Answer extracted from the How I Invest with David Weisburd podcast — listen to the full episode below.
What common cognitive bias limits venture investors' deal sourcing and reduces returns?
Venture investors rely excessively on their personal networks to source deals, creating a systematic blind spot that filters out exceptional founders who lack insider connections. The founders of Airbnb, Stripe, and countless other iconic companies began as complete outsiders without network advantages—yet many top-tier funds missed them entirely because they operated outside traditional deal flow channels.
This network dependency is reinforced by a secondary bias within large venture firms. Young investors are incentivized to maximize markups—the percentage gain on an investment—which pushes them toward hot trends and consensus picks rather than contrarian opportunities that carry real upside potential.
As V explains in the episode, chasing the same obvious winners that every other fund is chasing—whether a hot sector or a well-connected founder—produces competitive returns. The truly differentiated returns come from one standard deviation away from consensus, but the performance metrics inside venture firms penalize that kind of contrarian positioning.
How network bias narrows the funnel
The venture industry has inherited a structural problem: networks are exclusive by design. Founders who grew up in Silicon Valley, attended elite universities, or worked at Google and Facebook naturally plug into existing investor networks through warm introductions. Everyone else, no matter how talented, faces friction.
The evidence is stark. Airbnb's founders were rejected by most of Silicon Valley's top funds precisely because they lacked the right introductions. Same with Stripe—Patrick and John Collison built an exceptional company but had to overcome significant network disadvantages to access capital. These are not edge cases; they are the norm for transformational companies that emerge from outside the traditional pipeline.
This is compounded by a reality that the episode discusses: venture firms internally measure success partly through markup velocity. A young investor who participates in an early-stage round that later becomes a mega-success gets credit for the multiple. But investors are rewarded faster by participating in deals that are already obvious—companies everyone agrees are hot, rounds that are easy to get into because they're oversubscribed.
V — Founder of a venture fund and former partner at Lightspeed Venture Partners, where he spent nearly a decade investing across multiple market cycles. He has invested in venture for over a decade and has maintained a disciplined, focused investment practice, avoiding the temptation to diversify across multiple vehicles in order to deliver consistent returns.
Why consensus deals underperform
When everyone in venture agrees that a trend is hot, returns in that space tend to compress. The best outcome for a founder already raised at a high valuation is a solid exit—but the venture firms that got there early, at 1x, have made far more money than those who jumped in at 5x. Chasing the obvious winners is a race to the bottom of returns.
The counter-intuitive insight is that the highest-returning venture investments historically come from founders and sectors that looked contrarian at the time—one standard deviation away from what the consensus believed. But internal incentive structures inside large venture firms (particularly for junior and mid-level investors) reward the opposite: they reward speed to markup, not longevity of conviction.
For a fund that wants to outperform, the hard work is explored in more depth in this podcast: finding founders and markets that sit outside the warm introduction network and outside the obvious trend, then having the conviction to back them when everyone else is skeptical.
Key takeaways
- Network-based sourcing creates a structural bias against outsiders, despite outsiders founding many of the most valuable companies.
- Markup incentives inside venture firms push junior investors toward consensus winners, which compress returns over time.
- The highest-returning investments historically came from contrarian bets that looked questionable to the consensus at the time.
- Overcoming this bias requires both different sourcing mechanisms and internal incentive alignment around long-term value creation, not short-term markup velocity.
See also
How do multi-stage venture firms expand beyond their core competency, and what is the historical precedent?
Private equity firms like KKR and Blackstone emerged with one core business and over time expanded into adjacent asset management. Blackstone started as a private equity firm and eventually built substantial asset management operations.
What structural challenges prevent institutional LPs from participating in co-investment opportunities?
Most institutional LPs are not equipped for rapid decision-making. Co-investment opportunities often require decisions within less than five days, making it difficult for large institutional investors to move at the necessary speed.
Which new participant categories are expanding their presence in private markets?
Family offices are becoming more switched on to alternative assets and making direct investments in companies. Sovereign wealth funds, which manage approximately $15 trillion globally, are also significantly expanding their private market exposure.