- Short Description:
- If you believe that investing in startups has a power law of returns with a very few winners generating the vast majority of the returns, the strategy is to invest in more companies in order to increase the chances of having a true break-out winner in the portfolio. For example, funds that do 40 or more investments could be said to follow this strategy. The negative framing of this is sometimes called “spray and pray”.
- Benefits:
- Additional chances for investing in a breakout success that can
- Trade-offs:
- Portfolio company support: The more companies in your portfolio
- LPs tend not to like it: despite strong quantitative arguments, many LPs do not like a strategy that explicitly seeks to invest in many companies. Classic traditional VC funds had 15 to 25 companies in a fund and those well-known firms have had a strong performance. Also, many VCs are positioned to LPs as experts in deciding which are the best companies. Investing in many more companies because of power law reasoning admits that the GP has low odds per deal of investing in a breakout winner
- Pressure on selection criteria and sourcing: if you want to invest in 40 or 50 companies over a 3 or 4 year investment period, you may be setting out to find and execute a deal a month or more. That is a lot of work and the goal of doing deals can drive people to lower the quality threshold or reduce the quality of a decision. In addition, depending on the market conditions, and the funds other strategies, sourcing and talking with enough quality companies in order to do this many deals may be difficult.
- Examples:
- 500 Startups
- Right Side Capital
- Ulu Ventures
- Further Reading:
Portfolio Construction: More Investments for Power Law
