Harvesting Optionality in Early Stage Venture Capital

“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.

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