Venture capitalist Bill Gurley, when talking about losses reminds people that a fund can lose it’s money 1x on a failed investment in a business that goes under but can miss out 10,000x if they fail to invest in a big winner.
If you think about the nature of venture capital, it’s highly rational to have a risk profile that accepts a lot of failure to avoid misses because they are in the business of delivering returns.
It’s also rational to get into a deal at nearly any valuation. Sequoia famously walked away from Google because Larry Page was looking for a $120MM pre. The deal got done at $80MM. (GOOGL marketcap is 1.6 trillion at time of writing).
See also:
- Ellsberg paradox shows us people greatly value known risk but venture is basically the opposite of that
- Protect against the downside by enjoying the upside
- Fear is bad advice
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Surprise Should Come from the Upside Case Only
If your investments are good only because of future optimism, you will have surprises in the downside case. If your investments are good without optimism required then you will be surprised in the upside case.