In Search of Narrative Violations
Hi. Geoff Lewis and Eric Stromberg here. We launched Bedrock in March of 2018 with this letter after nearly a decade of friendship and business collaboration. As of March of 2021, Bedrock now manages approximately $1 Billion in assets across several funds.
Prior to starting Bedrock with Eric, Geoff was a partner at Founders Fund for five years. Early in his tenure, he led the first financing round in Lyft (NASDAQ: LYFT) and joined the Company’s Board of Directors. He went on to lead early investments in Wish (NASDAQ: WISH), Upstart (NASDAQ: UPST), Tilray (NASDAQ: TLRY) Nubank, Canva, and Clearbanc — each now valued at well north of $1 Billion — along with over twenty other companies led by talented entrepreneurs. Amongst those entrepreneurs was Eric, whom Geoff first met in 2010 when they were both starting out their careers in technology.
In 2012 Eric started Oyster, and Geoff led the Series A round. Oyster was acquired by Google in 2015, where Eric joined as a Product Lead responsible for growing the Google Play business. He also began angel investing — often in collaboration with Founders Fund — leading investments in Thirty Madison, Lattice, Hubble Contacts, and Built Robotics.
Our primary shared value is radical open-mindedness; we constantly question popular narratives in search of hidden truths. We believe this is especially useful in venture investing, where capital tends to be dramatically over-allocated to startups that align with the strongest market narratives. Rather than chase the narrative, Bedrock’s approach is to invest in promising companies that are underestimated precisely because they are incongruent with the storyline. Our starting point, therefore, is to search for narrative violations. When we find one, we do the work to build passionate conviction in opportunities that most overlook.
Very few of these opportunities exist. Thus, we make far fewer investments than most venture capital firms. Our primary focus is leading Series A , B, and C rounds with $5M to $30M checks. Occasionally we’ll make smaller investments in seed rounds. Bedrock has made over thirty investments thus far. A few include Flock Safety (Lead, Series A-1), The Athletic (Co-Lead, Series C; Lead, Series D), Workrise (Lead, Series B-1, Series C-1), Check (Lead, Series Seed, Series A) and Cameo (Series A). We are happy to be the only investor in the round or invest alongside others, and we reserve significant capital for follow-ons. We remain humble about the value we’ll actually add to your venture beyond writing the check, and pledge to work hard on your behalf in order to pleasantly surprise to the upside over time.
Let’s get an uncomfortable truth out of the way: It’s a crazy time to build a venture capital firm.
As Silicon Valley engineers day trade crypto ensconced in ergonomic energy pods, the venture capitalists who fund the pods are racing to deploy record levels of capital. In 2018, over $130 Billion was invested by VCs into US-based companies alone — surpassing the level seen at the height of the dot com bubble for the first time. Meanwhile, technology itself threatens the very reason venture capital exists as an asset class; providing capital to entrepreneurs. In the long run, Blockchain technology and the influx of capital unlocked by tokenization may fundamentally alter how venture capitalists operate, or perhaps even render the asset class obsolete.
In parallel, yesterday’s popular narrative of "Technology is a force for good!" has been drowned out by a rising chorus proclaiming "Technology is a force for bad!" The reality is more nuanced than either narrative. At its best, technology is powerfully positive sum: By creating new markets, the biggest breakthroughs can generate wealth that spreads throughout society, and offer unprecedented improvements to people’s lives. Yet as other markets shrink and marketable skills change, many are trapped in negative sum careers with no clear escape. Further, it’s now clear that some technology products impact society more profoundly than others, and in ways we’re only beginning to understand. Thus we’re presented with a stark new reality: Deeply considering — and defending — the societal consequences of a product is now as elemental to building a startup as was writing a line of code. Not for the faint of heart.
Silicon Valley needs many things today, but we’re acutely aware that more venture capital is not one of them. Indeed, all of this capital tends to influence our behavior in ways that compromise genuine innovation.
Just as capital powerfully influences our behavior, so too does narrative. Narrative is an extraordinary force that helps us make sense of the world. The most popular narratives are often accepted as truths. Yet we forget that narratives are not synonymous with truth. They can reflect what people wish were true, what would make people rich if they were true, or simply what an algorithm spits out as truly profitable. The internet fundamentally disrupted the process of narrative formation and dissemination. It enabled popular narratives to form and spread at hyperspeed; algorithmically optimized to draw us in without question. Further, advertising business models on the internet tend to elevate narratives that confirm pre-existing biases or polarize — often both — because these narratives drive the greatest engagement. Our sensemaking abilities as individuals simply have not caught up; decoding fact from supercharged narrative flourish is a feat, to put it mildly.
