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".
Spray and pray meaning they invest into a lot of young companies and hope for the best?
Data above is from Dan Gray at Equidam (who everyone should go follow on X, believe me). It looks at two portfolio strategies available to a VC manager with $40 million to invest.
Concentrated = 20 portfolio companies at $2M each
Diversified = 100 portfolio companies at $0.4M each
After you do a little math full of assumptions (on dilution per round, on potential exits, lots of assumptions), 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.
Now look, I'm not fully bought into this argument. 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!
If you have other examples of standard venture thinking that may not hold water, I'd love to hear them. Great research topics for future posts.
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Peter Walker
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