AI is an exponential technology and therefore, the “winners” deserve significantly higher valuations. But few can access them. Therefore, the quest for non-consensus-and-right still stands.
I think all of us are still systematically underpricing the extent of value AI is going to unlock for both enterprises and individuals.
As with compounding, the human brain isn’t wired to grasp exponentials. And the outcomes AI will drive over the next few decades are honestly unfathomable in humanity’s current context.
If you operate with this premise, it makes sense why category-defining companies are being valued at trillions, compared to going public at $10-100B in the 2010s.
This dynamic should reflect across the startup financing stack, and the reason why early and growth investors today are paying up for the best companies.
As long as you can be more-right-than-wrong in underwriting these companies as category-winners, beyond a certain level of de-risking/ PMF, the entry valuation really doesn’t matter because the commensurate exit valuations have also gone up dramatically.
I think a16z was one of the earliest VCs to grasp this change and also have the mental plasticity and capital war chest to execute behind this philosophy.
What is unclear to me is: while the power law winners in both public and private markets will keep going up in value without any real ceiling, does the median venture exit outcome also similarly increase in value? Eg., does the $100-250M M&A/ secondary sale outcome from the 2010s become the $5-10B outcome in 2030?
‘Cos if that’s the case, then it makes complete sense why entry valuations in YC have gone up from $10M a decade back to $50M today. And all pre-seed and seed investors like us should willingly pay up for whatever we deem to be the “best” consensus companies in our deal flow.
Another point: for pre-seed & seed stage micro VCs like Operators Studio , I expect secondary sales during growth rounds to constitute a large portion of our exit outcomes. I asked ChatGPT to analyze how Series C pre-money valuations in US startups have evolved over the last decade.
Interestingly, the median Series C pre-money valuation rose from approximately $75M in 2016 to $320M in 2025, a little over 4x. Here’s the annual trend:
So, it’s not illogical that seed valuations should be expected to go up by a similar factor during this time period, especially in an efficient venture market like the Bay Area.
It’s obvious now that accessing growth rounds in the very best companies is delivering early-stage-like venture returns in this market. However, the reality is that beyond a handful of top VCs, most of us fund managers neither have this access nor the fund size to do these types of deals.
For us emerging managers, the equation still stays the same – our best bet is to find non-consensus-and-right companies early enough.
It’s hard to find non-consensus teams in consensus fishing ponds like Stanford, ex-foundational model folks, repeat unicorn founders, and celebrity execs stepping out to startup.
We will need to look beyond these channels, back non-obvious people from non-pipeline backgrounds, perhaps fish outside the US.
While the venture industry thrives on standard pattern recognition, outlier outcomes often lie in narrative violations of these patterns. But how does one spot these diamonds hiding in plain sight?
As I was analyzing some patterns in the kind of deals I was seeing over the last few months, something stood out. Most deals that I see tend to fall into 3 buckets:
#1 Clear “No” – it’s clear that there is a lack of mutual fit. Easy to move on.
#2 Clear “Yes” – I want to thump the table and invest. The bar for this is high and therefore, deals in this bucket would be max. 1-2 per quarter.
#3 Not sure – I like a few things about the opportunity but also see major question marks in other areas.
Bucket #1 accounts for the majority of any VC’s deal flow. A typical investor will evaluate hundreds of deals in a year and will invest only in a handful. So the VC job description itself is to reject at scale and anyone in the industry either already has or goes on to develop the mental capacity to do this.
Bucket #2 is a dream for any VC as these deals inspire high internal conviction in a very organic way. Though this conviction may or may not align with what other investors think, still one feels great about doing such deals as strong VC investors tend to be independent thinkers and follow their internal compass. If this conviction also aligns with other high-quality investors, then even better! Examples of this Bucket that I have seen in my career include Lenskart, Delhivery, and (I would like to believe) a majority of the Operators Studio portfolio.
Bucket #3 is what I call the “Middle Zone” of venture deals. In these opportunities, there are some things to intensely like and also a few question marks to temper these positives. Some personas of the Middle Zone from my recent deal flow include:
Strong founder going after a bad market.
A talented founder but weak founder-market fit.
A market with massive tailwinds, but weak founder-market fit.
A pedigreed founder who has just stepped out of a Big Tech, only with an idea and zero traction.
A very young (therefore, generalist) founder, often <2 years out of undergrad, with a limited track record and/or traction to diligence on.
A startup that has been around for a while and is now raising a bridge.
