Conviction Capitalists

The Clash of Conviction vs. Consensus

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I frequently interact with people who are getting started in their investing career, whether its the first thing they've done for a job or something they're turning to after years of operating. One of the things that has consistently surprised me is how hard this industry is to parse for people. It's one of the reasons why the vast majority of my writing has been about unpacking venture capital. From founders to other investors, there is value in trying to better understand venture capital not just as an industry, but an ecosystem.

I had a conversation recently with a young investor who was feeling frustrated by the industry, but couldn't necessarily put their finger on what was so frustrating. They had been busy, they had gotten deals done, and they were learning. So why weren't they enjoying the work?

I asked them a question to try and break down to the fundamentals behind why most people want to be an investor. Here's the hypothetical:

Option 1: I give you $500M right now and the fundamentals of your job is just to make 5-10 high conviction investments in the public markets as a long-only hedge fund. No shorting or fancy business. You have all the access because its publicly traded and what your day will consist of is reading, talking to executives, operators, customers, and trying to understand your positions.

Option 2: I give you $500M right now and the fundamentals of your job is to get into the 5-10 hottest Series A/B/C rounds in startups. Your job is pure access; pay up on price, relationships are a means to access; schmooze as needed. You won't have to answer to me on what the company does, only why it was the hottest opportunity.

Which one is more compelling?

To a certain extent, this is venture capital today. The only fudge I had to make is the first option being public markets, only to emphasize what happens when access is not the fundamental part of your job. But the reality is that there are investors in the private markets who are not optimizing for access; they're optimizing for something else.

Heat Seekers vs. Truth Seekers

There are, for the most part, two kinds of venture firms of size and note in the market today: (1) scale-driven and (2) conviction-driven.

Many of the large capital agglomerators that I've written about before in pieces like The Puritans of Venture Capital, are scale-driven. They'll preach the marketing of venture; founder-friendly, innovation focused. But the reality is the scale at which these companies deploy capital is incapable of operating in the same mechanism that venture capital was originally invented for. These firms have too much capital that they need to deploy too quickly for that.

Andreessen Horowitz. Lightspeed. General Catalyst. ICONIQ. Sequoia.

Then there are conviction-driven firms that aren't optimizing for scale; they're optimizing for beliefs. Size isn't necessarily the differentiator. You can deploy $1B fund with conviction. Though you probably can't easily deploy $5B, and you can't deploy it into 100+ companies, at least not with conviction. Conviction-driven firms are optimizing for a small, highly concentrated series of high conviction bets.

Founders Fund. Thrive. Greenoaks.

You may say a lot of these firms are just as big. But think about this. In March 2023, Founders Fund decided to reduce the size of its fund. Not just a little bit. They cut it in half. Shrunk it from $1.8B to $900M. When was the last time you saw a16z opt for a smaller fund?

In some cases, you also have firms that exist in what my friend Ev Randle has called the "dead zone." The messy middle. These are firms that seek scale, but struggle to articulate their conviction. Maybe they want to operate like a Benchmark, but they want to compete with General Catalyst. They slip into a dangerous middle ground where it becomes much harder to articulate their strategy.

Accel. Index. NEA.

Now, here's an important caveat. That doesn't mean these firms are bad. My alma mater, Index, is going to print ~$13B+ of gains this year on Wiz, Robinhood, Scale AI, etc. They're doing just fine.

But as investors try and articulate the strategy that resonates with them; where their heart lies, this understanding of strategy dynamics are pretty instructive in terms of how different firms operate.

Conviction Schmiction

So what makes a high-conviction firm? Because here's the thing. Everyone says they have conviction. Its akin to saying you're "founder friendly" or "rooting from the sidelines." It is so overused that it doesn't mean anything. But the reality is that its not that it doesn't mean anything, its that we've ignored the actual meaning.

Conviction is putting up 76% of your first fund yourself. That's what Peter Thiel did.

Conviction is being willing to believe an idea can evolve, even if it means you have to argue with Fred Wilson about it. That's what Paul Graham did with Airbnb.

Conviction is being willing to build something you know is important, even if people that you respect stop talking to you, or call you immoral, or even try and cancel you. That's what Anduril did.

Conviction is being willing to double a company's valuation less than a year later, even when everyone says thats crazy (pre-AI madness). That's what Thrive did with Stripe.

See, we think that conviction is meaningless, not because it is. But because its rare. It’s so rare, that we assume its shallow marketing. And don't get me wrong, the vast majority of the VC industry is default cowardly. But just because a generation of VCs have sullied the reputation of conviction, doesn't mean it doesn't exist.

Perverse Incentives

What has filled the vacuum of conviction is consensus.

I've written before about how investors have become more focused on incremental outcomes vs. overall outcomes. The example that I've pointed to frequently is Peloton. At its peak, Peloton had a $46B market cap. Today? Peloton has a $3.4B market cap with $2.5B in revenue and they're almost breakeven (-$118M net income). That's not a terrible business. But the journey it took to get there was horrible.

So why did former Peloton investors line up to back John Foley's new company? Because they made money last time. Investors aren't necessary in the business of building generational companies for the long-haul. They're increasingly focused on (1) entry price, and (2) exit price. If the second is higher than the first, that's a win. Regardless of whether the company later drives into the ground because of how it was build. What I've called before "the institutionalized belief in the greater fool."

If you're solving for incremental outcomes, then you want (1) as big of an incremental outcome as possible (2) as quickly as possible. So what do you solve for? First, more swings. More capital, more shots on goal, more chances to invest in big winners. Once you have a big pool of capital, what are you focused on? Deployment. Can’t get to those incremental outcomes if we're not deploying capital. What signifies success in that formula along the way? Markups.

That's where consensus comes in. I've seen companies with 8-figure revenue, doubling, profitable, with 120% NDR struggle to raise. I've seen companies with $250K of revenue raise multiple consecutive rounds, doubling the valuation each time. The biggest difference? Consensus. People want to invest in what other people will invest in because that will attract consensus. Stamps of approval that those incremental outcomes are coming. What I've called The Value Chain of Capital.

Counterpositioned Conviction

So in a world of consensus capital conglomerates, how are you supposed to demonstrate conviction? Simple. You have to avoid playing the game on the field. Unfortunately, if you're at a firm that is culturally setup to play the game on the field then you're probably SOL. Either learn to play their game, or get off of their field.

But if the pursuit of conviction, even more than scale, is compelling to your soul, then there is an answer. You can demonstrate conviction in at least three ways:

Know More Than Anyone

This is another way of thinking about thesis-driven investing. This is my favorite approach to investing (see Contrary Research). The initial quintessential framework for this approach is what Arthur Patterson and Jim Swartz, the founders of Accel, called a "prepared mind."

“It comes from Louis Pasteur . . . chance favoring someone who has a prepared mind. It's having a thesis-based approach to sort out what's interesting"

This can be true of investors, but it is almost always true of founders. Will Quist recently wrote a piece where he quoted Marc Andreessen talking about real vs. fake founders:

"Real founders have spent 5-10-20 years thinking deeply about their domain. They've developed genuine expertise and conviction about what needs to change. 'Fake' founders, by contrast, are looking for problems to solve rather than solving problems they already understand."

That also reminded me of a Steve Jobs quote I've written about before:

"I hate it when people call themselves “entrepreneurs” when what they’re really trying to do is launch a startup and then sell or go public, so they can cash in and move on. They’re unwilling to do the work it takes to build a real company, which is the hardest work in business. That’s how you really make a contribution and add to the legacy of those who went before. You build a company that will still stand for something a generation or two from now. That’s what Walt Disney did, and Hewlett and Packard, and the people who built Intel. They created a company to last, not just to make money. That’s what I want Apple to be."

In a world of consensus-driven scale-focused investors who are solving for incremental outcomes, or attention-centered founders who are most interested in building a brand and getting a bag, be someone who is willing to build an empire. A generational business that will last lifetimes. Because not enough people do that anymore, and that's conviction. And that conviction comes from having spent obsessive amounts of time thinking about how to solve a particular problem.

