Startup Investing Is Investing in Options

Startups don’t have information about them needed for techniques you would typically use to value an investment. There is little history, cash flows, and even assets to do a discounted cash flow. As a result, public market investors are confused at how early-stage startups carry the valuations they do. That’s because these companies are like investing in options.

  • Avoiding Losers as an Investment Strategy

    One way to have good returns when investing is to have a few winners and merely avoid losers. Of course, you must have some winners and a plausible way to avoid the losers which is easier said than done. In the world of investing, the winners take care of themselves because they will have an outsized gain compared to everything else.

  • 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.