Our Philosophy: Creative Deviance
The Problem: Venture Capital Regresses toward the Mean
Two features of venture capital induce mediocre results:
- VC is a highly quantified activity. Any detail that can be converted into a countable metric is. Quantification is beneficial in that it lets us measure our performance. Returns matter, and they must be calculated. But such counting also increases the salience and gravity of the central tendencies: the mean, the median, and the mode dominate.
- VC is a highly risky activity. Though startups’ prospects improve as they grow, fully 97% of seed-stage startups fail to exit. This is nothing to fear. Experienced VCs understand that the game is to lose $1 million twenty times over in order to turn a single million-dollar investment into a billion-dollar return. Still, losses induce fear, apprehension, and timidity.
The combination of high risk and comprehensive quantification means that venture capital tends to regress towards the mean. VCs start by watching the benchmark to measure their performance and to stay above it.
However, the inevitable losses VCs incur lead them to fixate on the benchmark, hoping that, if they can at least match it, their fund and reputation will be saved … or at least adequate.
Sooner or later, the Zen of mountain biking asserts itself: the log you are staring at is the log you will hit. Afraid of underperforming the benchmark, VCs try to recreate the practices of firms achieving the benchmark. But they’re already behind the pack. At best, they pick up the scraps other firms leave behind.
Fear of risk leads typical VCs to seek safety in numbers, which leads them to replicate the ordinary. Predictably, fixating on the benchmark, becoming a face in the crowd, induces mediocre results.
The Solution: Creative Deviance
Some numbers in the VC world have an undeniable and compelling internal logic. For example, venture capital is about making money grow, and net IRR is the most direct measure of how capital has multiplied. Therefore, no VC can deny the importance of IRR without contradiction.
Many other numbers and norms in venture capital are largely conventional. For example:
- Why should funds run for 7–10 years — not more, not less?
- Why should the typical LP be a family office on the East Coast or a university endowment fund?
- Given the existence of a secondary market for pre-exit unicorns, why should smaller funds restrict themselves to early-stage startups?
- Why should the investment and innovation cycle in Silicon Valley be so geographically closed?
- Why do Stanford graduates enjoy a reputational premium even before they’ve proven themselves?
These typical beliefs and practices are conventional, not rational. They are common because they seem safe, not because they’re smart.
The safe and the ordinary have a long pedigree. Most very bright people focus on how to perform the ordinary well: how to build a better mousetrap, how to build mousetraps more efficiently, how to identify the next Google of mousetraps.
Generating extraordinary returns, however, requires deviance.
Thomas Kuhn, perhaps the greatest American philosopher of science, studied the history of scientific progress. He found that it follows an irregular pattern: relatively long periods of mundane research on routine questions performed by more or less able scientists interrupted by brief, revolutionary phases of dramatic change.
What catalyzes revolutionary phases are ideas, like heliocentricity, space-time, and quantum theory, that deviate from existing paradigms so drastically that they are usually considered incomprehensible or insane at first. All such deviant ideas originate in the deviant minds of those with the perspicacity to detect the contradictions and inadequacies in conventional wisdom, to see the folly of common sense.
Conventional thinkers doing conventional work tend to reject deviants, especially the brilliant ones. Ask Galileo. The norm abhors deviance because it is a threat. In the best case scenario, the deviant supplants the norm. At a minimum, deviants destabilize the norm by revealing alternatives.
The trick is identifying the most creative deviants — those who diverge from standard practices and models far enough to herald a revolution while making invested capital grow. Each area of deviance has its own norms to overthrow and its own indicators of success:
Tech’s luminaries — Steve Jobs, Mark Zuckerberg, Jeff Bezos, Elon Musk, Masayoshi Son — have many superficial attributes in common: they are all wealthy, middle-class, Western-educated men. But they also share a deeper trait: they are not necessarily content. Each is possessed of a certain narcissism that gives them the confidence to try and change the world as well as a certain insecurity that drives them to prove themselves and make the world take notice.
These deviant tech magnates show that greatness is not coincident with happiness or satisfaction. Instead, successful deviants take an adversarial stance towards the norm — they see the norm as a challenge and seek to defy it.
Sometimes deviant people only flourish in combination. Together, the Beatles were much better than the mere sum of John, Paul, George, and Ringo. Tycho Brahe’s expensive equipment and comprehensive measurements would have been worthless without Johannes Kepler’s mathematical aptitude.
As VCs, our job is to identify the hungry geniuses who want more from life, who are determined to change the world, and invest in them to feed their vision.
No mousetrap or mousetrap factory is deviant. Rebranding mice as ethically sourced animal protein and developing an app to connect mouse catchers with amateur, early-adopter home cooks and endorsed by innovative celebrity chefs is deviant … and scalable.
Deviant ideas do not seek niches in markets, they create markets. Doing so also gives them a privileged, potentially monopolistic position in those new markets. Thinking outside the box might yield dominance over the box. Thinking outside of boxes yields dominance over the box market.
Many VCs constrain themselves with predefined approaches, focusing on investments that conform to a particular thesis, working in a particular space, or at a particular stage of development. That’s fine. It’s what they know. It’s where they feel comfortable. But, in effect, such constraints merely reduce the sample from which the benchmark is calculated. Such specialization does nothing to assuage fear and avoid replication.
By committing ourselves to creative deviance, our best-case result is equal to the best-obtainable result, not just the best in our restricted domain.
The first direct image of a black hole was produced thanks to an algorithm developed by a team led by then 23-year-old Master’s student, Katie Bouman. The richest man in China, Jack Ma, barely passed the university entrance exam on his third attempt, graduated with a BA in English, and has reportedly been rejected by Harvard Business School ten times. Both deviate from the demographic norm, and both have achieved great things.
Genius has no demographic profile. The point is not that we should expect to find brilliant, unorthodox founders and ideas in unexpected places. The point is that we should eschew expectations of what bodies contain great potential.
We seek and find founders who are virtually plagued by their own creativity, whose passion gives them no rest, and for whom the world is not enough. And then we go long on their deviant projects.
When it comes to growing capital with technology investments, no country — let alone region — can compete with Silicon Valley. Its performance is unparalleled. The Silicon Valley tech sector generates roughly $535 billion annually. Were it a country, California’s GDP would make it the world’s fifth largest economy. There is a strong, undeniable reason to focus investment here. Silicon Valley isn’t the norm; it’s the locus of creative, technological deviance.
However, the map of where to source investment capital is very different. The country with the highest wealth per capita is Luxembourg, with 27% more than the USA. The country with the highest private investment relative to GDP is Guinea, and the rate in China is more than twice as high as in the USA. Israel has more unicorns per capita than any other country.
Just as genius knows no gender, age, or color, smart capital knows no home or borders. Geographically deviant capital is equal to old money in all respects but access.