Tuesday, May 06, 2014

How To Use Portfolio Theory At Your Startup

Famously, VCs take a portfolio approach, betting on numerous startups, while entrepreneurs bet the farm on their single startup.  This fundamental difference helps explain many of the conflicts that arise between entrepreneurs and their VCs, because an entrepreneur is focused on the success of a single startup, while a VC has a fiduciary obligation to maximize the returns of her portfolio.

But entrepreneurs have portfolios too.

The concept of a portfolio is a powerful mental model that can be applied to any resource allocation problem, not just startup investments.

For example, Joel Gascoigne writes about how Reid Hoffman's concept of "Core," "Expand," and "Venture" projects helped Joel allocate Buffer's product resources:
http://bit.ly/1lWcfZK

"I think the idea here is to try and shoot for a good balance between these 3 areas, and to always be working on all 3. It feels like a useful framework to follow. For us, it is probably going to be a 50:30:20 ratio right now."

Reid/Joel's portfolio approach solves the key problem of startup management, which is how to best allocate scarce resources.  Just about any startup--even one as successful and powerful as LinkedIn--could expend 300% of available resources just working on "Core" projects.  Deciding on an optimal blend and sticking to it helps you invest your scarce resources more intelligently.  It might be unwise to invest 100% of resources into moonshots, but if you don't invest in them at all, you're unlikely to achieve a breakthrough.

No comments: