In 2015, Collaborative Fund made an unusually bold bet—investing $5 million—20% of a $25 million fund—into a single startup. Less than five years later, that one investment returned over $100 million, singlehandedly quadrupling the entire fund.

Was this risk justified? Should a fund spread $25 million across twenty-five $1 million bets or five $5 million ones?

This wasn’t only a lucky outcome; it was also a deliberate choice rooted in conviction. Venture capital returns famously follow a power law—a tiny fraction of investments often generate the majority of returns, both for a given fund and the entire industry each year. The challenge is structuring a portfolio to catch at least one of these breakout outcomes without over-diversifying and diluting returns.

This post examines the math behind portfolio construction, the trade-offs between concentration and diversification, and why exceptional outcomes often come from high-conviction positions.

The flawed math behind venture portfolio construction

Venture investing is often called an art, but that doesn’t stop people from trying to turn it into a science. Many funds use math to guide portfolio construction, helping to estimate how many bets to place and how much to allocate per investment in a given fund. These range from probability-driven frameworks like the Kelly Criterion to simulation-based modeling like Monte Carlo.

No model perfectly captures the reality of venture capital. Each has flaws, assumptions, and blind spots. Some fail to account for the extreme variance in startup outcomes, while others assume investors can accurately predict success rates—something historical data suggests is extraordinarily difficult.

Still, these frameworks can help ballpark an approach. Below are some of the more common ones and their limitations.

Kelly criterion

Originally developed for gamblers, the Kelly Criterion calculates the optimal bet size to maximize long-term returns. In VC, it can be used to help determine the proportion of a fund to allocate per startup.

Why it isn’t a perfect fit for VC: 

• You don’t know exact probabilities of success or payouts—Kelly assumes you do.
• It assumes you can reinvest winnings each round, but in VC, capital is typically locked up for a decade.

Back of the envelope power law math

Some VCs take a probability-driven approach to ensure their portfolio includes at least one breakout winner. The basic logic goes like this:

• Assume a startup has a 5% chance of delivering a 20x+ return.
• If you invest in just one company, there’s a 95% chance you miss a big winner.
• If you invest in two, the chance of missing a winner drops to 90% (95% × 95%).
• Keep investing, and the odds of missing a winner continue to shrink.

From here, one can set a threshold for failure—say, wanting a 20% or lower chance of having zero breakout winners—and backsolve to determine how many investments to make (32 in this case).

Why it isn’t a perfect fit for VC: 

• The failure threshold is arbitrary—too low, and you dilute your best bets; too high, and you risk missing a winner altogether.
• It treats startup outcomes as binary (big winner or bust), ignoring the reality that many exits fall somewhere in between.
• A more nuanced approach would factor in different return profiles and optimize accordingly.

Monte Carlo simulations

This method runs thousands—sometimes millions—of randomized scenarios based on assumed success rates and exits, testing different allocation strategies to identify the best.

Why it isn’t a perfect fit for VC:  

• Like all models, Monte Carlo is only as good as its inputs. Assumptions about success rates and exit values are just that—assumptions. Even using robust historical venture data doesn’t guarantee reliability.
• For example, AngelList ran Monte Carlo simulations using data from 3,000+ past investments. One might expect a dataset of that size to produce generalizable conclusions. However, adding just a few breakout investments drastically altered the projected returns:
  • Adding Peter Thiel’s Facebook seed investment shifted the average return from 2.7x to 5.9x.
  • Including Google’s and Uber’s seed rounds pushed it to 27.7x.
• Monte Carlo is useful for modeling potential outcomes and assessing risk, but it can’t predict the future. Even running simulations on a perfectly curated dataset of every VC deal from the last decade wouldn’t ensure reliable forecasts—past performance isn’t indicative of future results.

So… how should you construct your portfolio?

Each of these methods has flaws, but together, they offer a rough picture of effective venture portfolio construction. 

They suggest that early-stage funds should aim for 25-40 investments per fund. This range balances the potential for capturing breakout winners while avoiding excessive dilution. 

However, portfolio construction isn’t just math—it’s strategy. Models can give a broad range of appropriate portfolio concentrations, but they can’t tell you exactly how many bets to make or when to make a single more concentrated bet. Our decision to allocate $5M—20% of our fund—into a single company wasn’t model-driven. In fact, most models would have cautioned against it.

Below are some strategic reasons for varying degrees of portfolio concentration.

Arguments for less concentration

• Firm longevity: A broader portfolio increases the odds of landing a power-law outcome. An overconcentrated fund that strikes out may compromise future fundraises. LPs won’t tolerate a decade of locked up capital for a <1x MOIC. Diversification may sacrifice upside in a single fund, but it can keep a firm in the game. If our $5M bet had missed and the rest of the portfolio underperformed, our concentration strategy would have been scrutinized, potentially leading to some tough conversations with LPs.
• Leading vs. following: Larger checks often mean leading rounds, which comes with extra responsibilities—diligence, term negotiation, and board seats to name a few. Not all firms are structured and willing to lead.
• Poker analogy: Fred Wilson compares early-stage investing to poker. Players put in a small ante to see their cards before deciding whether to bet a larger amount. Similarly, a small early check secures a seat at the table, giving investors time to assess execution from the inside. A diversified approach in early stages increases exposure to potentially strong performers, enabling investors to deploy follow-on capital with greater conviction in subsequent rounds.