While I am not really “feeling” the opportunity, someone who I rate highly/ who understands the space deeply/ has spent a lot of time with the founders, and has high conviction/skin in the game.
As a venture investor, I am spending a lot of time thinking through the best way to identify & evaluate these Middle Zone deals. While the venture industry thrives on standard pattern recognition (repeat founders, domain expert founders, young generalists, ex-Stanford founders, co-investing with Tier 1 VCs etc.), outlier outcomes often lie in narrative violations of these patterns.
As an example, in my post ‘Three unicorns and a VC‘, I wrote about how Amagi was an unpolished diamond hiding in plain sight that most venture firms missed. I don’t want to miss the next Amagi that comes to me!
As accomplished angel & now VC investor Ben Narasin once said on a podcast:
There are deals we should do, there are deals we shouldn’t do, and then there are the ones in the middle. We make all our money in the middle ones.
-Ben Narasin
The fact that Middle Zone deals are non-obvious makes them less competitive and therefore, inefficiently priced, lending them well to giant outcomes when the bet turns out to be right. Hence, every VC investor worth its salt needs to have some mental models and heuristics in place to deal with them.
Here are some high-level guiding principles I have learned and am using for Middle Zone deals (more detailed heuristics are my secret sauce😉):
Middle Zone Case
Approach
Strong founder going after a bad market.
Mike Maples of Floodgate says (paraphrasing) – “A strong founder will ultimately pivot to a good market”.
My investing style is founder-first. So, strong founders going after supposedly bad markets are fair game for me. Though I would definitely try and ask – “If this founder is strong, why has she chosen this market to begin with?”
Also, I don’t find spending time on market sizing at the seed stage to be particularly beneficial. For why I believe this, check out my post ‘The TAM Fallacy At Seed Stage‘.
A talented founder but a weak founder-market fit.
If a founder is strong but the founder-market-fit is weak, I try and answer the question – “Can this market be won by first-principles thinking and hustle?”.
Many areas in Consumer Internet and Enterprise Software lend themselves well to young generalists, while areas like hardware can be excruciatingly painful to execute on and require a founder persona who is prepared for it.
A market with massive tailwinds, but weak founder-market fit.
This one is tricky. A working POV is that a “hot” market will get crowded very quickly and therefore, a founder without a clear right-to-win in it will struggle to build a large, enduring business.
A pedigreed founder who has just stepped out of a Big Tech, only with an idea and zero traction.
This case needs all art. Every context will be different but as an approach, important to understand: (1) Backstory of identifying the problem statement and leaving a cushy job to start up.
(2) Personal life story – motivations, adversities, aspirations, chip-on-shoulder.
A very young (therefore, generalist) founder, often <2 years out of undergrad, with a limited track record and/or traction to diligence on.
Again, this stage is all art. I like to look at 3 things here: (1) Does the founder fit a few “spiky” personas I like to back? A few I have written about before include storyteller vs scrapper and engineering dhandho. I would also include the college builder/hacker in it. A catch-all I like to use for these personas is born-to-be-founder.
(2) Does the market they are going after lend itself well to young generalists?
(3) Has the founder been able to acquire some early users/ customers that I can speak with?
A startup that has been around for a while and is now raising a bridge.
While I am not really “getting” the opportunity, someone who I rate highly/ who understands the space deeply/ has spent a lot of time with the founders, has high conviction/ skin-in-the-game in the opportunity
While I am not really “feeling” the opportunity, someone who I rate highly/ who understands the space deeply/ has spent a lot of time with the founders, and has high conviction/skin in the game.
This will vary a lot by context but as I said in my post ‘An Investing Framework to Find Startup Diamonds‘, one way of sourcing high-signal-non-consensus opportunities is (quoting the post): “a respected investor, sometimes a domain expert, has taken the time to evaluate & build high conviction around the company. Or a visionary customer is taking a bet, partnering with them in building the early product”.
While evaluating these signals, especially when they are from other investors, I find it useful to ask: “Is this deal amongst this investor’s best ideas?“.
I know that’s a lot to digest so let me give you the TLDR of what all the above analysis is trying to say:
Given Power Law, the most important thing in venture capital is getting into the companies with monster outcomes. Only the hits matter.
Based on history, many of these monster outcomes looked like weird companies in the beginning. Hence, having a strategy to sift these out of the Middle Zone is what gives a VC the Midas touch, and what at least I aspire for.
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