Invest in $0 Billion Companies

Naval: As Vinod Khosla says, you want to invest in zero-billion-dollar companies. If a company can’t get to at least $1B in value, you don’t want to invest.

If you can’t make at least a 100x return, you’re not seed investing; you’re Series A investing, but with less capital and less ownership.

One of your investments has to get to the 100x mark for a seed-stage portfolio to make sense, assuming you have a relatively diversified portfolio. You should not invest in any company that looks interesting but will return 5x or 10x.

There are two reasons for this. First, many of your investments will go to zero, so having only a few 5x or 10x returns will barely make up for your losses. Second, as a seed investor your ownership is so small that it will not make a material difference in your life, or for your investors, unless the company is a massive success.

For a venture capitalist putting millions of dollars into a deal, a 5x return is meaningful—even 3x is meaningful. But as a seed investor, you have to go for broke.

VCs won’t invest in companies that can’t be worth $1B

VC funds are quite large and need to generate hundreds of millions of dollars on winning investments to justify their fund, so they won’t invest in companies attacking small markets. Top VCs will pass on a company that can’t get to $1B in market cap, and even that may be too small.

As Bill Gurley likes to say, “Venture capital is not even a home run business. It’s a grand slam business.” However, this doesn’t mean to only go after obviously large markets: Emerging markets are, by definition, small.