Everyone loves to talk about their wins. The 100x returns, the unicorn exits, the prescient calls on a world-changing technology. It’s the highlight reel of venture capital. But what about the losses? The deals that go to zero, the mistakes that cost you a quarter of a million dollars. Nobody posts those on Twitter.
Well, I’m going to. I lost $250,000 on a single deal, and it was one of the most important lessons of my career. It wasn’t a fraudulent founder or a market crash that did me in. It was my own stupid mistake. I completely misread the portfolio construction, and it cost me dearly. This isn’t a story about a bad investment; it’s a story about a bad strategy.
The Seduction of the "Sure Thing"
This was early in my angel investing journey. I’d had a few modest wins, my confidence was growing, and I was hungry for a breakout success. Then, a deal came across my desk that looked like a sure thing. It was a late-stage secondary opportunity in a company that was the darling of Silicon Valley. Every top-tier VC was in, the growth was explosive, and the narrative was perfect. The opportunity was to buy shares from an early employee looking for some liquidity.
I’d been tracking the company for a while, and I believed in the vision. The price was high, no doubt about it, but the momentum felt unstoppable. I convinced myself this was a "can ’t miss” opportunity. So I did something I’d never done before. I went all in. I put $250,000 into that single deal. That was a huge portion of my liquid capital at the time. It was a bet-the-farm kind of move.
Why? Because I was thinking about the deal in isolation. I wasn’t thinking about it in the context of my overall portfolio. I was seduced by the story, the hype, the fear of missing out. I saw a shiny object and I grabbed it with both hands, without thinking about how it fit with everything else I was holding.
What is Portfolio Construction, Anyway?
Before I get into the gory details of how it all went wrong, let’s talk about what “portfolio construction” actually means. It’s a term that gets thrown around a lot in VC, but it’s often misunderstood. It’s not just about picking good companies. It’s about building a portfolio of companies that, as a whole, has the potential to generate venture-scale returns.
Here’s the thing about venture capital: the vast majority of startups fail. Even the ones that look promising, the ones with brilliant founders and hot technology, can and do go to zero. The entire model of venture capital is built on the assumption that a small number of massive winners will pay for all the losers, and then some. This is the power law in action.
Therefore, how you structure your portfolio is arguably more important than any single investment you make. It involves answering a few key questions:
- How many investments will you make? (Your N)
- How much will you invest in each? (Your check size)
- What’s your ownership target?
- How much will you reserve for follow-on investments?
These aren’t just academic questions. They are the fundamental building blocks of a successful venture strategy. A well-constructed portfolio is designed to survive the inevitable losses and maximize the chances of catching a few of those elusive 100x winners.
My $250,000 Mistake
So, back to my story. I put $250,000 into this single, late-stage deal. At the time, I had a relatively small portfolio of a dozen or so early-stage investments, with check sizes ranging from $25,000 to $50,000. This one investment was 5 to 10 times larger than any of my others. It completely skewed my portfolio.
I justified it to myself by saying it was a “lower risk” investment. It was a late-stage company, after all. The product was proven, the revenue was growing, and the exit seemed just around the corner. I told myself that while my early-stage bets were high-risk, high-reward, this was a safe bet to balance things out.
I was wrong. So, so wrong.
What I failed to appreciate was that even late-stage private companies are still incredibly risky. They are not public stocks. They are illiquid. And the information asymmetry is massive. You are not getting the full picture, no matter how much due diligence you do.
In my case, the company’s growth started to slow. The market shifted. A new competitor emerged with a better technology. The narrative started to unravel. The “imminent” IPO was pushed back, then pushed back again. The company ended up raising a down round, and my shares were massively diluted. To make a long and painful story short, that $250,000 investment is now worth close to zero.
The Brutal Lesson: Position Sizing is Everything
Losing that money was excruciating. It was a significant blow to my net worth at the time. But the lesson it taught me was invaluable. It was a $250,000 education in the single most important aspect of portfolio construction: position sizing.
My mistake was not investing in the company. My mistake was investing too much in the company. I let one deal dominate my portfolio, and I paid the price. I broke the cardinal rule of venture capital: I didn’t give myself enough shots on goal.
Think about it. If you have $1 million to invest, you could make one $1 million investment. Or you could make ten $100,000 investments. Or you could make forty $25,000 investments. Which strategy is more likely to produce a 100x winner? The one with forty shots on goal, of course.
