Going big or going home

One of the biggest differences you’ll find between “west coast” and “east coast” investors is whether or not they endorse the theory of “go big or go home” or the theory of “try not to go home.”

In a typical venture fund, half of your returns come from your single best deal.  That’s a pretty shocking stat, give it a second to sink in.  Now look from a VC’s perspective.  If that’s the case, then you’re either a grand slam or you don’t matter to the portfolio.  So VCs will almost always want you to aim for the grand slam.  If you hit, you’re a huge success.  If you miss, they lose on one of their many bets, and still have others aiming for a grand slam.  By contrast, if you hit a single, you’re not the grand slam the VC needs to make their portfolio a winner – and with so many grand slam or bust type bets, singles aren’t going to make up for the strikeouts.

So west coast VCs who make bets that follow that pattern of investing end up having portfolios that are very reflective of their strategy – high fail rates, a couple home runs that account for basically all of the returns.  But it’s not purely a VC motivation – west coast entrepreneurs (especially technical ones) have a massive opportunity cost.  Every year you work on your startup for a mid-five figure salary, you’re passing up $150k+ at Facebook or Google as an engineer.  So you might as well go big or go home, since going home is actually more lucrative in the short term.

“East coast” investors tend to be wired differently.  At SaaS Ventures, for example, we build a portfolio that we believe can be successful without a billion dollar exit – where solid doubles and triples can create a successful portfolio.  We also make relatively few binary bets – we count on a lower fail rate, a higher hit rate, and more $100-200M exits rather than a single billion dollar exit with a bunch of busts.  So we’d rather you don’t go big or go home.  Sure, going big is great, but failing sucks.  The investors lose all their money, the entrepreneur is left going to work for someone, and everyone has a bit of regret about what didn’t fall into place.

 So we’d rather you try not to go home.  Sure, you have to go big enough to make an impact – that’s why you raise money, have a “burn” and spend more than you’re making, etc – but every day you make decisions about whether or not to go for broke in the name of getting bigger faster.  We believe in hypergrowth well-managed, maximizing the chances of a great outcome for everyone involved – rather than maximizing the odds of a grand slam, which also maximizes your odds of the much-more-likely strikeout.