Arguments for more concentration

• Conviction: When a standout team, market tailwinds, and early traction align, a concentrated investment can be the right move. While conviction should underpin every investment (ideally), some opportunities inspire greater confidence than others. When that happens, check size should reflect it.
• Deeper involvement and better follow-on decisions: A concentrated portfolio lets investors be more hands-on, building stronger relationships with founders and offering targeted support. With fewer companies to track, follow-on decisions are also more informed.
• Quality over quantity: More deals can mean spreading capital too thin or investing in lower-quality startups just to fill a portfolio. If a fund can reliably identify its strongest investments at the time of investment, concentrating more on those maximizes returns.
• Top-tier funds tend to concentrate capital: Data shows higher-performing funds tend to be more concentrated. Whether through larger initial checks or follow-on investment, they focus on companies with the highest potential for outsized returns.

Conviction and check size dynamacy 

Our $5M bet wasn’t one of five evenly sized investments within our $25M fund—it was an outlier. The fund made 20 investments, keeping it relatively concentrated, but this check was unusually large. It was placed with conviction, and in hindsight, it paid off.

Had this bet failed, we would have reassessed our approach to concentration. Big swings carry big risks, and a miss would have been a tough reminder of the balance between focus and diversification.

While we haven’t committed 20% of a fund to one company since, this experience reinforced conviction’s role in our portfolio construction. Since then, we’ve leaned on it more heavily, ensuring we’re positioned to bet big when the right opportunity presents itself.

Venture capital is as much an art as a science. The real challenge isn’t just portfolio sizing—it’s knowing when to take a concentrated risk and having the discipline to live with the outcome, whether it’s a hard-earned lesson or a $100M success.

Past performance is not indicative of future results. There can be no assurance that any Collaborative Fund investment or fund will achieve its objective or avoid substantial losses. All returns, including MOICs, shown herein are gross returns. Gross returns do not reflect the deduction of management fees, carried interest, expense, and other amounts borne by investors, which will reduce returns and in the aggregate are expected to be substantial. Certain statements contained herein reflect the subjective views and opinions of Collaborative Fund. Such statements cannot be independently verified and are subject to change. In addition, there is no guarantee that all investments will exhibit characteristics that are consistent with the initiatives standards, or metrics described herein. Performance information shown herein is for a subset of Collaborative Fund investments.

I heard a phrase recently: “Magazine architect.”

It’s a derisive term architects use for their colleagues who design buildings that look beautiful, grace magazine covers, and win awards, but lack functionality for the tenants.

Intricate roofs look amazing – and are notorious nightmares for leaking.

Oddly shaped buildings win awards – and offer little flexibility to remodel interior layouts.

Fancy materials glisten—but good luck finding someone skilled enough to maintain or replace them.

Ornate lobbies take up tremendous space – and are often not used by occupants, who enter through the garage.

The book How Buildings Learn writes that architects fancy themselves as artists, but people who occupy buildings do not want art; they want a building to work in:

Art must experiment to do its job. Most experiments fail. Art costs extra. How much extra are you willing to pay to live in a failed experiment? Art flouts convention. Convention became conventional because it works. Aspiring to art means aspiring to a building that almost certainly cannot work, because the old good solutions are thrown away. The roof has a dramatic new look, and it leaks dramatically.

The book cites renowned architects like I.M. Pei and Frank Lloyd Wright for designing buildings admired by everyone except their occupants, whose feelings tend towards frustration and disgust. Frank Lloyd Wright once said of his infamously leaky roofs: “If the roof doesn’t leak, the architect hasn’t been creative enough” – an amusing comment to everyone but those living in his homes.

The flip side is that office buildings with happy tenants tend to be big, boring, rectangles built with classic materials. They will win no awards and grace no magazines. But the roof is tight, the layout is flexible, and the HVAC system is located where it should be. The true purpose of a building – a place that helps you do your best work – is achieved.

I like art and can appreciate architecture. But the idea that there is a time and place for beautiful vs. practical should be recognized. And the idea that if you are looking for practical advice, beware hiring an artist whose goal is to be praised should be, too.

Is that true for many things in life?

Jason Zweig once wrote about investing:

While people need good advice, what they want is advice that sounds good.

The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold.

A lot of financial advice is beautiful and intelligent but has no practical purpose for the person receiving it.

It happens for a couple reasons.

One is that, like architects, financial professionals may want to further their career more than they want to help their clients. I think this is usually innocent: It’s easy to be blind to what your clients need when your business is so profitable and you’re gaining so much attention.

“Look how much money I’m making and how often I’m asked to come on TV” can be interpreted as “I am adding so much value.” Sometimes that’s true; often it’s not. An intense and complex derivatives strategy can make you sound brilliant and bring in buckets of fees, and also be the opposite of what a client actually needs. It’s telling that the company that figured out how to provide low-cost index funds – Vanguard – could only do it as a non-profit. There’s a mile-wide gap between what many clients need and what generates the most fees. A lot of people need the financial equivalent of a rectangle building but are sold a gorgeous geodesic dome with a leaky roof and no garage.

The other reason is that no two people are alike, and financial advice that’s useful for you could be disastrous for me and vice versa. There is no one-size-fits-all financial plan – a fact that’s easy to overlook because people want to think of finance like it’s physics, with clean formulas and absolute answers. When advice needs to be personal but you think it’s universal, it’s common to default to what sounds the best, the most intelligent, and the most complex. People drift from practical towards beautiful.