This is not to say that you should spray and pray. You still need to have a high bar for quality. But you need to balance that with the mathematical reality of venture returns. You need to have enough investments in your portfolio to have a statistically significant chance of hitting a home run.
For me, the sweet spot is a portfolio of 40 to 50 early-stage companies. This allows me to take enough swings at the bat without diluting my focus too much. And my check sizes are now much more uniform. I don’t let any single investment become so large that it can blow up my entire portfolio.
How I Construct My Portfolio Today
My painful experience with that $250,000 loss fundamentally changed my approach to angel investing. Here’s how I think about portfolio construction now:
- Target N of 40-50: I aim to build a portfolio of 40-50 companies over a 3-4 year period. This is my "shots on goal" number.
- Initial Check Size: I have a standard initial check size, and I stick to it. This prevents me from getting overly excited about any single deal.
- Follow-on Reserves: I reserve a significant portion of my capital for follow-on investments in my best-performing companies. This is where the real money is made in venture. You don’t have to be a genius to know which of your companies are breaking out. You just have to have the discipline to double down on them.
- Stage & Sector Diversification: While I primarily focus on early-stage (pre-seed and seed), I do have some exposure to later stages. But I do it in a disciplined way, with smaller check sizes. I also make sure I’m not overly concentrated in any one sector.
This is not the only way to do it, of course. There are many successful venture capitalists with different strategies. But this is what works for me. It’s a strategy born from a very painful, very expensive mistake.
Don't Learn This Lesson the Hard Way
I’m sharing this story not to brag about my losses, but to save you from making the same mistake I did. It’s easy to get caught up in the hype of a single deal. It’s easy to convince yourself that this is “the one.” But the reality is, you don’t know which of your investments will be the next Google or the next Facebook. No one does.
The only thing you can control is your process. You can control your portfolio construction. You can control your position sizing. You can give yourself enough shots on goal to have a chance at catching a monster.
So, before you go all-in on that “sure thing,” take a step back. Think about your portfolio as a whole. Think about your position sizing. And remember my $250,000 lesson. It could be the most valuable advice you ever get.
The Psychology of a Bad Bet
Looking back, I can see all the psychological traps I fell into. It's a classic story, and I played my part perfectly.
First, there was the fear of missing out (FOMO). This deal was hot. Everyone was talking about it. All the “smart money” was in. I was terrified of being the one who missed the boat. That fear clouded my judgment and pushed me to act impulsively.
Then, there was confirmation bias. I was so convinced this was a winner that I only looked for information that confirmed my belief. I dismissed the naysayers as haters. I ignored the red flags. I was living in a self-created echo chamber of positive reinforcement.
Finally, there was the narrative fallacy. I fell in love with the story. The charismatic founder, the disruptive technology, the massive market. It was a beautiful narrative, and I wanted to be a part of it. I invested in the story, not the business. The problem is, stories can be deceiving. The numbers, on the other hand, don't lie.
These biases are powerful, and they can trip up even the most experienced investors. The key is to be aware of them and to have a system in place to counteract them. That's where a disciplined portfolio construction strategy comes in. It's your defense against your own worst instincts.
Building a Resilient Portfolio: More Than Just Numbers
My portfolio construction today is not just about the numbers. It's about building a system that is resilient to my own biases and the inherent uncertainty of the market. Here are a few more principles I live by:
- Be Thesis-Driven: I have a clear thesis about the future. I invest in founders who are building that future. This helps me to stay focused and to avoid chasing shiny objects.
- Value Over Hype: I'm more interested in the substance of a business than the hype surrounding it. I look for strong fundamentals, a clear path to profitability, and a founder who is obsessed with solving a real problem.
- The Long Game: I'm not a trader. I'm an investor. I'm in it for the long haul. I'm patient with my winners, and I'm quick to cut my losers. This long-term perspective helps me to ride out the inevitable ups and downs of the market.
The Bottom Line
Losing $250,000 was a painful but necessary education. It taught me that in venture capital, the process is more important than the picks. A disciplined portfolio construction strategy is not just a nice-to-have; it's the only way to survive and thrive in this game.
So, my advice to you is this: don't be like me. Don't learn this lesson the hard way. Build a resilient portfolio. Diversify your bets. And never, ever let one deal have the power to sink your ship. Your future self will thank you for it.
Frequently Asked Questions
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.