Contrary to conventional clich?, there is very little that is “binary” about venture investing outcomes. That is, when it comes to private investing, it is not a choice of either feast or famine. Rather, the investing outcomes are diverse and asymmetric. You can lose your entire investment, just lose a portion, break even, receive periodic distributions producing double-digit IRRs, or achieve exits at 5X, 10X, 20X multiples or greater on your initial investment.
What does appear to be binary, however, is the manner in which prospective investors in private ventures, and the advisors who recommend such investments, perceive the asymmetric return profile of venture investment outcomes: most either adore it or abhor it.
On the one hand, an investor like the famed Jim Rogers is attracted to what he no doubt views as a positive asymmetric profile of venture investment outcomes.
His venture acumen began developing at the age of five by selling peanuts and getting the deposits back by picking up empty bottles that fans left behind at baseball games. In 1970, he co-founded the Quantum Fund. During the following 10 years the portfolio gained 4,200% while the S&P advanced about 47%. Nice.
In a recent online rant widely covered and distributed in the blogosphere, Rogers opined not only that “diversification was garbage,” but went on to say that “you only need four or five good ideas in your life to get really rich.” (Rogers says “really” rich, which seems rather elitist, since one or two good ideas can make one simply rich.)
Nevertheless, 90X returns over the S&P implies that he had very little fear of placing losing bets.
But what drives those less adventurous souls to eschew positive asymmetric return scenarios in favor of investments in exclusively binary and symmetric outcomes? Why are there so few angel and venture investors despite the compelling data of the asset class’s returns and the proven history of private enterprise as the single greatest creator of family wealth?
Enter the Nobel Prize