From Lone Wolves to the Herd: Consensus and Independent Thinking in VC

Lone wolves think independently; members of a herd influence one another. #TheHerdsConsensus Financial markets are fundamentally made up of people and the ways their behavior influences one another. Behind many financial phenomena lie the forces of human nature. Look through finance’s endlessly changing appearances to see the underlying truths that do not change. When we participate in financial markets, we are like sheep in a flock. Many of our views and actions seem to arise spontaneously, but are really the result of being “assimilated” into market consensus. Behind many complex and changing financial phenomena, you can see the “consensus of the herd.” ---- Venture capital has now moved from the “era of lone wolves” to the “era of the herd.” Investors used to be more like lone wolves. Now, with venture capital flourishing and so many people working in it, they have begun influencing one another. Investors frequently exchange information and discuss deals, and look at much the same things. The result is a high degree of similarity in the sectors and companies they invest in. When AI, biotechnology, or software becomes popular, everyone rushes after the same deals. Once those deals cool off, everyone loses interest together and moves on to the next area, such as new-energy vehicles or autonomous vehicles. Under the influence of herd behavior, the chances of backing a good venture diminish. So who can find good ventures? First, those who can maintain the independent thinking of a lone wolf. Second, investors who come from other disciplines. Their different perspectives and ways of looking at problems can help them uncover promising ventures. ---- The same pattern exists outside venture capital, so the lesson applies there too. What he is describing is really a way of thinking about problems. First, do not let group effects shape your thinking and decisions. Second, keep stepping back to look from the outside. Even pretending to come from another field can help: look at what you are doing through the lens of another discipline.