> Suppose instead you split that investment between 10 companies at a tenth the valuation. How confident do you have to be that any given one will become a billion dollar company?
You'd have to be more confident in aggregate.
Let's say in the former case you have a 50% certainty with one company; and in the latter case you have 5% confidence with each of 10 companies.
The chance that NONE of them succeed to that degree is 0.95^10, or about 60%. So only a 40% chance someone will make it, vs. 50% for the former.
With smaller probabilities the difference is less, but guesstimating at billions is such a crapshoot. How about something more realistic?
How about doubling your money: Let's say you put $1 mil into the former company. If it doubles its worth, you've doubled your money. But in the $100k for each of 10 companies case, they all have to double their worth, or one has to grow 20x.
Let's say you think it's a 50% safe bet in the former case, but a whopping 90% chance in the smaller cases. The chance they ALL double up is 0.90^10, or about 35%. So you're probably losing money.
Sure, some might do 3x or 4x to make up for a couple of the flops, but you probably aren't going to let a 100k investment just die; you'll be sinking more into the money losers, so the successes have to do even better to make up for the bailouts.
You'd have to be more confident in aggregate.
Let's say in the former case you have a 50% certainty with one company; and in the latter case you have 5% confidence with each of 10 companies.
The chance that NONE of them succeed to that degree is 0.95^10, or about 60%. So only a 40% chance someone will make it, vs. 50% for the former.
With smaller probabilities the difference is less, but guesstimating at billions is such a crapshoot. How about something more realistic?
How about doubling your money: Let's say you put $1 mil into the former company. If it doubles its worth, you've doubled your money. But in the $100k for each of 10 companies case, they all have to double their worth, or one has to grow 20x.
Let's say you think it's a 50% safe bet in the former case, but a whopping 90% chance in the smaller cases. The chance they ALL double up is 0.90^10, or about 35%. So you're probably losing money.
Sure, some might do 3x or 4x to make up for a couple of the flops, but you probably aren't going to let a 100k investment just die; you'll be sinking more into the money losers, so the successes have to do even better to make up for the bailouts.