to keep going."
Jesse Zhang - Co-founder at Lowkey. gg (Acquired by Niantic) and Sequoia Capital Scout
Finally, Chirs Turlica from MaintainX exemplifies the type of founders who defy conventional wisdom by having deeply rooted viewpoints on products and customers:
"There were quite a few folks in the beginning that called us “just” checklists on equipment with chat, “just” a simple form builder or, welp, a “just” a do app. It made no sense to them why something they perceived as so simple would work.
From day 1 it felt illogical for us that frontline professionals were running around with supercomputers in their pocket with front and back cameras, connected at high speed to each other (their smartphones) while the state of the art system of record for work execution was a paper clipboard. The way we as humans interact with the real world is through the equipment and facilities that we built.
No one should look at the initial simplicity of a product when determining if it will be valuable. Salesforce is just a place to see the status of your deals and who owns them. Dropbox is just a syncing folder. Outreach is just a place to call and text your leads. Docusign is just a place to put signatures on a document.
Being “just” work execution on equipment and facilities has allowed us to sign over 3,000 customers, hire 140 amazing teammates, and raise $54m in financing. We are “just” getting started."
Chris Turlica - Co-founder and CEO at MaintainX, backed by Bessemer Ventures Partners
On the surface, they share the consistent traits of thoughtfulness, high-power execution, and relentless resiliency. Deep down, they have this unshakeable conviction that’s grounded on products and users, which are the first principles and the true north in the startup world.
It’s not uncommon to hear successful founders say things like “other people keep saying no to us but we know fundamentally the business is doing well so we just keep pushing”.
Why would that be the case? Why would the “consensus” often misjudge the “next big thing" so badly4?
It seems evident that people from the outside are often viewing these founders and companies with the wrong filter - a filter that’s often based on popularity rather than the intrinsic one. So from the outside looking in, we call these founders “non-consensus” but in truth, they are really “first principle” founders - we are the ones who got lagged behind. The world is always pushed forward by those first principle thinkers who happen to be founders.
People say that the venture market is crowded and perhaps even efficient - by that, they mean we have so many venture funds in the market and a good opportunity would always get funded efficiently with proper pricing - therefore, one should always chase and follow what the “smart money” is endorsing. In other words, by the “efficient market” logic, the non-consensus founders would be quickly identified and funded.
By that logic, an early-stage venture investor would want to spend time rubbing elbows with “higher-tier investors” in hope that one would get some allocation to a “hot” investment; also by that logic, one would not care about the number of portfolio companies as long as they are all led by other “top-tier investors”. With this approach, instead of getting a concentrated portfolio based on independent thinking and high conviction, you would get a wide-spread “index fund” on startups with a tiny equity percentage on each.
Would this work?
That approach might work to a certain degree - perhaps under two conditions:
the companies are mature with less turbulence on both the downside and the upside; and
the macro market needs to be in a favorable, if not a bullish, condition.
It’s our belief that the beauty of early-stage company creation is anything but certain. Therefore, one can not simply evaluate a company simply based on numbers, let alone external metrics such as social proofs and press.
Early-stage investing is NOT an efficient market. Far from it. Fundamentally, early-stage VCs are actually in the “company building” service business instead of the so-called “investing” business.
There is a fundamental difference between these two frameworks. The former demands time and care to do the homework, bond with the founders, and discover the first-principle truth together; while the latter is about doing transactions. Only a few VCs stay true and rooted in the first one over the past decades - they are Sequoia, Benchmark, and USV of the world; while there are many VCs in the second camp - they tend to come and go with the market winds.
So how do you be a “non-consensus” or even a “first-principles investor” in venture? There are ways to separate noise from the signal:
For example, if you don’t believe that the early-stage capital market is efficient, then you might want to ignore what others do or don’t do and instead focus on developing your own conviction on a certain market and on which technology products can make meaningful impacts - in this case, the so-called “social proof” is the noise, the fundamentals of a market and its tech-enabled products are the first principles.
Take another example, if you believe that early-stage companies are governed by power-law distribution and grow in a non-linear fashion. Then overly obsessively with the historical tractions can become a bottleneck to hinge one’s ability to imagine with the founders and therefore miss meaningful opportunities: in this case, ironically early traction data can become the “noise” while spending real-time understanding founders’ vision is the first principle.
Putting things into the current macro perspective, if you believe that tech innovations are here to stay and some markets will stay forever big (such as enterprise software, healthcare, global logistics, and developer tools), then the bearish tone of the other investors become the “noise” - while sticking to founder-market fit and product-market fit become the first principle.
Often times, investors can not develop a 100% conviction by themselves; they need to partner with similar worldview founders to form the thesis, experiment, and then ultimately build enduring companies.
It’s only from the outside looking in, they might appear as “non-consensus” because the “consensus” at the time doesn’t recognize the fundamental value just yet.
In the early days, it could also be easy to confuse fundamentals with vanity metrics - for example, “don’t the ‘social proofs’ and ‘press headlines’ help attract more users and fundings, therefore they are the core to the business, right?” It depends - depends on which one you focus on, and which one follows. The ambiguity and the struggles of the early days are necessary factors in forming iconic companies.
It’s actually a systematic feature, not a bug. Thanks to the early misjudgment of the eventual winners, early-stage VCs then can have the venture-style return that’s baked into the business model.