THE ANTI PORTFOLIO
All investors have an anti portfolio. Your anti portfolio is all the companies you looked at but didn’t invest in.
Some investors publish theirs, most don’t. Your anti portfolio is usually valuable, which implies you either weren’t as good at picking as you promised, or you didn’t win the deals you picked. If your anti portfolio isn’t valuable, you’re probably not seeing enough good deals.
Having a valuable anti portfolio doesn’t make you a bad investor. Startup investing is just tough, really tough. Contrary to most founders’ intuitions, investors are not powerful — even if they appear that way. They are desperate, and they have to be.
Why? A tiny number of companies generate almost all the profits. There are way more investors than there are companies that make investors money. By some estimates, less than 1% of the companies investors fund generate over 75% of the profits across the entire industry. Factor in the companies investors don’t fund, and the numbers are mind boggling. If you don’t invest in one of the tiny number of winners? Well, you’re kind of stuffed.
Unfortunately, even for the best investors, the rules of the game mean you can’t catch ’em all.
So, what can you do to invest in more valuable companies? How do you succeed despite the unforgiving odds?
You need to increase your odds, relative to other investors. The state of your anti portfolio will lead you to some combination of three strategies:
- Pick better. Maybe you compete on theses, decision making processes, or knowledge.
- Win more deals. Maybe you compete on price, negotiation, or value add.
- See more deals. Maybe you compete on brand, reach, or sheer legwork.
In the short term, these strategies work. If you go to any half decent fund’s website, you’ll find their theses, their value add, their brand.
But in the long run, pursuing these strategies is bad for investors. They don’t increase the number of valuable companies, or how valuable they turn out to be. These strategies just create more competition for deals.
It is an arms race. You need to get into the best companies, but doing so gets harder and harder. You’re jacking up costs, financial and personal, through competition. You have run this race before — you ran it in the dot com boom, and you’re running it now.
All the while, you have no good strategy to increase the scarce resource — companies that will make you money.
DIGGING FOR GOLD
Startup investors are modern day gold miners, and everyone is crammed into the same mine.
You can be a really successful miner. You just have to get lucky and strike gold. But is it sustainable?
There’s one big problem: nothing you do will increase the amount of gold in the mine. You don’t know how much was there to begin with, or how much is left. There might be none. And yet you’re committed to this — it’s your job to keep digging.
What can you do? Like an investor, you need to increase your odds, relative to everyone else. You’ve got a few options:
- Dig smarter. Maybe you find a neglected spot, or spot patterns in the rock.
- Dig faster. Maybe you get more complex machinery, or trade speed for safety.
- Dig more. Maybe you spread yourself thinner, and dig through the night.
However smart, hard, and long you dig, your competition will too. And worst thing that can happen is that they strike gold. Who knows how much is left to mine — the only thing you know for sure is you’re now less likely to hit something.
New gold gets created over time, but you don’t know quite how. Frustratingly, you have no levers to pull to increase the rate of production, to increase supply. You can’t control or influence the process, and it’s agonisingly slow. All you can do is compete to extract the gold that organically appears. All you can do is stay in the mine.
You compete until it’s not worth it any more, long after the gold runs out.
Investing in startups is digging for gold and, one way or another, the gold always runs out. When it does, all there is to do is wait.
Investors wait for supply to appear, and hope to be in the right place when it does. They hang around where gold appears fastest, but they can’t make it appear faster.
How do we know this is the case? Because waiting would be an insane strategy if you knew the alternative — how to create supply.
Creating the supply of an otherwise scarce resource will make you very rich. If you control the supply of something scarce, you control the economics associated with the resource, and can create monopolies of many kinds.
Given the dominant investment strategy is not to create supply, but to compete for it, this suggests no one has figured out how to reliably create valuable companies from scratch yet. If you knew how to reliably create valuable companies, you would be doing it already.
People have been trying to figure this out for a while. Academics have studied startups for decades. You might protest that universities, accelerators, incubators, pre seed investors start very early — just some technology, an idea, or a pitch.
But even Day 1 is fundamentally different to Day 0. As soon as a company exists, you lose the chance to study how it came to be. No one in the world has systematically, at scale, observed what came before.
This is what we’re doing at EF. We are taking in raw materials — hundreds of extraordinary people from across the world every year — and putting them through an iterative, data driven methodology. We are experimenting all the time: collecting information about the founders we support; understanding their qualitative experience; and learning what works and doesn’t work. From the moment we first make contact, we are building a methodology to get them from Day minus 100 to Day 1 of something valuable.
We go beyond Day 1, to the end. This is a massive feedback loop — from the thousands of people we interact with, to the hundreds we fund, to the tens that become outliers. Every step of the way we are there supporting, tracking, analysing. Over time, this turns the mystical process of creation into a science. What inputs yield what outputs? What interventions change outcomes?
At EF we study outliers from before they even know they’re outliers, right through to the day they prove it. This has never been done before.
Uncovering the secret to finding, creating, and supporting them, means owning the supply of a scarce resource. EF is alchemy for the 21st century.
VENTURE CAPITAL’S ANTI PORTFOLIO
If we can get it right, uncovering the secret to creation will have more impact than any investor has ever had.
It doesn’t matter if you don’t dig for gold: someone else will. For the best companies, sooner or later investors end up fighting over them and, to be honest, who cares who wins? Paradoxically, the counterfactual value of the investor tends towards zero the better the company is.
But creating supply allows you to answer the question “what are all the great companies that never got built?”. It allows you to bring far futures closer, to change the course of history, and to create companies that would never have existed otherwise. The counterfactual value of creation is uncountable.
Creation unlocks venture capital’s unseen anti portfolio — all the things we missed, because we only knew how to invest in things that already existed. Without creation, you can only dig for gold that’s already there, and then wait. You can’t dig up what could have been. You can’t dig up what could, one day, still be.
Creation is how you unlock the portfolio, the millions of incredible people, that Venture Capital has failed.
And this portfolio will be supremely large. It’s capped only by the number of people that could, in some circumstance, build companies. If creation can unlock Venture Capital’s unseen anti portfolio, it will reveal the true potential of the entire asset class.
Perfecting creation would mean hitting the theoretical maximum for value creation. What could be more valuable to work on than that?
What idea should be tried that might never be tried?
What team should meet that might never meet?
What great companies are yet to be built?
I don’t know the answers, but I know we’re going to find out.