Is a lack of immediate investor interest a sign of failure?

A useful analogy can be drawn from lean startup theory, which emphasizes targeting the 'early adopter' market first. Early adopters are enthusiastic about the initial product and utilize it to address a pressing issue. The primary objective is to conquer this niche market, thereby validating the core business hypothesis and gaining credibility for future expansion.

When pursuing early adopters, a founder's focus should be on refining their customer base rather than the product itself. Identifying customers who resonate with the insight and the associated product is crucial. These customers will readily embrace the offering, resulting in a swift sales cycle where pricing becomes less of a concern.

In the realm of early investors, a mindset fixated on pattern recognition can often overlook unconventional ideas. This is a natural human tendency, as there is comfort in consensus. Yet, amidst the conventionality, a contrarian investor awaits. Therefore, rather than altering the narrative, founders should adapt their approach to potential investors.

The most successful venture capitalists (VCs) often report that the highest returns come from insights that challenge conventional thinking. Peter Thiel, the founder of PayPal and a notable investor, refers to these insights as "secrets" in his book, Zero to One. Such groundbreaking ideas have the potential to create a dominant category winner, ultimately leading to significant returns for the fund.

What characteristics define these "secrets"?

Andy Rachleff, co-founder of Benchmark Capital, has articulated a well-known framework originally attributed to the esteemed investor Howard Marks from Oaktree Capital. He suggests that investment can be understood through a 2x2 matrix. On one axis, you can be 'right' or 'wrong', while on the other, you can be 'consensus' or 'non-consensus'. To generate substantial returns, investors must be both 'right' and 'non-consensus'.

This implies that simply being correct within a consensus framework does not suffice. Consensus implies that the business opportunity is already recognized in the market, leading to increased competition and investment activity. Many successful VCs argue that returns are unattainable in such competitive scenarios, as the opportunity shrinks to a mere race to the lowest price.

VC Mike Maples of Floodgate Ventures emphasizes the crucial role of non-consensus thinking: "It is extraordinarily difficult for a tiny, undercapitalized, understaffed company with zero customers and no market awareness to identify and exploit a new opportunity fast enough to leave all competitors behind. As soon as a business opportunity becomes apparent to even a small number of people, the odds begin to work against the startup…[but] being non-consensus and right affords the startup the time and runway to survive, adapt, and succeed after trial and error without fatal consequences."

While there are instances of highly successful startups that did not possess a non-consensus viewpoint, they are rarer than one might expect.

Marc Andreessen, whose VC firm a16z has backed many of the most notable startup success stories, asserts: "If something is already consensus then money will have already flooded in and the profit opportunity is gone. And so by definition in venture capital, if you are doing it right, you are continuously investing in things that are non-consensus at the time of investment. And let me translate 'non-consensus': it translates to crazy. You are investing in things that look like they are just nuts… It has to be something where, when people look at it, at first they say, 'I don't get it, I don't understand it. I think it's too weird, I think it's too unusual.'"

Many of the most successful tech firms were deemed outrageous at their inception. Investors did not rush in initially because these concepts either contradicted conventional wisdom or were simply too bizarre to comprehend. Notable examples include personal computers, the internet, Bitcoin, Airbnb, Uber, and Twitter.

This illustrates why pitching to VCs is often a numbers game. With a non-consensus (and correct) proposal, many may not understand it or may deem it too contrarian. After numerous attempts — perhaps when hope seems lost — the next VC on your list may resonate with your vision.

Your secret will finally find a believer.

John Hall is the CEO and Co-Founder of Duet Partners Ltd., a startup-to-scaleup advisory firm dedicated to helping ambitious founders navigate funding campaigns at Seed and Series A stages. Over the past 12 years, Duet has collaborated with some of the UK's most promising startups, assisting in raising hundreds of millions. To learn more about our client successes, visit our website.

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