Why is this a problem for investors? Within the technology industry, narratives are constantly generated on multiple layers: Founder, company, category, industry, and societal. At each layer, they tend increasingly toward the extremes. Founders are cast as heroes or villains. Companies are rocket ships or death spiraling. A category is the next global megatrend or a house of cards. The industry is creating jobs or destroying them. Society is being revolutionized or ravaged by Silicon Valley. Bombarded with conflicting information and in a rush to deploy capital, it’s tempting to look for shortcuts to drive investment decision making. Allowing a popular narrative to decide for you is the most seductive of shortcuts. When everyone takes the same shortcut at the same time, everyone competes to deploy more and more capital into the same set of companies.
Popular narratives at the category layer tend to be the most troublesome. Surging capital and spiraling narratives about the next huge market catalyze to form a perfect storm. Whenever an easily understood and easy to replicate new startup shows even a glimmer of promise, the hallucinations kick in. New global categories are conjured up in mere days based on a nascent startup’s early success. If it can be cloned, it will be cloned. Remixed, reused and repackaged with a superficially different veneer by dozens of teams. Each funded by dozens more investors. Location-based marketing. Daily deals. Wearables. Chatbots. In the end, each category proved nothing more than a narrative mirage.
Today, entire funds of Bedrock’s size could be invested entirely into a portfolio of clones competing in the electric scooter sharing market. Mobike and ofo pioneered bikesharing in China and grew rapidly through 2016 and 2017. Their hypergrowth sparked a global bikesharing race that was quickly sliced and diced into an exotic new derivative: Electric scooter sharing. In the roughly two years since Bird launched in Los Angeles, dozens of clones have sprouted up around the globe, raising what we estimate to be north of $1B in aggregate venture capital thus far (with billions more sure to come!). This category is narratively attractive for investors on every layer. Unfortunately, we believe it is a narrative mirage.
Anatomy of a popular investor narrative:
Electric scooter sharing is the next huge category!
|Narrative Layer||Investor Narrative|
|Founder||Operations expert, often with experience in ridesharing.|
|Company||Easy to launch, easy to grow. Vast amounts of capital can be quickly deployed to fuel growth (capital we have!)|
|Category||Narrative straight line to ridesharing category. Ridesharing is for long distances; scooter sharing is for shorter distances.|
|Industry||China is a lens into the future and the new Silicon Valley. Bikesharing seems to be working there, and Xiaomi is the leading manufacturer of electric scooters.|
|Societal||Scooters are good for the world because they are non-pollutive.|
Narrative mirages create the illusion of a market so large that anyone who owns even the smallest slice of it will be richly rewarded. Lost in the haze, it is easy to forget that the extraordinary returns generated by technology have been generated almost entirely by only a few dozen companies globally. Almost none of them fit into an easy to define category with multiple winners. This power law of returns dictates that the vast majority of startups in hyper competitive markets will fail.
While there’s no doubt electric scooters are here to stay, it’s only a matter of time before scores of electric scooter sharing startups fade away. Groupon endured as the singular daily deals company once that category’s narrative mirage evaporated (hovering around a $2B public market cap over the past three years, after closing its first day of trading valued at more than $16.5B). Similarly, we believe that while one or two of the electric scooter sharing companies will endure, the frenzy around the category most certainly will not.
At Bedrock, we aren’t immune to the siren song of the narrative mirage. We’ve made mistakes in the past, investing based on narrative vs. substance. But we try our best to relentlessly question each narrative layer in pursuit of the truth about a company.
Rather than chase popular narratives, Bedrock’s approach is to invest when companies are incongruent with the narrative. Simply put, we search for narrative violations.
The term narrative violation aptly describes many of today’s greatest technology investment opportunities. They are either too one-of-a-kind to fit with the popular narratives of the day, or they violate what the narrative gatekeepers deem plausible or possible.