I watch financial markets every day because I think they’re a window into culture and behavior. They’re so fascinating, so beautiful, like art. But my personal finances are simple and boring. They will win no awards. But they’re practical for me and my family. They provide what I need them to do. Isn’t there beauty in that?

A simple formula for a pretty nice life is independence plus purpose.

Purpose is different for everyone. Sometimes it’s family, sometimes it’s community, religion, work, whatever.

But independence is more universal. Our desire to be independent, why we want it, what prevents us from achieving it, and why some people sabotage their ability to have it, is such a common story across cultures and generations.

I have a parenting story.

My son has always been shy. Painfully shy. At times it’s adorable; at times my wife and I worry. Pre-school teachers gave up trying to get him to participate in group activities – he would sit by himself in the corner watching other kids play. He wouldn’t trick-or-treat one year because the thought of knocking on a stranger’s door could bring him to tears. We almost didn’t make it through airport security once because he refused to tell the TSA agent his age (he was eight).

But we had confidence he’d improve. And like most kids, he has.

Last week we were at a pool and he asked if he could get ice cream. I said yes, but you have to do it by yourself. You have to order it yourself, hand her the money, take the change – all of it. I’m not even going to be nearby.

“I can’t do it,” he said.

“That’s OK, you don’t have to” I said.

He paused.

“But can I still get ice cream?”

“Yes, but you have to do it yourself,” I said.

Another pause.

“What if I get in trouble?” he asked.

“For what?”

“What if they tell me no because I’m a kid?”

“They won’t. But even if they do, it’s fine,” I said. “You won’t be in trouble.”

I could see the gears turning in his head. He wanted to do it so badly.

“I don’t know,” he said. “I’m so scared.”

Another pause.

“I can’t do it.”

It’s difficult as a parent to, on one hand, want to shower your kids with protection and help while, on the other, know how important it is to teach them independence. “Teach” is probably the wrong word, because you know they’ll figure it out on their own. Sometimes you provide the most help with the assistance you withhold.

My son walked off. I had no idea what he was going to do.

A few minutes later he came back – absolutely beaming – with a bowl of ice cream.

This story might seem benign to other parents – or even bizarre if you’re used to a gregarious kid. But in the context of his past, it’s hard to describe its impact. He was so proud of himself.

If I had gone with him and held his hand through the process, the ice cream would have given him a small happiness boost. When he did it on his own terms, with a sense of independence, the psychological rewards were off the charts.

I’ll tell you the takeaway: If you’re used to being assisted, supervised, mandated, or dictated, and then suddenly you experience the glory of independence, the feeling is sensational. Doing something on your own terms can feel better than doing the exact same thing when someone else is peering over your shoulder, telling you what to do, guiding you along.

And that’s as true for adults as it is for kids getting ice cream.

Independence is the best financial goal for most people. But independence is more than just financial – moral, cultural, and intellectual independence – is one of the highest levels you can reach in life. “There is only one success,” says poet Christopher Morley, “to be able to spend your life in your own way.”

Derek Sivers once put it a different way:

All misery comes from dependency. If you weren’t dependent on income, people, or technology, you would be truly free. The only way to be deeply happy is to break all dependencies.

That’s why independence – financially, intellectually, morally – is one of the highest goals you can achieve.

Here are a few things I’ve thought about with independence.

1. Independence is the only way to recognize individuality.

I read this great quote recently from an early Amazon employee:

Jeff [Bezos] said many times that if we wanted Amazon to be a place where builders can build, we needed to eliminate communication, not encourage it.

The idea is that if you want to do something great, you cannot have a group of people constantly telling you what you’re doing wrong and why it doesn’t mesh with their own goals. That’s not because those other people might be wrong; it’s because they might be playing a different game than you are.

In business, finance, and everyday life, a great decision for me might be a terrible decision for you and vice versa. If everyone had the same goals, the same family dynamics, and the same personalities, we could make finance a hard science and say, “Here’s how everyone should save and invest.” But it’s not like that. The difference in how you and I want to live our lives – what our own definition of success might be – can be 10 miles wide. A potato farmer and a hedge fund manager might be equally happy, all while looking at the other as if from a different planet.

A lot of financial mistakes come from decisions that would be right for someone else but wrong for you. They are the most dangerous, because smart people around you say, “This worked for me. It changed my life. You should do it too.”

Here’s another thing I read recently, from G. K. Chesterton:

Ideas are dangerous, but the man to whom they are least dangerous is the man of ideas. He is acquainted with ideas, and moves among them like a lion-tamer. Ideas are dangerous, but the man to whom they are most dangerous is the man of no ideas. The man of no ideas will find the first idea fly to his head like wine to the head of a teetotaller.

If you have no strong views on what kind of life you want to live – who are you, what you desire, what makes you happy and what doesn’t – you’re likely to want to mimic the most visually appealing person you come across (often the person with the biggest house, fastest car, or nicest clothes). That may work, it may not.

And so it’s vital to constantly reflect on who you want to be, what kind of life you want to live, and ask if you’re on an independent path versus chasing someone else’s dream.

2. Independence in thought, philosophy, morals, and culture are as important as financial independence.

Charlie Munger once listed three practical rules for success:

• Don’t sell something you wouldn’t buy.

