Alpha in the Age of Agreement

Last week, over a stream of hipster coffees and expensive bottled waters, I had a series of catch-up meetings with VC colleagues and VC friends in the Bay Area. In every conversation, a now-familiar set of topics lines itself up for discussion: the rising valuations and sizes of Seed and Series A rounds (often starting at $100M pre-money), the frenetic and rapidly accelerating pace of investment decisions (measuring in hours), and — crucially — the narrowing set of signals that could conceivably assemble themselves into an investible thesis.

Anecdotes from a bubble. Across the four days, a few anecdotes stand out: stories of VCs staking out AI labs on campuses around the country; stories of deals closing in a matter of hours over a weekend with no product; stories of outstanding sales leaders refusing work at freshly minted unicorns, convinced that their exploding revenue is a leaky bucket of churn; and — most poignantly — the successful, exited, repeat founder telling me in a moment of honest clarity that “it’s just not any fun anymore” because his domain (like nearly every other) feels crowded with “100 people all running down the same path” as him.

Rationalization. When you talk to VCs these days — they use a few tropes to defend their decision-making. Sometimes, “revenue is just exploding” seems to be both true and compelling, but in too many cases there are nagging questions about durability, churn, and uniqueness. In a lot of cases, “the founders are just amazing” despite no revenue at all has become the fallback logic, taking the place of any robust analysis of product, technology, or competitive landscape. There isn’t really time for any of that. And finally — and I heard this from at least two experienced VCs — the rush to invest is justified by a rush to get in and out before the acknowledged bubble explodes in our face. One VC said five years, one said two, but they both want to play the game on the field and ride the wave before it’s too late. There will undoubtedly be some massive winners in the AI-fuelled race to reinvent software, and so this gold rush is not at all irrational.

The age of agreement. What is striking to me is the widespread wall-to-wall agreement of so many decision-makers in the tech business right now. There are a few truths that seem obviously true, and they are clear to just about everyone. Moreover, we have all realized them at more or less the same time.

• We all agree that AI will profoundly reshape business. It already is.
• We all agree that LLMs, multi-modal generative models, and reasoning models are powerful tools that unleash new value vectors.
• We all agree that prosumers and enterprises are eagerly lapping up these new products, resulting in unprecedented revenue growth for many players.
• We all agree that downstream investors (Series B and beyond) are willing to follow on with ever larger check sizes.
• We also all agree that the “right” founders are (1) located in the right place (SF), (2) correctly pedigreed (the right lab or startup hyperscaler), and (3) part of the right networks (YC, Stanford, Neo, ZFellows, Prod).

There appears to be only one game in town right now and one way to play it: find a team of legible, pedigreed founders to build the next big AI application and focus on raising a big follow-on round almost immediately. Because everyone is playing the same game, they are chasing the same opportunities. Founders are going after the same spaces with similar products. VCs are going after the same narrow set of founders. All participants in this game understand the rules, and — thus — prices get bid up extraordinarily high and very quickly. Only time will tell if exit sizes will be large enough to justify the entry valuations and the shotgun wedding dynamics that are governing the landscape. As in every bubble, a handful of outlier cases will mask the realities of billions of incinerated capital. And as in every bubble, by the time the bubble dynamics are clear, the winners have typically long-since been minted.

Alpha in the age of agreement. When the entire market agrees on nearly everything, it’s difficult, frustrating, and painful to be contrarian. To generate real alpha, one has to be short-term contrarian, long-term right, and — crucially — close enough on the timing that the contrarian can flip to consensus within a reasonable timeframe that works with fund lifecycles and cashflows. Doing this well is tricky at any time, but it’s particularly tricky in an age of agreement. The zeitgeist pushing everyone to focus on a few ideas is strong — and it’s not necessarily wrong. So follow-on investors and even customers might be more reluctant to bet on something that seems off-piste. Moreover, the reputational cost of being wrong is higher when everyone else is in violent agreement. Finally, it would be imprudent for any investor to build a portfolio comprised solely of one type of risk (either consensus or contrarian).

At Angular, we’re trying to approach this unique time with enough mental flexibility to make smart investment decisions across the matrix of possibilities, which I’ve sketched below.

Press enter or click to view image in full size

Historically, we’ve done our best and most rewarding work when we’ve invested in pre-traction and illegible companies. That said, we have invested in known-good (sometimes repeat) founder teams in the past. We’ve also increasingly focused on some traction at pre-seed, especially when a company is doing something exceptionally weird. The weirder a company is, the less likely it is to easily raise follow-on financing. In such cases, we believe that some early traction is both a signal of potential future follow-on financing and a cash-flow insurance policy in case that follow-on capital takes too much time to arrive. We’re trying to strike a balance. We think it would be foolish to slavishly avoid any investment that stumbles too close to consensus and starts to attract heat. At the same time, we wouldn’t be venture capitalists if we didn’t maniacally pursue the hunt for “true alpha” in its purest form.

We are living through a very unique moment. This age of agreement will not last forever, and we are already seeing some early cracks in the wall of consensus — at least at the lowest technical levels. Wherever you are on this opportunity matrix, we’d love to talk. If you’re building at the center of the zone of agreement, we’d love to learn from what you are seeing. And if you are building something weird out on the edges, we’re super intrigued and eager to help. Either way, please reach out. It’s never too early, or too weird.