“CONVEXITY IS EASIER TO ATTAIN THAN KNOWLEDGE” Nicholas Nassim Taleb (Antifragility)
MISPRICED (CHEAP) OPTIONALITY:
Financial options may be expensive because people know they are options and someone is selling them and charging a price.Optionality of early stage VC is misunderstood & mispriced (cheap).
Traditional VC has relied upon a stock-picking investment philosophy for investing at later-stage (when metrics/traction apparent) but has not adapted to the new paradigm of low barriers to entry (and resulting firehose of startup supply) when adjusting methodology for early-stage investment.
NO NEED TO PREDICT FUTURE:
All you need is the wisdom to not do unintelligent things to hurt yourself (some acts of omission) and recognize favorable outcomes when they occur.
The key is that your assessment doesn’t need to be made beforehand, only after the outcome.
MORE THAN 50% 0F STARTUPS WILL FAIL:
Optionality works by negative information, reducing the space of what we do by knowledge of what does not work.
For that we need to pay for negative results (strategic value).
A 1/N STRATEGY IS ALMOST ALWAYS BEST WITH CONVEX STRATEGIES:
Reducing the costs per attempt, compensate by multiplying the number of trials and allocating 1/N of the potential investment across N investments, and make N as large as possible to capture fat tail/rare event.
NOT BUYING “LOTTERY TICKETS” & NOT PRAY AND SPRAY:
Lottery tickets are patently overpriced, reflecting the "long shot bias" by which agents overpay for long odds - lotteries are sterilized randomness, constructed and sold by humans, and have a known upper bound.
Pray & spray assumes no filter. An optimized early stage VC portfolio achieves diversification via a pre-screened and de-risked pipeline using a distributed & scalable process to avoid uninvestable opportunities & gain exposure to top 10% of pipeline.