• Work for people you admire.

• Partner with people you enjoy.

So simple.

I have seen many people achieve some level of financial independence only to be sucked into a new kind of dependence: the culture of their tribe. Financial freedom is achieved, but it’s replaced with sycophancy to a new boss, or a blind adherence to tribal views you might disagree with deep down.

It’s a unique form of poverty: rather than needing to work for money, you are indebted to needing to think a certain way.

I once heard a good litmus test: If I can predict your views on one topic by hearing your views about another, unrelated topic, you are not thinking independently. Example: If your views on immigration allow someone to accurately predict your views on abortion and gun control, there’s a good chance you’re not thinking independently.

There are so many different versions of this: The salesman who doesn’t believe in his products, the worker who secretly thinks her boss is crazy, the employee who can’t stand his highest-paying client, the voter who nods along while wincing inside.

There’s a difference between the practical need to accept different views and pretending to agree with different views, especially if you’re just doing it for more money.

Investor Ed Thorp once said: “It is vastly less stressful to be independent—and one is never independent when involved in a large structure with powerful clients.”

Less stress is a good point. It’s mentally exhausting to pretend to be someone you’re not. It’s part of why so many people look forward to retirement: it may be the first time in their professional lives they can truly be themselves.

Financial independence is easy to grasp – you no longer rely on others for income. Intellectual and moral independence is more nuanced, but not having it is a unique form of debt.

3. When you’re independent you feel less desire to impress strangers, which can be an enormous financial and psychological cost.

Speaking of hidden forms of debts: How much of what takes place in our modern economy is done purely for signaling reasons? It’s impossible to quantify, but you know it when you see it. And taking an action to impress other people is a direct form of dependence. It happens in many different ways:

• Physical signaling (clothes, cars, homes, jewelry)

• Clout-chasing (desperate for social media engagement)

• Tribal signaling (political battles, status superiority, election bumper stickers)

• Moral signaling (everything is us-versus-them)

Each of these is about measuring your own value through the opinions of others. Sometimes it’s direct (your net worth versus mine) and other times it’s more subtle (do you like me?). The person who is desperate for attention and acceptance from a group of strangers is hardly different from the person begging for money on the street.

The wild thing about all this effort is how easy it is to overestimate how much other people are thinking about you. No one is thinking about you as much as you are. They are too busy thinking about themselves.

Even when people are thinking about you, they often do it just to contextualize their own life. When someone looks at you and thinks, “I like her sweater,” what they actually may be thinking is, “That sweater would look nice on me.” I once called this the man-in-the-car-paradox: When you see someone driving a nice car, rarely do you think, “Wow, that driver is cool.” What you think is, “If I drove that car, people would think I’m cool.” Do you see the irony?

When you’re truly independent you rid yourself of this silly burden. It can be such a relief when you do. Only when you stop caring what strangers might think of you do you realize how much effort you may have previously put into their validation.

But let me make an equally important point:

4. Independence does not mean you don’t care what anyone thinks of you. It means that you strategically decide whose attention you seek.

I need the love and admiration of my wife, kids, and parents. I enjoy the presence and camaraderie of about five friends. I want to foster relationships with a small group of people I admire in my professional orbit.

But you can see how this funnel keeps tapering off from there.

When you independently choose who you want to include in your small circle of life, the actions you take, the work you pursue, and even the values you hold can completely flip. Rather than trying to appease everyone (foolish, impossible) you select the life you want to live and focus your attention on a smaller group of people whose love and support you deeply desire.

It’s the opposite of when business leaders and politicians pander for the support of the masses. On one hand you can say they are doing something that gets them what they want (power). On the other, how independent are you if the words you say and the actions you take are dictated by the beliefs of a group of people you’ve never met?

A related point here is that loyalty to those who deserve your loyalty is a wonderful thing. Family, genuine friends, companies who you deeply respect and admire – it can be so satisfying to offer your loyalty to someone who deserves it. But it’s rare, and only when you’re independent can you be honest about whether you’re being appropriately loyal or attached to the attention and money of people you secretly don’t admire.

5. Financial independence doesn’t mean you stop working.

This idea is related to the previous one: Financial independence is a wonderful goal. But achieving it doesn’t necessarily mean you stop working – just that you choose the work you do, when you do it, for how long, and whom you do it with.

Those who retire early tend to come from one of two camps:

• They hated their work but kept doing it to make as much money as they could.

• They enjoyed their work but quit when they had enough money.

To each their own, but both look like situations where money controls your decisions. The irony is that some people who think they’re financially independent are actually completely dependent on money, so much so that they spend their days doing things they’d rather not because money tells them they should. Rather than using money as a tool, the money used them.

6. Being independent doesn’t mean you’re accountable to no one. You become accountable to yourself, which is often when you do your best work.

Study any great creator – scientists, artists, entrepreneurs – and you’ll find an independent drive. They weren’t working to appease a boss or earn a paycheck; they were driven solely by their own curiosity and expectations.

When you’re working for someone else’s expectations, the path of least resistance is to put in the minimum required effort – or, worse, to give off the appearance of effort while not actually being productive.

I think almost everyone is creative. But it’s often hard to dredge up creativity when you’re doing it for someone else. In my profession: Writing for yourself is fun, and it shows. Writing for other people is work, and it shows. You do your best work when you’re doing it on your own terms.

