When they Zig, you Zag: The importance of not following the crowd in Venture Capital
The 1998 book titled When They Zig, You Zag by Siimon Reynolds provides many bits of general wisdom, but the title itself offers the most value: Don’t follow the crowds.
The current Venture Capital environment is very much stuck in a follow the crowd mentality. Between FOMO (Fear Of Missing Out) and positive reinforcement caused by social media “tailor made” content selections, it is easy to drift into a world of Apps, AI, Blockchains and Virtual Reality.
Being contrarian for the sake of being contrarian offers no real value. The real value of not following the crowd mentality is to find the best opportunities that others may not see. It enables us to critically think and see beyond the hype.
The best ideas quite often sound very bad. The crowd wisdom routinely rejects the best ideas, going for uniformity and compliance within the status quo. A decade ago, staying in a stranger’s house or letting a stranger drive you across town was considered a bad idea. We even tell our children to “not talk to strangers”. Both seemingly horrible ideas led to the creation of AirBnB and Uber, each valued at tens of Billions of Dollars.
Mainstream ideas led to a generation of young people fixated on creating Apps and Software, generating a strong blindness to tangible problems that can be solved. Imagine if young people focused on creating cheap energy and curing cancer instead of building an AirBnB for Dogs.
Venture Capital funds quite often invest in packs, diluting their exposure and acting as a crowd. Smaller funds try to invest in rounds where larger funds participate, and quite often act as disciples to a deep pocketed messiah.
In a world of cheap capital and a general lack of good ideas, VCs are in a tough spot. Limited Partners quite often pressure the fund to focus on specific over hyped areas, limiting the fund’s ability to not follow the crowd. This lack of variety in turn creates a high ratio of capital per feasible company, leading to reduced potential returns.
This investing culture indirectly punishes Outliers that have enough vision to go against the crowd and find untapped opportunities. My Venture Capital Firm Outroll, focuses mostly on tangible items. I quite often hear other VCs saying “Hardware is too hard” or “we just invest in software”.
By 2030, two thirds of the global middle class will be based in Asia, generating the largest buying power to ever exist in human history. Any competent VC should strategically enter this space, however most of Silicon Valley will miss out on the largest consumer market to ever exist.
The Venture Capital focus on software products also expose them to greater risks than most other industries. When people’s financial situation becomes tougher, the first things to be cut are online subscriptions — People tend to prefer eating instead of paying for Spotify Premium.
Consumer habits are changing greatly, mostly when it comes to Millennials. Millennials prefer experiences to things, spending less on the ownership of tangible items than previous generations. This trend is reversing, as they are becoming older and starting their families, increasing demand for tangible items.
There is a huge gap in capital availability for western companies to enter into the Asian market. If the trend does not change, western economies will miss out on the biggest opportunity since the Internet itself.
The center of economic gravity is drifting towards Asia. It will take a massive amount of capital for the western world to maintain economic prosperity in the next decades. It will take dozens of large funds to enable western startups and companies to remain relevant in the region.
Venture Capital can be the key driver in the largest growth period in human history, as long as they zag when everyone else zigs.