First Principles: VC’s Guide to Non-Consensus Deals

Because following the herd might lead you straight off a cliff

If Silicon Valley venture capitalists were animals, they wouldn’t be the wise owls or cunning foxes they fancy themselves to be – they’d be Instagram-obsessed lemmings with Patagonia vests and All Birds sneakers. Much like how your entire friend group somehow decided to get into sourdough bread making during lockdown, VCs have an uncanny ability to simultaneously “discover” the same investment trends faster than teenagers clone TikTok dances.

Picture this: A VC walks into a pitch meeting the same way my grandmother approaches new technology – with a mental checklist of patterns they recognize, desperately hoping it matches something they’ve seen before. “Oh, it’s like Uber but for _____” has become the startup equivalent of “Have you tried turning it off and on again?”

But here’s where things get interesting (and by interesting, I mean potentially catastrophic for innovation): This pattern-matching addiction is about as helpful for finding the next big thing as using a 1995 MapQuest printout to navigate modern-day San Francisco.

Consider these classic VC pattern-matching greatest hits:

• “We only invest in founders who dropped out of Stanford” (because apparently, finishing your degree is a red flag)
• “It needs to be a SaaS platform with a marketplace component” (bonus points if you throw in ‘AI-powered’ somewhere)
• “The founding team must have previously worked at FAANG” (because innovation only happens within a 50-mile radius of Mountain View)

The irony? The most successful companies in history – from Apple to Amazon – weren’t “pattern matches.” They were non-consensus deals that most VCs actively avoided. These contrarian bets, which flew in the face of conventional wisdom at the time, ended up being some of the greatest returns in venture history. Yet today’s VCs probably would have passed on them faster than a WeWork pitch deck in 2023.

Here’s the real kicker: While every VC claims to be looking for “the next big thing,” most are actually searching for “the last big thing, but with a slightly different logo.” It’s time to break free from this collective hallucination and get back to actual first-principles thinking – you know, the kind that doesn’t require checking what Y Combinator’s latest batch is doing before making an investment decision.

In the sections that follow, we’ll explore how to break free from the lemming lifecycle and embrace true first-principles thinking in venture capital. Just promise me you won’t turn this into a pattern-matching exercise about how to pattern-match less. (Yes, I see the irony here.)

Break It Down Like Aristotle (But With Better ROI)

Listen, if Aristotle were a VC today, he’d probably be crushing it on Twitter with threads about deconstructing pitch decks while sipping kombucha in San Francisco. But his core principle – breaking things down to their fundamental truths – is exactly what modern VCs need more than another AI-powered SaaS platform for pet wellness.

The Art of Startup Deconstruction

First principles thinking in VC is like performing an autopsy on a living business idea (stay with me here). Instead of asking “What other companies does this remind me of?” (looking at you, pattern matchers), you’re asking “What unchangeable truths make this business actually work?”

Let’s break down a typical startup pitch using first principles:

• “We’re the Uber for dog walking” becomes “What fundamental human need or behavior makes pet care services necessary?”
• “Our AI will revolutionize everything” transforms into “What specific, provable technological capability do we actually have?”
• “The TAM is $50 billion” morphs into “How many real customers with real problems can we actually serve?”

The First Principles Toolkit

When evaluating startups through first principles, consider these foundational elements:

• Physics of the Business: What immutable laws of economics/technology make this possible?
• Customer Truth: What human behavior or need will never change?
• Unit Economics: Strip away the fancy growth projections – what’s the bare minimum viable transaction?

Pro tip: If a founder can’t explain their business without naming other companies, that’s a bigger red flag than a Series A pitch deck with 200 slides.

The Uncomfortable Questions

Here’s where first principles thinking gets spicy. Instead of asking comfortable questions like “Who else invested?” start asking:

• What would make this business work even if all current market conditions reversed?
• If every competitor disappeared tomorrow, what fundamental problem would still need solving?
• Why hasn’t this been done before? (And no, “blockchain” is not always the answer)

The Reality Check: Most “innovative” startups are actually just elegant repackaging of existing solutions. True first principles innovation is as rare as a VC admitting they don’t understand crypto.

The First Principles Paradox

Here’s the wild part: The more you apply first principles thinking, the more you realize how few “innovative” startups are actually building something fundamentally new. But that’s exactly why this approach is so valuable – it helps you find the rare gems that are actually shifting paradigms instead of just shifting buzzwords.

Remember: Elon Musk didn’t create Tesla by asking “How can we make a better Ford?” He asked “What are the fundamental limitations of electric vehicles?” (Though maybe someone should have asked about fundamental limitations of Twitter acquisitions…)

Stop Copying Sequoia’s Homework

Let’s address the elephant in the Zoom room: copying Sequoia’s investment thesis is about as original as naming your dog “Luna” in 2024. Sure, they’re brilliant, but if you’re always following their lead, you’re basically showing up to the party after everyone’s already gone home and the good snacks are gone.

The Copy-Paste VC Syndrome

Here’s what typically happens when a new VC firm tries to “learn from the best”:

• Download every public Sequoia investment memo
• Create a fancy framework that’s suspiciously similar to their famous company evaluation rubric
• Convince yourself that you’ve “adapted” it to your own style by changing the font to Helvetica

Spoiler alert: If you’re reading about a trend in their investment thesis, you’re already six months too late to the party.

