For the VCs, finding alpha is all about identifying the diamonds in the rough – the startups that are tackling seemingly unsexy problems or operating in markets considered “cold”. The proof is in the pudding. Looking at the list of ‘hottest’ trend in the past 10 years, the most valuable company built each year didn’t correlate with the theme
We’ve seen this scenario play out again and again: a theme becomes ‘hot’ and a non-stop barrage of VC funding follows. But the chart below, by Digital Native, tells an interesting story. Often, the most valuable company built in a given year is not part of the ‘hot’ theme. What should we make of it?
It’s crucial to look beyond the current hype cycles to uncover hidden gems. This approach aligns perfectly with the concept of “pattern breakers” – individuals and companies that challenge the status quo and defy conventional wisdom. You can read my takeaways from Mike Maple’s Jr Pattern Breakers book.
There are several takeaways for both founders and VCs, let’s unpack them in the short post below.
Takeaways for founders
- Timing matters less than conventional wisdom suggests – it almost doesn’t matter when you start. In fact, the earlier the better.
- Focus on fundamentally valuable problems rather than current trends– Consider focusing on areas that are not currently “hot” but have the potential to become popular in the future. For example, healthcare, consumer products, and education are all areas that have historically been challenging for tech startups, but there are reasons to believe that they may be poised for growth in the coming years.
- Focus on building businesses that have the potential to be outliers. I love that the examples are pretty much bang on the core thesis of our firm, Remagine Ventures, including consumer, gaming, and digital media.
- Consumer startups have fallen from favor, receiving just 7.1% of Seed capital in recent years (down from 14.3% in 2019). This reduced competition creates opportunity, especially as AI enables new consumer experiences. The next $100B AI company is likely to be a consumer application – probably in commerce, online video, or gaming.
Takeaways for VCs
Venture capital is fundamentally a business of outliers. The data tells a striking story: both “good” and “great” performing funds have roughly 50% loss ratios – meaning half their investments return less than 1x. What separates the great funds? They get 90%+ of their returns from 10x+ investments.
- Pattern recognition can be a liability if it creates blind spots to new opportunities
particularly in pre-seed investing. Don’t get blinded by the trends. The best ideas look crazy or impossible at first. This requires a keen eye for spotting potential, a willingness to take calculated risks, and the patience to see these companies through their growth trajectory. - “Being early and being wrong often feel the same” – conviction and patience are crucial.
- Look for markets where reduced competition enables better entry prices and ownership levels. Industries and markets that have previously been overlooked by most VCs, but now are ripe for disruption. Don’t chase “hot” deals, as these deals are often overpriced. Instead, VCs should focus on finding undervalued companies with the potential for significant growth.
In venture capital, as in entrepreneurship, the greatest returns often come from being right when others think you’re wrong. The key is identifying which “cold” markets today will become tomorrow’s hot sectors – and having the conviction to act before the crowd arrives.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
- Finding Alpha: Why the Best Startups Often Buck the Trends - November 25, 2024
- Weekly #FIRGUN Newsletter – November 22 2024 - November 22, 2024
- Breaking the mold: Pattern Breakers book review - November 18, 2024
