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Investing in non-consensus ideas. Misunderstood until it’s the hot deal.
I have heard many larger late-stage investors say, “If the price is cheap, or the founder raised at a low amount in the last round, then something must be wrong with it. If it’s not a competitive bidding war, then what are we missing?” They say this until someone else invests, the revenue numbers leak, and then it becomes the hot deal to chase.
There is something to say about investing in non-consensus deals. Typically, the best investments, at least at Social Leverage, over time have been non-consensus. They have been deals that were not chased by every VC. They were investments we did at sub $10m valuations with founders building bold ideas that weren’t chased by dozens of VCs. Maybe it was the industry they were going after, the idea wasn’t big enough in some people’s minds, or they were investing in a down market when other things were more in favor. Or maybe it’s that the good founders recognize the value of hands-on, helpful investors who have experience in their area of focus and are willing to take lower valuations.
Chasing investments, especially at the early stage (Pre-Seed/Seed), which is where we invest, is crazy. The math is the math is what my partner Howard Lindzon likes to say. The numbers have to make sense. We have to return multiples of our money to LPs. We can’t have funds that do 1.5x DPI. We need to shoot for 3x+ funds and underwrite each deal with the belief that it can be a 100x return.
If you are investing at the early stage and doing deals where you own 10%-15% at a $25m-$40m valuation, then everything needs to be multi-billion dollar outcomes. The reality is lots of companies get acquired for $300m-$700m, and if you can return your entire fund at those exit numbers, then why not! Own 10%-20% at a $4m-$8m valuation. Give everyone optionality. Founders win. Investors win. Win Win Win.
We are all about winning. Returning capital. Investing in great founders with big ideas tackling areas where we are interested and can be helpful. The right founders see this as a winning playbook and recognize that dilution doesn’t ultimately matter if they reach the finish line they are shooting for.
