VC’s, and particularly seed focused VC’s, pursue a variety of different strategies in their portfolio.  Every firm thinks about things a bit differently.  It probably doesn’t really matter too much to entrepreneurs, but after a couple conversations about this with founders recently, I thought I’d share how we tend to think about it.

The main parameters that VC’s tend to think about around portfolio strategy are:

1. Number of investments

2. Ownership percentage

3. Concentration and staging of capital (how much and what stage and how much of the fund in a given company)

4. Capacity

5. Exceptions

I’m sure there are other things, but these are some of the main ones.

Here’s an interesting through experiment though.  The single best venture capital firm in the world would take this strategy:

• Invest in only one company
• Put the entire fund entirely into the first round with the lowest cost basis
• Pick the best company

Of course, no one does this. But what does that say?  Essentially, the further one strays from this strategy, the more one admits that there is luck and unpredictable risk in the market they are investing in. So funds diversify.  Some diversify across many companies, some across stage, some across time to some degree.  The downside to diversification, however, is that you dampen the impact of any one winner.

Put it simply, the bigger the portfolio, the more the investor thinks that luck and uncertainty is a factor.

The problem is that the overall market for VC is pretty crappy.  You don’t want to buy the index.  Funds that have very broad portfolios are making a very particular bet – that although the entire index sucks, their slice of the index will outperform.  Time will tell how that works out.

FWIW, our strategy is that we invest in about 30 companies per fund.  That’s 3-4/partner, probably more concentrated than the vast majority of seed funds out there.  We think that our portfolio will work out roughly as follows:

10 companies will not make it beyond their seed round 🙁

10 companies will make it beyond see, but die  anyway 🙁 🙁

10 companies will make money 🙂

Of those 10, 0-4 will be transformative.  If it’s 0, we  don’t do so well. If it’s 1-4, we win.  How much we win by depends on how large those outcomes are.

We are a one product company – and that product is a highly engaged, meaningful seed investment.  So with any luck, we don’t actually have to worry too much about whether those 1-4 are at a low cost basis, or if we have enough dollars in.  The answer should be yes for every investment.  At least that’s the model.