Common investment 'rules of thumb,' like avoiding tools businesses, are often based on outdated pattern matching and can cause VCs to miss generational companies like Canva. Instead of relying on these heuristics, investors should use first-principles thinking to analyze why a product truly needs to exist, conducting their own research to find the underlying truth.
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The most successful venture investors share two key traits: they originate investments from a first-principles or contrarian standpoint, and they possess the conviction to concentrate significant capital into their winning portfolio companies as they emerge.
Investors don't need deep domain expertise to vet opportunities in complex industries. By breaking a problem down to its fundamentals—such as worker safety, project costs, and labor shortages in construction—the value of a solution becomes self-evident, enabling confident investment decisions.
Successful startups tap into organic customer needs that already exist—a 'pull' from the market. In contrast, 'conjuring demand' involves a founder trying to convince a market of a new worldview without prior evidence. This is a much harder and less reliable path to building a business.
When evaluating a startup, don't accept analogous trends as proof of demand. For example, Drift's pitch deck used consumer messaging growth to justify B2B marketing software. A better approach is to find direct evidence of business users already struggling with the specific project the product addresses.
Instead of searching for a market to serve, founders should solve a problem they personally experience. This "bottom-up" approach guarantees product-market fit for at least one person—the founder—providing a solid foundation to build upon and avoiding the common failure of abstract, top-down market analysis.
A core investment framework is to distinguish between 'pull' companies, where the market organically and virally demands the product, and 'push' companies that have to force their solution onto the market. The former indicates stronger product-market fit and a higher potential for efficient, scalable growth.
Product-market fit can be accidental. Even companies with millions in ARR may not initially understand *why* customers buy. They must retroactively apply frameworks to uncover the true demand drivers, which is critical for future growth, replication in new segments, and avoiding wrong turns.
Strict investment theses (e.g., "only second-time founders") are merely guidelines. The high volume of meetings required in venture capital provides the essential context and pattern recognition needed to identify exceptional outliers that defy rigid heuristics.
When evaluating revolutionary ideas, traditional Total Addressable Market (TAM) analysis is useless. VCs should instead bet on founders with a "world-bending vision" capable of inducing a new market, not just capturing an existing one. Have the humility to admit you can't predict market size and instead back the visionary founder.
Experienced VCs may transition from rigid analytical frameworks to an intuitive search for outliers. Instead of asking if a business plan 'makes sense,' they look for unusual qualities that challenge their worldview and hint at massive potential.