Bet Bigger Than Anyone

In many cases, some of the most conviction-driven bets have been into ideas that aren't necessarily non-consensus. They may very well seem somewhat obvious. The demonstration of conviction is not the direction, but the magnitude. I return, again, to Thrive's first investment in Stripe.

In 2014, Stripe had already been crowned in many regards. They were a unicorn, valued at $1B+ (a big deal back then). And they had raised from the who's-who: Founders Fund, Sequoia, General Catalyst, Khosla Ventures. Thrive came along and acknowledged that Stripe looked pretty obvious. Maybe not everyone thought it would be a $100B+ company processing more TPV than the average country. But it wasn't a diamond in the rough.

But then, Thrive leaned in less than a year later after the company had been valued at $1.75B and offered them double the price. They didn't even make it a new round, they just extended the Series C. They didn't even announce it; it just leaked. Stripe couldn't even be reached for comment. Thrive knew what mattered was being on the cap table of the most exceptional businesses, and they put their money where their conviction was.

The conviction was not in betting on Stripe. Most of the best firms in the business had already done that. But at double the price, with a massive check (almost 20% of their fund) when the firm was just 5 years old. The conviction was the magnitude of the bet. And it paid off.

Play Different Than Anyone

Finally, you can decide to play a different game. I've often thought (and written) about often is this quote from Stephen Schwarzman, the founder of Blackstone:

"[One] way we thought about building our business was to keep challenging ourselves with an open-ended question: Why not? If we came across the right person to scale a business in a great investment class, why not? If we could apply our strengths, our network, and our resources to make that business a success, why not? Other firms, we felt, defined themselves too narrowly, limiting their ability to innovate. They were advisory firms, or investment firms, or credit firms, or real estate firms. Yet they were all pursuing financial opportunity."

Not to continuously fan boy over Thrive, but here again they've demonstrated conviction in being willing to bend the rules of what is normal. From investing a $1B check into Databricks in one fell swoop, to making $500M+ on a public bet on Carvana when it was one of the most hated stocks around, to setting up a vehicle to buy companies, rather than just invest in them.

What Schwarzman describes as a "why not" is a function of conviction. Not necessarily in a specific bet or company or founder, but in yourself. If your strengths can be applied? Then pursue that.

Why Are So Many Drifting?

Founders, investors, operators, artists, builders, writers, policy wonks; I see in my life dozens and dozens of people who feel as though they're drifting. Why? Because in an over-financialized world where every entity has been optimized for scale and securitizing any inkling of value, we've lost a common mechanism for conviction.

I wrote a few weeks ago about the emotional rawness of those who would seek to be ambitious but hunger for meaning beyond grind culture. In that piece, I quoted Dostoyevsky:

"You sensed that you should be following a different path, a more ambitious one, you felt that you were destined for other things but you had no idea how to achieve them and in your misery you began to hate everything around you."

Some people can thrive as heat seekers. Some people are comfortable just trying to suck the life out of the things around them, in hopes of keeping their own self-hating darkness at bay. But for many, many others, they simply want to "live deep and suck out all the marrow of life." They seek conviction. The engines of corporatism that we've built will rarely offer that. You have to go get it yourself.

Find conviction in a faith, a family, or a freedom. Find conviction in a business that will shake the world in what its capable of. Find conviction in an ideology that should be trumpeted from the rooftops and instilled in every heart. Find conviction in a cause worth fighting for.

Because the reality is that what they say about death is true. No one wishes they had worked more when they die. So don't live for work. But even more common than "I wish I hadn't worked so much" is a more fundamental deathbed regret that many of us are gearing up to have to face on that final day:

"I wish I’d had the courage to live a life true to myself, not the life others expected of me."

Conviction cannot be communal. Either you believe, or you don't. I believe this is also why we try and foist our belief system onto in-group thinking. Because at least if we can just rely on the group, we don't have to feel that empty hollowness of failing to live up to our own convictions. But that is not a life worth living.

So if you're at a fund that operates in a way you don't resonate with? Leave. If you work for a company you're not sure should exist? Quit. If you're building something you're not convinced is earth-shaking? Pivot.

In a world of consensus conglomerates, be a conviction capitalist.

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