On Funding — The Denominator Effect

On Funding — The Denominator EffectI recently wrote a post about funding for investors to think about having a diversified portfolio, which I called “shots on goal.” The thesis is that before investing in an early-stage startup it is close to impossible to know which of the deals you did will break out to the upside. It’s therefore important to have enough deals in your program to allow for the 15–20% of amazing deals to emerge. If you funded 30–40 deals perhaps just 1 or 2 would drive the lion’s shares of returns.You can think of a shot on goal as the numerator in a fraction where the numerator is the actual deals you completed and the denominator is the total number of deals that you saw. In our funds we do about 12 deals / year and see several thousand so the funding rate is somewhere between 0.2–0.5% of deals we evaluate depending on how you count what constitutes “evaluating a deal.”This is Venture Capital.The Denominator EffectI want to share with you some of the most consistent pieces of advice I give to new VCs in their career journey and the same advice holds for angel investors. Focus a lot on the denominator.Let’s assume