TL;DR: Yes

To me, anyway. This is a simple question with many, many different variations of answers so I am simply sharing my opinion and thinking around this as it relates to my perspective, fund size and investment strategy. Your mileage may vary so don’t hate on me.

“Surface area” in this context represents the extent of the exposure you have across different investments, so maximizing the number of opportunities to find truly breakout companies that will provide outsized returns.

In venture capital, there are a few undeniable variables – entry price, company execution, and exit price. Wrapped around those things as an investor are ownership share, dilution, preferences (as discussed previously) and beyond.  As a pre-seed or early stage investor most, if not all, of those things are completely outside your control over the life of the company other than entry price – meaning the price you paid to invest be that as priced shares or some type of valuation cap on a convertible note or SAFE. And, sometimes, even that can be out of your control in subsequent rounds.

So, Robert, are you saying you should “spray and pray” as a pre-seed investor?  Of course not and that phrase gets slapped on any type of portfolio strategy that drifts north of 20-25 investments it seems. No, you should have a structured and methodical way to evaluate investments that you believe will deliver the risk adjusted returns you and your investors expect and invest enough in each company for it to matter. So factor in fund size, holding periods, estimated outcome potential and many other factors to get to what you think is a proper number of investments to hold.

What I am saying is that the startup journey has barely begun at the pre-seed stage and what is known and knowable is generally lacking. This is the core of the information asymmetry that exists at this stage and where the truly outsized returns (the “alpha”) resides. There are many, many reasons things don’t work out like the founders or investors thought they would. Sometimes for self-inflicted reasons, sometimes through no fault of anyone involved. It’s just part of the deal.

So balancing the risk you are taking on with the return you are seeking requires surface area because, in the famous words of screenwriter William Goldman “nobody knows anything.” 

You can certainly be informed, you can certainly be smart, you can even have what you believe is an edge in access or decision making but truly nobody knows.  That is why it is important to be disciplined about why you are making an investment and clearly articulate what you believe the “bet” is that you are making. Which is also the reason that I believe the most important thing in due diligence is figuring out if the founders will quit. There will be failures and going back to see what you believed needed to happen for success and why it didn’t is both humbling and instructive. 

How do you increase your surface area as a pre-seed investor?  Obviously through a larger portfolio of investments but getting there requires time, patience, process and, to a degree, creativity plus the capital to do it.  As an angel investor, things like AngelList and products like Sydecar let you build a portfolio for $5k or so per shot.  A broader (and I think, self servingly, better way) is through investing in a fund.  Yes, you pay a management fee but you are (hopefully) getting access to a larger, diversified portfolio with better deals, better terms, and dedicated management.

In my current fund, we are making direct investments in companies as well as select Limited Partner investments in stage and category aligned venture capital funds. That adds the holdings of those underlying funds to my fund’s surface area increasing the potential return profile.

Highly concentrated funds can and do work but at the later stages (late here meaning Series A and beyond) there is more known and more that can be analyzed and forecasted vs. the “first check” type of investor. This is a thoughtful write up on this topic “Should You Build a Concentrated Fund”

Being a pre-seed investor makes you a “believer” investor while later stage investors are more “spreadsheet” investors. As a founder, you should know and understand the difference because if you get in front of a spreadsheet investor too early, they will eat you alive.

So this is my opinion and approach formed by doing direct and fund investing for the last 15 years. Things I was convinced were winners, weren’t. Some that struggled, found success. Many failed. Some were great. Many, many surprises along the way.

Surface area matters.