I bet that applies to most fields.

And actually most of life.

If I told you a company was on track for $500M in sales in 2024 — up from $200M in 2023 and $70M in 2022 — and thriving thanks to massive secular tailwinds, what kind of business would you imagine? A cutting-edge AI company? What if I told you it was a soda company founded just five years ago in Oakland, California?

The flashiest companies don’t always deliver the highest returns for early investors. Let’s explore a comparison between two vastly different businesses: OpenAI and OLIPOP.

OpenAI is among the most influential and widely discussed companies in the world, and for good reason. It ushered in a golden age of LLMs, with staggering ripple effects: skyrocketing AI-related CapEx among tech giants, NVIDIA’s ascent to the world’s most valuable company by market cap (though it now ranks #3), and a dramatic resurgence in U.S. power demand growth.

Then there’s OLIPOP – a soda company. But not just any soda. OLIPOP makes a healthier alternative with gut-friendly prebiotics and plant fiber. Its nostalgic flavors, like Classic Root Beer and Vintage Cola, feel indulgent but deliver a BFY experience. It’s also delicious. Simple as that.

Comparison methodology

To compare the investment performance of OpenAI and OLIPOP’s first investors, we’ll use a simple returns multiple: the current value of their ownership divided by their initial investment. Since both companies raised their first rounds in 2019, this approach allows for a direct comparison, even though it doesn’t factor in timing (e.g., IRR).

For simplicity, we assume early investors did not participate in later rounds and were diluted. To calculate these returns, we need to determine:

1. Size and valuation of each company’s initial equity round
2. Sizes and valuations of subsequent rounds to account for dilution
3. A reasonable estimate of their current valuations
4. A projection of future dilution each company may face before exit

OpenAI’s returns

Founded in 2015 as a nonprofit focused on advancing AI safely, OpenAI restructured in 2019 to fund its expensive pursuit of AGI. It created OpenAI LP, a “capped-profit” entity governed by the original nonprofit (renamed OpenAI Nonprofit). This structure allowed OpenAI to raise private capital while capping early investor returns at 100x, with any excess profits flowing back to the nonprofit.

At the time of this change, OpenAI also announced its first institutional funding round, led by Khosla Ventures. Let’s call this their Series A. Details remain unclear: PitchBook lists it as a $10M raise at an undisclosed valuation, while other sources suggest Khosla’s stake alone was $50M at a post-money valuation of $1B. We’ll assume a round size of $50M for 5% ownership.

Estimating dilution is tricky. Most of OpenAI’s funding post-Series A has been from Microsoft, which has poured in ~$14B through a mix of equity, Azure credits, and unique profit-sharing agreements. Sources disagree on the details, but key reported investments include $2B in 2021 and $10B in 2023. Adding to the complexity, OpenAI is now transitioning to a for-profit public benefit corporation, which could eliminate the 100x cap on early investor returns.

To simplify, we’ll assume:

1. OpenAI completes its transition, removing the 100x cap.
2. Half of Microsoft’s 2021 and 2023 investments were dilutive, with valuations of $14B in 2021 and $29B in 2023 (as suggested here).

Beyond Microsoft, OpenAI raised a $300M round in 2023 at ~$29B (Series B) and a $6.6B round in 2024 at $157B (Series C). Just yesterday, WSJ reported that OpenAI is in talks for a $40B round at a whopping $300B valuation (Series D). If this round closes as reported, Series A investors will be diluted from 5% to 3.2%, as shown in the table below.

At a $300B valuation, that 3.2% stake is now worth $9.5B – a 189x return on their initial $50M. Not bad!

OLIPOP’s returns

OLIPOP’s story is far more straightforward. PitchBook shows its major funding rounds below:

OLIPOP’s seed investors have been diluted from an initial 28% ownership to roughly 13% today. The last disclosed valuation was during its 2022 Series B, but OLIPOP has grown significantly since then. To estimate its current valuation, we apply a forward revenue multiple from a public comparable to its projected next-twelve-months (NTM) revenue.

OLIPOP’s revenue growth has been remarkable, with several sources indicating it was on track for $500M in 2024 sales, up from $200M in 2023, and $73.4M in 2022. Extrapolating this 2022-2024 CAGR, we estimate NTM revenue of $1.3B. This projection seems reasonable, as revenue growth has shown little sign of slowing, and OLIPOP has significant room to expand distribution and retail presence.

Celsius Holdings (CELH), the maker of CELSIUS energy drinks, offers one of the only relevant public comparables. Applying their 3.8x forward revenue multiple to OLIPOP’s estimated NTM revenue yields an implied valuation of $5.0B.

At this valuation, seed investors’ 13% stake would be worth $639M – an astonishing 256x return on their $2.5M investment, outperforming even the 189x return estimated for OpenAI’s Series A investors.

Future dilution

While current valuations provide a snapshot, returns are realized at the point of liquidity. OLIPOP not only appears likely to deliver higher returns than OpenAI based on current valuations, but is also likely to experience less dilution – and the resulting erosion of returns multiples – before exit. To assess dilution risk, we must evaluate how much additional capital each will need to reach self-sufficiency, where revenues consistently cover operating and capital expenses. Ultimately, this hinges on the strength of each company’s unit economics.

OpenAI’s unit economics

OpenAI’s two primary revenue streams — ChatGPT subscriptions and API usage — present distinct unit economic profiles and associated challenges.

