Conventional VC Wisdom Says Spray and Pray Is Wrong

Should VCs be more open to the spray & pray approach?

I’ve been thinking a lot about the conventional wisdoms around venture capital.

Things like “don’t invest in solo founders”. Or “the only way to make money in VC is to concentrate in your winners”.

Which brings me to an oft-derided phrase - “some VCs just spray and pray”.

There is some thinking behind the derision. Some LPs believe that the core value of the VC is to pick the right companies - so if your portfolio is 2-3x bigger than most seed-stage VCs, it signals you don't know what you're looking for.

Of course a counter point may be that if you take more swings, each individual bet can be less consensus. Easier to back the wildest ideas if the fund has 50 portcos vs 25.

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Let's look at some (simulated) data. Chart below is from Dan Gray at Equidam who everyone should go follow.

It looks at two portfolio strategies available to a VC manager with a $50 million fund (so $40M of investable capital).

• High Conviction = 20 portfolio companies at $2M each

• Diversified / "Spray and Pray" = 100 portfolio companies at $0.4M each

After you do a little math full of assumptions (listed below for context), the diversified portfolio beats the concentrated one for MOIC (Multiple on Invested Capital) at every point along the curve except for the super stellar funds.

Said differently - if you are a top 5% fund, concentration wins. If you’re not, diversification wins.

The full breakdown:

• 𝗠𝗲𝗮𝗻 𝗳𝘂𝗻𝗱 𝗺𝘂𝗹𝘁𝗶𝗽𝗹𝗲: Diversified: 2.6x  | Concentrated: 2.1x

• 𝗠𝗲𝗱𝗶𝗮𝗻 𝗳𝘂𝗻𝗱 𝗺𝘂𝗹𝘁𝗶𝗽𝗹𝗲: Diversified: 2.5 x  | Concentrated: 1.9 x

• 𝗖𝗵𝗮𝗻𝗰𝗲 𝗼𝗳 ≥ 𝟭𝘅 (𝗰𝗮𝗽𝗶𝘁𝗮𝗹‑𝗽𝗿𝗲𝘀𝗲𝗿𝘃𝗶𝗻𝗴): Diversified: ≈ 99.7 % | Concentrated: 81.9 %

• 𝗖𝗵𝗮𝗻𝗰𝗲 𝗼𝗳 ≥ 𝟮𝘅: Diversified: 77 % | Concentrated: 47 %

• 𝗖𝗵𝗮𝗻𝗰𝗲 𝗼𝗳 ≥ 𝟯𝘅: Diversified: ×27 % | Concentrated: 22 %

• 𝟵𝟱𝘁𝗵‑𝗽𝗲𝗿𝗰𝗲𝗻𝘁𝗶𝗹𝗲 𝗼𝘂𝘁𝗰𝗼𝗺𝗲: Diversified: 4.0x | Concentrated: 4.8 x

Now look, there are tons of other factors to consider. Things like ability to follow-on into your winners, time available to support each portfolio founder, etc etc.

But I like the challenge to conventional wisdom!