Founders Fund invested in SpaceX shortly after their second rocket blew up; the popular narrative was that the company was about to blow up as well. Andreessen Horowitz’s second investment was in Skype, at a time when the popular narrative was that Skype was in a death spiral. When Geoff invested in Lyft in 2012, Uber was still just a black car business. The popular narrative then was that the peer-to-peer model pioneered in large part by Lyft would never work, and even if it did Uber’s ruthlessness would crush Lyft. Almost nobody predicted that Uber’s ruthlessness would nearly crush Uber.
Believing in an idea that violates the popular narrative is lonely. Building a company around that idea is doubly lonely for entrepreneurs. It entails all the challenges of building something new from scratch, but offers none of the status game advancement bestowed upon entrepreneurs pursuing “popular” opportunities. They don’t slot easily into technology trend pieces or analyst reports on hot categories. They aren’t buzzed about by venture capitalists at the myriad of startup networking events around the world. As a result, these companies are granted immunity from clone wars by narrative shade that can last for years. They also remain systematically underestimated by investors. By the time the popular narrative catches up to begin resembling truth, these companies have grown beyond their fragile early days. And at that point — when they have bent the narrative toward a new reality by sheer force of will — they have already become unstoppable.
The best time to invest in a company is
when it’s most in violation of a popular narrative.
|Year||Popular Narrative||Narrative Violation|
|2010||Cleantech is dead||Tesla|
|2011||Social gaming is an absolutely horrible business||Supercell|
|2012||Dating apps are always fads||Tinder|
|2013||Cryptocurrency is a bubble||Bitcoin|
|2014||Amazon is ruthless, so the only way to win in e-commerce is building a verticalized brand||Wish|
|2015||Uber will crush all competitors and win every market around the world||Lyft, Didi, Grab|
|2016||Food delivery is too capital intensive.||Doordash|
|2017||Food delivery and ride sharing are the gig economy.||Workrise|
|2018||Hardware is too hard to scale.||Flock Safety|
|2019||The future of FinTech is embedded in software, but payroll is too complex.||Check|
Narrative violations are highly idiosyncratic, so unearthing them is admittedly more art than science. One starting point is to identify categories that were narratively hot for investors in the past but that most have cooled on today. Online media, Virtual Reality, AdTech, Hardware, and Travel are a few current examples. Another starting point is to search for companies that cannot be easily categorized at all. Is Workrise like Uber, Fiverr, or Workday? Perhaps it’s simply one-of-a-kind. On rare occasion, an entirely new category emerges that offers particularly fertile ground for narrative violations. Today, it may be decentralized apps and protocols.
Blockchain has unleashed a new wave of creative energy from some of the world’s most talented developers, just as the scent of ICO riches unleashed hordes of hucksters who cashed in on nothing more than poorly written whitepapers. Yet the frenzied casino-like vibe of many cryptocurrencies masks the reality that decentralized projects are here to stay, and ultimately a few of them will radically reshape our world. Volatile crypto asset prices and the speed of innovation make people especially thirsty for narratives. When the narratives come from cryptolebrities they get amplified faster than we’ve ever seen. Yet, the space is so new — and we have so few data points on what success looks like over time — that even today’s most popular narratives are extremely fragile. Indeed, going against a popular crypto narrative may be the only way to win in a market that has attracted so much capital and competition.
Resisting the Narrative Thrall
Narratives can inspire us. They can move us to stand for something. They can make us feel connected to others. All of these are important, especially today.
Yet when the pendulum swings too far, narratives become a shortcut for thinking and we shortchange our future. In a Shakespearean twist, Silicon Valley’s success has narratively ensnared it on two levels. Not only has the popular narrative turned against the tech industry, but many in the industry themselves are caught in a narrative thrall that’s supplanting independent thought. We’ve become addicted to consuming the narrative; its dopamine hits are delivered by the decisecond on every screen — whether via Twitter, CoinMarketCap, or everything in between.
As our keystrokes hunt for the next narrative high, thousands of possibilities that will never be remain trapped beneath our fingertips. When we allow popular narrative to dictate who, where, and what is worthy of our time or capital, breakthroughs that could transcend remain overlooked, underestimated, or simply fade away.
Against all odds, a few brave entrepreneurs violating the narrative today will come to define profound new truths tomorrow. We’re on a mission to find them.
|Geoff Lewis||Eric Stromberg|