ChatGPT Subscriptions

OpenAI offers several subscription tiers, from a free plan with limited features to a $200/month “Pro” plan. While paid tiers generate predictable monthly revenue, inference compute costs scale with user activity, which can be unpredictable. This means new users don’t always equate to profit growth. This challenge is exemplified by recent reports that OpenAI is losing money on GPT Pro users due to unexpectedly high inference costs, despite the $200/month price point, which Altman set with profitability in mind.

This issue is further exacerbated by the overwhelming proportion of free-tier users – estimated at 95% – who incur inference costs without generating revenue. As a result, paying users effectively subsidize these expenses. Inference compute costs for 2024 were projected at $2B, compared to an estimated $4B in total revenue.

API Usage

The API’s pay-per-token model better aligns revenue with costs, but rising competition has eroded OpenAI’s pricing power. Token prices have plunged 89% in just 17 months, dropping from $36 per million tokens at GPT-4’s launch in March 2023 to $4 by August 2024. DeepSeek, which recently demonstrated that training and inference can be far less compute-intensive, has only accelerated this price collapse. Its reasoning and chat models are currently priced over 95% lower than OpenAI’s.

Training, while not directly tied to unit economics since it doesn’t scale with usage, remains a significant and growing financial burden. Costs are projected to reach $9.5B annually by 2026, with R&D expenses climbing from $1B in 2024 to over $5B in 2026. Though these projections predate DeepSeek’s breakthroughs in cost-efficient training, training will undoubtedly remain a massive and essential expense for sustaining AI leadership.

The following chart illustrates how high inference and training costs, a large base of free-tier users, and pricing pressures combine to create significant profitability challenges.

Training compute costs for 2024 were projected at $3B, with inference costs adding another $2B. Combined with Microsoft’s $700M revenue share and substantial operational expenses, these factors contribute to an estimated $5B loss for 2024, excluding stock-based compensation. These losses are expected to continue, with OpenAI projecting $44B in cumulative losses from 2023 to 2028. Profitability is targeted by 2029, with a revenue goal of $100B.

Covering these massive losses has required successive capital raises, most recently the $40B round, further diluting investors. If OpenAI’s $44B in projected losses through 2028 proves accurate, this latest capital infusion would have brought it close to self-sufficiency. However, a substantial portion of this round is reportedly allocated to OpenAI’s $19B commitment to President Trump’s $500B Stargate initiative, leaving a funding gap. As a result, more funding rounds and investor dilution are likely.

OLIPOP’s unit economics

OLIPOP benefits from straightforward unit economics, driven by predictable production and distribution costs in the established soda industry. Key variable costs include raw ingredients, packaging, co-packing fees, and freight, while fixed costs cover overhead, staff, brand marketing, and R&D. Unlike OpenAI, OLIPOP doesn’t require massive upfront capital or speculative R&D. Its differentiated formulation, brand identity, and consumer positioning also help shield it from commoditization risks despite competition from peers like POPPI.

Regarding future dilution, OLIPOP is already fully profitable. While the company is likely to raise additional capital to accelerate growth, they don’t need to. This gives a more flexible path to exit – OLIPOP could sell to a strategic buyer or IPO without the pressure of hitting complex, multi-year milestones. Fewer funding rounds, less dilution, and a profitable business model mean early OLIPOP investors are far less exposed to the risk of a delayed exit and ownership erosion over time.

Final thoughts

These returns underscore an important lesson: less flashy businesses can sometimes outperform even the most hyped tech companies. This is largely driven by the importance of entry price – achieving a 256x return is far more feasible from a $2.5M starting valuation than from $1B – as well as the path to profitability and the unit economics that pave the way.

While OpenAI is revolutionizing industries, OLIPOP is quietly dominating its category, proving that exceptional returns don’t always come from the highest-profile companies. For investors, the takeaway is clear – entry price and timing are critical, but so is recognizing opportunity in unexpected places.

Finally, full disclosure – Collaborative Fund is a Seed investor in OLIPOP – an investment made before I joined the team. Credit goes to my colleagues for identifying the opportunity early, and even more to the OLIPOP team for consistently exceeding expectations.

If this has left you craving OLIPOP or curious to learn more, you can check them out here. My favorite flavor is Vintage Cola.

A day after the September 11th terrorist attacks, every member of Congress stood on the steps of the U.S. Capitol and sang God Bless America.

Could you imagine that happening today? It’s easy to say no, given how nasty politics has become. But if America faced an existential crisis like 9/11 again, I think you’d see the same kind of unity return. There’s a long history of enemies putting their differences aside when facing a big, devastating threat. People get serious when shit gets real.

If that sounds like wishful thinking to you, let me propose a reason why: Part of the reason today’s world is so petty and angry is because life is currently pretty good for a lot of people.

There are no domestic wars.

Unemployment is low.

Household wealth is at an all-time high.

Innovation is astounding.

It’s far from perfect, and even an optimist could list hundreds of problems and injustices. A pessimist could do worse.

But let me put it this way: As the world improves, our threshold for complaining drops.

In the absence of big problems, people shift their worries to smaller ones. In the absence of small problems, they focus on petty or even imaginary ones.

Most people – and definitely society as a whole – seem to have a minimum level of stress. They will never be fully at ease because after solving every problem the gaze of their anxiety shifts to the next problem, no matter how trivial it is relative to previous ones.

Free from stressing about where their next meal will come from, worry shifts to, say, a politician being rude. Relieved of the trauma of war, stress shifts to whether someone’s language is offensive, or whether the stock market is overvalued.

Imagine a fictional society that has unlimited wealth, unlimited health, and permanent peace. Would they be overflowing with joy? Probably not. I think their defining characteristic would be how trivial and absurd their grievances would be. They’d be enraged that their maid was 10 minutes late, stressed about whether their lawn was green enough, or despondent that their child didn’t get into Harvard.

Psychologist Nick Haslam once described what he called Concept Creep. It’s when the definition of a problem expands beyond its original boundaries. It often gives the impression that the world is getting worse when what’s changed is our definition of what counts as a problem. It happens two ways:

- Things previously considered normal are redefined as risks. Like a child being bullied at school, or mild anxiety being diagnosed as mental illness.

- Less severe instances of a risk are recast as major risks. Like having to delay retirement from age 65 to age 67.

In each case, the world can get better but people don’t feel it – they can even feel like they’re going backwards – because once a problem is solved it’s replaced by a new one, often with the same level of anxiety, fear, and anger.

A few things I keep in mind:

In a way, the best definition of progress is when you’ve knocked out the major issues and are left dealing with lower, less-severe ones.

Stress is an innovator. Nothing incentivizes like worry, so we should never want a world where people see everything as perfect.

People are problem solvers. It’s a great characteristic and the source of all progress. But when solving problems is core to your identity, you occasionally see trouble where none exists.

Being angry can be an intoxicating feeling. It offers a sense of moral superiority, because when you accuse others of causing problems, you’re implying that you are better than them. It feels great, and in a strange way some people love being pissed off.

The dumber the disagreements, the better the world actually is.

They’re relevant to everyone, and apply to lots of things:

Who has the right answers but I ignore because they’re not articulate?

What haven’t I experienced firsthand that leaves me naive to how something works? As Jeff Immelt said, “Every job looks easy when you’re not the one doing it.”

Which of my current views would I disagree with if I were born in a different country or generation?

What do I desperately want to be true, so much that I think it’s true when it’s clearly not?

What is a problem that I think only applies to other countries/industries/careers that will eventually hit me?

What do I think is true but is actually just good marketing?

What looks unsustainable but is actually a new trend we haven’t accepted yet?

What has been true for decades that will stop working, but will drag along stubborn adherents because it had such a long track record of success?

Who do I think is smart but is actually full of it?

What do I ignore because it’s too painful to accept?

How would my views change if I had 10,000 years of good, apples-to-apples data on things I only have recent history to study?

Which of my current views would change if my incentives were different?

What are we ignoring today that will seem shockingly obvious in a year?

What events very nearly happened that would have fundamentally changed the world I know if they had occurred?

How much have things outside of my control contributed to things I take credit for?

How do I know if I’m being patient (a skill) or stubborn (a flaw)? They’re hard to tell apart without hindsight.

Who do I look up to that is secretly miserable?

“Our political leaders will know our priorities only if we tell them, again and again, and if those priorities begin to show up in the polls.”

— Peggy Noonan

Ahead of Thanksgiving, I thought it would be timely to write about something every American should be thankful for, so here it goes.

The United States just concluded its 60th presidential election and every American should be thankful.

Now, before everyone who voted for Kamala Harris starts to fume, hear me out.

The reality is that every American should be thankful after every election, regardless of the outcome.

You heard that right.

Every American should be thankful after every election. In fact, every American should also be thankful that these elections are often determined by razor thin margins.

Why?

Because these elections highlight one of America’s greatest superpowers – its “optionality”.

Let me explain.

Optionality is defined as, “The ability, but not the obligation, to choose a specific path.”

America’s optionality stems from the fact that its citizens have the ability, but not the obligation, to change the country’s direction every four years. If things are going well, Americans can choose to “stay the course”. However, if they believe the party occupying the White House has swung too far in one direction, they can vote to move the country in a different one.

Don’t get me wrong. America has a lot else going for it, including being protected by two massive oceans on its coasts and two friendly nations to its north and south, vast resources (energy, farmland, and navigable waterways), a diverse population, an educated workforce and entrepreneurial ethos, and the world’s strongest military, economy, and financial markets. However, Americans’ ability to choose how to leverage these assets most effectively is what makes it the most dynamic country and economy in the world.

As to why Americans should be thankful that their elections are determined by razor thin margins, the fact is that if America had one dominant political party (i.e. “one party rule”), it would be much more difficult to enact change. Thankfully though, American swing voters play an instrumental part in how the country is run, as evidenced by the most recent election.

Now, a logical response would be,

“But don’t these razor-thin margins lead to elevated tension, friction, and division, especially in the lead up to and after elections?”

Of course, but that is because optionality isn’t free. In fact, it always comes with a cost. Yet, the tension and division associated with optionality is almost always cheaper than the alternative.

Look no further than Argentina.

A century ago, Argentina was one of the strongest and wealthiest countries in the world. With endless resources, a diverse and literate population, and a diversified industrial base, Argentina was positioned for an incredibly bright future. European nations had started investing heavily, while countless multinational companies were opening offices or plants throughout the country (including manufacturing, retail, advertising, construction, and finance companies, as well as law firms). Some even declared its capital, Buenos Aires, “The Next Paris”.

