I strongly believe in Howard Marks’ framework that for better than average investing performance (i.e. beating the benchmark), an investor needs to be non-consensus-and-right. My own derivative framework for venture investing is to look for High-Signal-Non-Consensus deals – companies where I am catching strong leading signals, but which the investor-crowd is struggling to understand.

Executing this strategy well requires consciously looking for:

(1) Overlooked markets, and/ or;

(2) Underestimated founders.

If both the market and team were hot, the company by definition, would be consensus. Consensus deals get significantly bid up in price, and as Howard Marks frequently says, high prices indicate low future returns. Therefore, through both learning from OGs like Howard Marks and observing my portfolio’s behavior over the last decade, I have gradually come to believe that entry price definitely matters in venture investing.

While evaluating teams, the role of a VC is often defined as that of a Picker. The best GPs possess a combination of 3 abilities:

1/ Analyzing tangible skills for founder-market fit.

2/ Using past experiences to pattern-match for intangibles like grit.

3/ Having a 3rd filter of intuitive judgment that may override the previous two.

While these features are cool for venture capital in general, they might still fail during the specific quest for identifying underestimated founders. By definition, many of these founders don’t have classic indicators of tangible skills such as Ivy League backgrounds, Big Tech work experience etc. Further, they can have quirky, irreverent, or misfit personalities, so pattern-matching with past venture-backable personas will also not give the right output.

The 3rd feature of intuitive judgment becomes overwhelmingly important in this scenario. Therefore, to describe a venture investor who is on a conscious quest to discover underestimated founders, I prefer the framing of a ‘Talent Scout’ over that of a Picker.

To highlight the mindset of a Scout, here’s a cricketing story once shared by the famous Pakistani bowler Shoaib Akhtar, the fastest in the world at that time who regularly hit the 150-160 kmph range. As an unknown player harboring ambitions of playing for the national team, Shoaib once turned up for trials that were being run by legendary cricketer Zaheer Abbas. More than 3,000 kids turned up so to grab Mr. Abbas’s attention, Shoaib started running laps around the 3 km cricket ground in sweltering heat. A kid hungry enough to be doing this madness caught the legend’s eyes. He asked Shoaib to bowl one ball at the nets, and the rest is history!

The mindset of a Talent Scout is to focus on developing a ‘Feel’ for talent, judge how strong this Feel truly is, and then have the courage to let it become the basis of strong conviction even in the absence of other tangible signals. What’s the source of this Feel, you ask? That’s the alpha, the x-factor of the Scout. Sometimes it’s a unique worldview of what it takes to win in that particular game. It can also be just a superior reading of human behavior. Often, Scouts can access a subconscious intelligence, built up over many years but still hard to precisely explain.

When meeting non-consensus founder talent, I have found adopting the mindset of a Scout to be immensely helpful. It’s a very different context from evaluating a typical venture-backable persona or a relatively proven team, and therefore, this change in mindset leads to an interaction of a very different flavor.

The hope is that having a talent scout mindset leads to an increased likelihood of non-consensus-and-right investments, thus positioning the portfolio for generating venture alpha.

Closing out with this line from my friend Manish Singhal who runs the deeptech fund Pi Ventures – “We don’t have proprietary deals. We create a proprietary view on the same deals everyone sees.”

PS: if you liked the concept of scouting underestimated founders, do check out my post ‘Reputations and Underdogs in VC‘ which tackles whether spending time with the laggards in your venture portfolio makes sense or not.

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