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
smal­ler ones.

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:

Gorilla Capital Management Oy

VAT 2827907-4

Maria 01, Building 1, entrance B
Lapinlahdenkatu 16, 00180 Helsinki


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