Concentrated Or Bust? The Case for Late-Stage Diversification in VC (Part II)

Public Power Law

“[Our] favorite holding period is forever” — Warren Buffet [7]

Figure 4. S&P 500 Historical Annual Returns
Figure 5. Index approach bests active management [11]
Figure 6. Years from $1M to $100M ARR [14]

Our Hypothesis: Diversified Investing Also Works At Late Stage

If we all agree that indexing is the dominant strategy to play the public markets and it is even more powerful in the early-stage private markets (the fat tails in the public markets lead to black swans, but they’re nowhere near as fat as the tails in venture capital [6]), why shouldn’t these dynamics hold true at the late stage?

Figure 7. Power Law for different values of Alpha [16]
  1. You hold the original asset
  2. You recycle capital
Figure 8. “Something Ventured”, adapted to show global venture activity in $B, by location only [20]
Figure 9. How to angel invest at growth stage
  • Index to every credible deal at the early stage (the bigger the basket, the better)
  • Utilize your asymmetric information advantage to invest in the top 10% of your portfolio at the late stage & add in your favorite late stage companies you have access to
  • Take advantage of mis-pricing by selling secondaries + hold onto schmuck insurance
  • Recycle that capital to compound further
  • Continue backing your breakout winners
  • Compound, compound, compound
  • Re-invest into the ecosystem

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Luke Skertich

Luke Skertich

Embracing debate… Gladiator is the best movie of all time.