money & markets

In statistical distributions with thick tails, as Nassim Taleb says, the tail wags the dog . The relevant information is all in the tails, not in the body. Why would an allocator want statistical estimators to ignore the tail and instead overweight the center of the distribution, which is predominantly noise?

Venture capital has a pay-to-play nature, where not only bad investors, but many good investors often pay up as they mature to make sure they are part of the biggest success stories partly since they can afford it (and need it) with more capital and credibility, partly due to their more granular and selective pattern recognition, partly due to the ... See more

From this, it follows the popular idea of not fundraising at a spuriously high valuation2, as it turns the startup into an option with a higher strike price (K), that is probabilistically worth less as now the startup would far surpass that valuation in a lower number of potential futures. Funnily enough, investors end up paying more for such early... See more

But the strategy required reimagining traditional venture capital portfolio construction. Abstract’s model focused on “relative ownership” rather than absolute ownership: If he could get 5% ownership in deals where Andreessen Horowitz got 15%, he might have one-third their ownership, but out of a fund that was one-fifteenth the size, his LPs got 5x... See more

Overall, participation in an early-stage company can be seen as a far out-the-money call option with:

1. The strike price (K) which is often based on the target of returning the fund , which is a multiple of the entry valuation and ratio of the check size to the fund size. It can also be based on reaching a certain magnitude of outcome ($1b+, $10b+, e

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Statistical robustness is about finding metrics that can handle tail events, large deviations, without changing much. And, for measuring venture returns, the median is used vs. the mean because it is more robust as a statistical estimator. It represents the typical outcome (i.e., middle-of-the-road funds) vs. the mean that is sensitive to outliers ... See more