Below is the “Tip of the Week” transcript from the Podcast Episode 21: VC Portfolio Strategy (Rob Go):
On this week’s episode we touched on the timing of returns and faster time-to-exits. We also addressed, on last week’s episode, this notion of a binary outcome where a win is a unicorn investment with an out-sized return, and everything else is a loss. I’d like to use this week’s tip to discuss how, so-called “losses” from the portfolio, that experience an early-exit, can ultimately become enormous wins. Many will talk negatively about investments that payback less than the capital invested, the same amount as the capital invested or even the modest, single-digit IRR returners. While it’s true that these also-rand investments will not make an angel’s portfolio, as exits occur and capital is returned, this provides an angel more shots on goal. Consider David S. Rose’s comments from episode three. He mentioned that five out of 10 angel investments will fail completely. Two will return your money. Two will be solid successes. And just one will be a significant success. So, the four out of 10 modest returners… may provide four or more opportunities to find startup with an out-sized return.
When this is considered, a portfolio of 10 investments can turn into a portfolio of 14 or more investments, without ever going back to the well for more capital. Marc Andreesen recently said that… “ultimately, in both startups and VC, “success” rate (batting average) means nothing; slugging percentage means everything.”
In an industry where the winners can be very big and the # of investments made can significantly increase the likelihood of a big outcome… more at bats can be extremely valuable. So, embrace these so-called “losers” b/c more opportunities at the plate, means more chances to hit that homerun.