FuturProof #139: Underwriting Checklist - Probabilities (14/14)
“Venture capital is an inherently optimistic form of investment - which is both its primary strength and its primary weakness.” - Neil Blumenthal
Investing is not about predicting the future. No one has a crystal ball— that is what makes investing intellectually gratifying
The culmination of the work in our due diligence checklist is debating the probabilities of the various outcomes with yourself and/or your investment team. The most difficult part is assigning probabilities to different outcomes, but that should be the only part where any opinions are expressed
The probabilities we assigned internally before investing in a pre-seed team with our main focus being adoption:
Some people may be surprised that we made an investment despite assigning a 50% probability to the investment breaking even or losing money. But these are actually some of the highest probabilities of success we have assigned to a pre-seed company. No matter our level of conviction, early-stage teams do not have chances in their favor
Most investors and teams are overly optimistic about the probabilities of success of early-stage teams. Many of the teams would probably be offended if they saw the probabilities of success we assign to them. But, we believe our approach is realistic and necessary
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“The biggest secret in venture capital is that the best investment in a successful fund equals or outperforms the entire rest of the fund combined.” - Peter Thiel
Investing is an exercise of probability-adjusted decision making. All it takes is being honest about the chances of the different possible outcomes and allocating capital accordingly
If the expected value of an investment is above your benchmark after adjusting for the chances of the different scenarios, make the investment without any emotions involved
Disclaimers: http://bit.ly/p21disclaimers
Not any type of advice. Conflicts of interest may exist. For informational purposes only. Not an offering or solicitation. Always perform independent research and due diligence.