That's pretty astute. I would say VCs do hedge their risk by allocating in many options, sometimes by investing in multiple startups in the same domain or even different/opposite approaches to the same goal. But that could be classified as diversifying their risk too.
Personally I don't mind the idea of going lean in the beginning, which I think applies fairly well to early founders. The current Silicon Valley notion of throwing money at it to generate enough revenue + growth, without potentially having profit for a long time is a bit uncomfortable to me. I have a hard time distinguishing between businesses that are re-investing their income for growth and no profits (like Amazon) vs. those subsidizing their growth from VC money and having little chance of being self-sustainable in the long run (e.g. I don't know where Uber will land).
Ideally, I would like to do a venture where profits do come in even at smaller unit sizes and you can test that before you decide to go big. I am not sure if there is a term for that or if anyone thinks like that.
The "hedging" point is, VCs can't hedge away the risk of making 100 little bets which are only expected to make a mean profit of $10m each (private equity might). They need the triple bagger $1b unicorns to make up for all the firms who don't make it, or their business model falls apart. Just like with trend following. The game has negative expectations; it's only the bet sizing which makes it profitable.
I'll say it a different way: VCs don't give a shit about the company _ever_ making a profit. They give a shit about ther VC making a profit. It's not the same thing at all! VC makes a profit if they invest at good valuations and sell at much higher valuations when the company goes public. The company doesn't have to be profitable! For all they care it will never be profitable! Pets dot com made some VCs a bunch of money!
(thx for kind words -good luck with your startup!)
Personally I don't mind the idea of going lean in the beginning, which I think applies fairly well to early founders. The current Silicon Valley notion of throwing money at it to generate enough revenue + growth, without potentially having profit for a long time is a bit uncomfortable to me. I have a hard time distinguishing between businesses that are re-investing their income for growth and no profits (like Amazon) vs. those subsidizing their growth from VC money and having little chance of being self-sustainable in the long run (e.g. I don't know where Uber will land).
Ideally, I would like to do a venture where profits do come in even at smaller unit sizes and you can test that before you decide to go big. I am not sure if there is a term for that or if anyone thinks like that.
PS: like your blog and background.