Breaking Free from the Echo Chamber

Instead of playing “Investment Thesis Karaoke” with top VC firms’ greatest hits, try these approaches:

• Question Everything:
  • Start with: “This is how the industry works”
  • Ask: “But WHY does it work this way?”
  • End with: “What if everything we know is wrong?”
• Find Your Own Blind Spots:
  • Areas where top VCs aren’t looking
  • Markets they’re too big to care about
  • Problems they’re too Silicon Valley to understand
• Develop Contrarian Views:
  • If everyone’s investing in AI, maybe look at human intelligence (revolutionary, I know)
  • When they go Web3, you go Web2.5 (it’s like Web3 but with actual revenue)
  • While they chase unicorns, you might find some pretty awesome horses

The Anti-Pattern Pattern

Here’s a radical thought: Instead of asking “What would Sequoia do?” try asking:

1. What fundamental problem needs solving?
2. Why hasn’t anyone solved it yet?
3. What assumptions are everyone else making?
4. Why am I still checking Sequoia’s website?

Pro tip: If your investment thesis sounds like it could have been generated by GPT-4 scanning tech Twitter, it’s time to go back to the drawing board.

The Originality Paradox

The true irony? The best VCs became the best by thinking differently when they started. By copying their current strategies, you’re actually going against the very principle that made them successful: original thinking.

Remember: Even Sequoia had to start somewhere, and it wasn’t by copying another firm’s homework. Though if you’re reading this while secretly updating your thesis to match their latest blog post, I saw that eye roll.

Bottom line: First principles thinking means building your thesis from the ground up, not from someone else’s penthouse down. Besides, if you wanted to follow others’ leads, you could’ve just become a consultant. (No offense to consultants, but… you know what I mean.)

Your Portfolio Isn’t A Tribute Band

Remember when every band in the 90s tried to sound like Nirvana? That’s basically what most VC portfolios look like today – cover bands playing the greatest hits of successful funds. But here’s the thing: Kurt Cobain didn’t create grunge by trying to copy Led Zeppelin, and you won’t find the next transformative startup by being the sixth fund to invest in “AI for pet wellness.”

The Cover Band Syndrome

Let’s be honest about what most VC portfolios look like:

• “We’ve got our obligatory AI startup” (just like everyone else)
• “Here’s our Web3 play” (from six months ago…awkward)
• “And of course, our climate tech investment” (because ESG is so hot right now)

It’s like watching a band’s setlist that’s just Billboard Top 100 songs from last year. Sure, it’s safe, but nobody ever changed the world by playing it safe.

Building Your Original Album

When using first principles thinking to construct your portfolio, consider these fundamental questions:

• Market Dynamics:
  • Instead of “What’s hot right now?”
  • Ask “What will be necessary regardless of market trends?”
  • Bonus points if you can explain it without using the word “disruptive”
• Value Creation:
  • Not “How can we copy [Successful Company]’s model?”
  • But “What fundamental human need isn’t being met?”
  • And no, the world doesn’t need another food delivery app

The Differentiation Paradox

Here’s where it gets interesting: True differentiation often looks weird at first. Remember:

• Amazon looked like a money-losing online bookstore
• Airbnb seemed like a crazy way to get murdered
• Uber appeared to be a luxury black car service

The First Principles Portfolio Test:

1. Could you explain each investment without naming other companies?
2. Would these companies make sense even if current trends reverse?
3. Are you sweating a little when explaining your thesis to other VCs?

If you answered “no” to any of these, you might be running a tribute band.

The Authentic Portfolio

Think of your portfolio like a great album – each investment should be distinct but contribute to a coherent whole. And just like how The Beatles didn’t become legends by copying Elvis, your fund won’t make history by copying Andreessen Horowitz’s greatest hits.

Pro tip: If your investment thesis could be mistaken for a Mad Libs version of another fund’s strategy, it’s time for a rewrite.

Remember: The goal isn’t to avoid all common investments – sometimes the crowd is right. The goal is to build a portfolio based on fundamental truths rather than FOMO. Besides, if everyone’s already singing the same song, maybe it’s time to write your own.

Final thought: In twenty years, do you want to be known as the fund that saw what others couldn’t, or the one that really nailed that whole “X for Y” investment strategy of 2024?

Think Different, Make Bank

Let’s wrap this up with some hard truths that would make even Aristotle scratch his head (while checking his AngelList account).

The Real Deal About First Principles in VC

Here’s what actually matters after all this philosophical pontification:

• First principles thinking isn’t just mental gymnastics – it’s your unfair advantage in a market where everyone else is playing “follow the unicorn”
• The harder path (actually thinking deeply about fundamentals) usually leads to better returns than the easy path (copying whatever a16z tweeted about last week)
• You don’t need a physics degree to think from first principles, but you do need the courage to look stupid temporarily to look brilliant eventually

Actionable Next Steps (Yes, Really)

1. Start Small: Pick one upcoming investment decision and break it down to its fundamental assumptions
2. Question Everything: Especially the things that “everybody knows” about your market
3. Build Your Framework: Create a first principles checklist that forces you to examine basic truths before pattern matching

Pro tip: If you can’t explain your investment thesis to a smart 12-year-old, you probably don’t understand it well enough yourself.

The Final Paradox

The beautiful irony is that by thinking from first principles, you’ll often reach conclusions that seem obvious in retrospect. That’s not a bug – it’s a feature. As Einstein said, “Everything should be made as simple as possible, but not simpler.” (Though if Einstein were a VC today, he’d probably be posting atomic physics memes on LinkedIn.)

Remember: The goal isn’t to be contrarian for contrarianism’s sake – it’s to be right for fundamental reasons. Besides, if thinking from first principles was easy, everyone would do it, and then we’d need to find some other way to be contrarian. (Meta-contrarianism, anyone?)

And if all else fails, just remember: Aristotle never had to deal with a down round.

Here’s to thinking different – not because it’s trendy, but because it’s true. Now go forth and question everything (except maybe your fund’s LP agreements – those should probably stay intact).

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