In his Medium post, Matt H. Lerner, founder of Startup Core Strengths, considers the
calculations behind risk and return in venture capital. Using a Monte Carlo simulation, he
finds that ceteris paribus, a larger portfolio yields markedly better return multiples than
This is chiefly due to the power law characterizing VC returns, which implies that a small
number of portfolio companies bring in a large portion of total returns. Simply put, the
more companies you have, the more likely it is that you find an outlier that ends up
becoming a unicorn and yields a gargantuan multiple.
Of course, VCs do not choose their firms randomly, and some of the top ones highly
benefit from their brand and connections which certainly boost the probability of success
for all of their respective portfolio companies. The above still holds true, and we at Gorilla
Capital have since 2012 been vocal advocates of the large portfolio approach.
The diversification benefits from having 70+ active companies in total in our Funds I & II
mean that our success is actually not even contingent on finding the occasional unicorn.
Instead, the bulk of the solid returns is generated from a large number of successful,
earlier-stage exits. However, should a portfolio company show potential to reach a billioneuro IPO, we certainly support them on their path – our approach doesn’t force any
artificial ceiling on companies.
There are some understandable reasons behind LPs preferring managers that practice
unicorn-hunting over this more sensible strategy. First, venture capital is seen as an asset
class with a high level of risk correlated with a high level of reward. LPs might feel as
though they can get solid returns with a sounder risk level from other assets. Second, the
irrational optimism characterizing the entire venture capital industry is strongly present
when funds are pitching to LPs: the dramatic, emotional and overoptimistic style often
entices more than a more cynical one.
At Gorilla, our mission is thus to show that a larger portfolio size of companies is also able
to generate sizeable returns for investors. We are essentially hedging our downside
without limiting our upside in the slightest. The success of our previous funds applying
this strategy serves as empirical proof: the general VC wisdom of unicorn-hunting can and
should be challenged.
A Tale of Two Squirrels: The Not So Simple Math on Venture Portfolio Size: