Fundamentalists vs. Revolutionaries

There has been and always will be two competing Venture Capital investment frameworks. The lexicon I’ve adopted: Investors are either Fundamentalists or Revolutionaries.

Fundamentalists believe that what’s possible is dictated by the dynamics of an ecosystem. Building in stages on top of solid unit economics is what matters. To Fundamentalists, the journey matters because great companies are built on top of good companies.

Revolutionaries believe that what’s possible is a function of differentiation. Dominance of a big market is the only goal. To Revolutionaries, only the destination matters because success is a function of an amazing team eventually dominating an ecosystem with large TAM.

Fundamentalists believe that financials matter because a company’s enterprise value will eventually collapse to a function of margin, volatility, profit and growth.

Revolutionaries believe that dominance is the goal and financials will follow.

These differences materialize in the advice that a Founder is given by an Investor regarding how to deploy capital and how important systemic de-risking is. It also shows up in how businesses are valued by Investors!

For any business, valuation is a function of the intrinsic value of the current business plus the option value of what can be built in the future. Fundamentalists and Revolutionaries weigh the components of valuations vastly differently. Fundamentalists place a lot of value on the current machine and trajectory of the business while Revolutionaries place a lot of value on the option value associated with the possibility of building a dominant company.

But even with these differences, over the long run the best investors have historically delivered great returns regardless of their philosophy. Great investors spot great opportunities.

What has changed is that liquidity events (IPOs and strategic sales) are aligning with Fundamentalist thinking and valuation methodologies more than Revolutionary narratives. Internalize this because it’s really important. It means that connecting the dots between a Seed stage investment and a liquidity event MANDATES shifting from a Revolutionary mentality to a Fundamentalist mentality.

Think about what this means for companies that haven’t gotten far enough fast enough. Mid and later stage Revolutionary Investors are hard to come by these days and it’s not going to change anytime soon…