Venture Portfolio Management: Tips for Success

An article we liked from Thought Leader Alec Torelli:

How to Manage a Venture Portfolio

Exploring the math behind diversification and how it impacts investor returns. Plus, my theory on the ideal number of investments and check sizes.

Poker has taught me a lot about bankroll management. I’ve learned the hard way how important it is for one’s long-term success. As I now remind my clients, you can be the best poker player in the world, but you will (eventually) wind up broke if you don’t manage your capital correctly.

I can now lecture because I’ve made just about every mistake in the book. People told me this when I was first starting out, but of course, the brash 21-year-old who won $1,000,000 in a year didn’t listen.

Naturally, I learned the lesson only after losing most of that money back and having to rebuild my bankroll from scratch.

Poker and Angel Investing

When I got into angel investing, I was determined to avoid the mistakes I made in poker.

The game has taught me that no matter how confident I am, there are things beyond my control. That is why I believe it’s almost always correct to diversify your bets, hedge your risk, and only invest what you can afford to lose.

Notably, humans are risk-averse, and the pain of losing is almost always greater than the joy of winning. Therefore, protecting downside risk is particularly important as losing money has a negative compounding effect.

In addition to bringing unwanted stress, losing can make it harder to make objective decisions, leading people to chase, which only furthers the loss.

While it seemed intuitive that diversifying would entail less risk, what I didn’t know when getting into investing was that it also leads to higher returns.

The Unknown Power of Diversification

The following is a summary of a post by Kevin Dick of Right Side Capital.

Let’s play a game.

I give you two options:

You invest $10,000 today, and I guarantee to return you $30,000 in 4 years.
We roll a six-sided die. You wager $10,000 that you can pick the correct number. Guess right, and I pay you $200,000. Guess wrong, and you lose everything.

Although #2 has a slightly higher expected value (EV), most would choose Option #1 due to the...