What if the squirrel could see?

From A Crowded Space
May 18, 2017 - 5:10pm
The most effective investment strategy is a highly un-diversified portfolio when you are right.”  – Jim Collins, From Good to Great. I recently appeared on TwentyMinute VC podcast and declared that highly concentrated portfolios are the best way to invest as a venture capitalist.  This started a debate between concentrated and diverse portfolios in venture capital.Matt Lerner at 500 Startups in cooperation with Yannick Roux recently produced a Monte Carlo simulation of various portfolio sizes and shared the results here.First off - genuine thanks to Dave McClure, Matt Lerner, Leo Polovets, Josh Hannah, Paul Arnold,  Harry Stebbings, and Yannick Roux for engaging in a healthy debate.   Dave and Matt make a compelling case for diversification, especially at the very early seed stage.  But, I have a different point of view.What if the squirrel could see?The Blind Squirrel theory (hereafter referred to as the BS theory) states effectively that all that matters is getting in 1 or more of the mega-winners in venture capital AND the best way to do that is to make LOTS of bets.The Monte Carlo simulation results seem to prove that and I have no debate with the simulation.  My issue is with the inputs and underlying assumptions in the model.  Specifically, I feel the BS theory works in theory, but fails in practice because of the following 4 fallacies. 1) Access Fallacy - the BS theory can only work if an investor has access to invest in any and all private companies.  This is fundamentally why Vanguard works in the public markets with unrestricted access and why there is no Vanguard of the private markets.  (Just FYI - Vanguard now has 2T under management).  I can’t simply look at a database of startups and write 200 checks to startups for 100K each for a 20M fund.  First I need to source all of these investments and then I need to ensure that I can get access to invest.  In many cases, great startups are oversubscribed and turn investors away.  That said – for firms like 500 Startups and YC, this may be less of an issue because they are frequently the very first check into a company and companies have in fact applied to join them.  2) Selection Fallacy - the BS theory seems to suggest that we have no idea what we’re doing when we select companies.  Honestly, sometimes I feel like this is true.  But if it were really true, th

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