Then, everything began to change.

In 1913 Argentina suffered a coup d’état, which was followed by a series of government overthrows that resulted in alternating periods of democracy and military rule. Then, with the rise of Peronism in the mid-1940’s, the country embarked in what amounted to more than 75 years of “one-party rule”.

The result?

Argentina went from being one of the world’s wealthiest countries in the world as measured on a GDP-per-capita basis to one ravaged by inflation (regularly north of 20% and over 100% in 2023), corruption, poverty (currently over 40%), and a rolling series of debt defaults.

So, how did this happen?

It happened because Argentinians lost their optionality. They lost their ability to institute change. To shape their destiny. As a result, a country many thought would be one of the next great global powers instead suffered a historic decline.

Sound familiar to something we are witnessing today?

It should, because after Xi Jinping removed term limits and instilled himself as “president for life” in 2018, the Chinese people were stripped of their optionality (while the Chinese do not have democratic elections, its leaders in the years prior to Xi typically responded to the needs/wants of the Chinese people and were chosen by consensus every ten years).

In doing so, Xi appears to have put China on a path similar to Argentina, or for that matter Russia, Turkey, Iran, and many Middle Eastern countries that are currently one-party or autocratic states. Unsurprisingly, these are the countries saddled with corruption, unbalanced economies, and on poor terms with the “West”.

Meanwhile nations with the most vibrant democracies, and therefore optionality (e.g., countries like Australia, Denmark, Finland, The Netherlands, New Zealand, Norway, Sweden, Switzerland, and the UK) are also the least corrupt, have the most balanced and resilient economies, and are some of the United States’ strongest allies. Unsurprisingly, these nations have also historically had some of the strongest equity markets.

Funny how that works.

The fact is, optionality is one of the most underappreciated things in life. It is what enables you to be nimble, change course, adjust on the fly, and self-correct. It is also what allows you to get through difficult moments, while simultaneously participating in the good ones.

While Americans may fight over the country’s path forward, be vicious with one another at times, and either get upset when their candidate loses or thrilled when they win, we should cherish our elections because it means we have the ability (but not the obligation) to change the path we are on. To choose our destiny.

As it relates to China, so long as optionality is absent, consumer confidence will remain depressed (has fallen more than 30% since Xi removed term limits), net capital outflows will continue, economic conditions will likely deteriorate further, and its equity markets will languish.

Frankly, this is what makes the country feel un-investable to me right now.

That said, if China reverts to a system of term limits, things could change quickly and dramatically.

After all, this is precisely what has happened in Argentina after its citizens elected libertarian Javier Milei last year. The results so far have been astounding as Argentina has experienced a material drop in inflation, green shoots in economic growth, and world leading equity returns as a result of his sweeping changes.

Often times the things we should be most thankful for aren’t obvious because they come with a cost. In the case of our elections, the cost is more than well worth it.

After college, my wife (who was then my girlfriend) and I got an apartment in the Seattle suburbs. It was amazing – a perfect location, a beautiful apartment, even had a view of the lake. The economy was such a wreck at the time that we paid almost nothing for it.

A few months ago I reminisced to my wife about how awesome that time was. We were 23, gainfully employed, living in our version of the Taj Mahal. This was before kids, so we slept in until 10am on the weekends, went for a walk, had brunch, took a nap, and went out for dinner. That was our life. For years.

“That was peak living, as good as it gets,” I told her.

“What are you talking about?” she said. “You were more anxious, scared, and probably depressed then than you’ve ever been.”

Of course, she was right.

If I think deeper than the initial knee-jerk memory, I remember being miserable. I was overwhelmed with career anxieties, terrified that I wouldn’t make it, worried I was about to be fired. For good reason: I was bad at my job. I was insecure. I was nervous about relationships being fragile.

In my head, today, I look back and think, “I must have been so happy then. Those were my best years.” But in reality, at the time, I was thinking, “I can’t wait for these years to end.”

There’s a Russian saying about nostalgia: “The past is more unpredictable than the future.” It’s so common for people’s memories about a time to become disconnected from how they actually felt at the time.

I have a theory for why this happens: When studying history, you know how the story ends, which makes it impossible to imagine what people were thinking or feeling in the past.

When thinking about our own lives, we don’t remember how we actually felt in the past; We remember how we think we should have felt, given what we know today.

I remember myself as being happier than I was because today, looking back, I know that most of the things I was worried about never happened. I didn’t get laid off, the career turned out fine, the relationships endured. I slayed some demons. Even the things that were hard and didn’t end up like I wanted, I got over.

I know that now.

But I didn’t know that at the time.

So when I look back, I see a kid who had nothing to worry about. Even if, at the time, all I did was worry.

It’s hard to remember how you felt when you know how the story ends.

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I was recently asked at a conference how investors should feel about the stock market given that it’s basically gone straight up over the last 15 years.

My first thought was: you’re right. If you started investing 15 years ago and checked your account for the first time, you would gasp. You’ve made a fortune.

Then I thought, wait a minute. Straight up for the last 15 years? To echo my wife: What are you talking about?

Are we going to pretend like the 22% crash in the summer of 2011 never happened?

Are we supposed to forget that stocks plunged more than 20% in 2016, and again in 2018?

Are we – hello? – now pretending that the worst economic calamity since the Great Depression didn’t happen in 2020?

That Europe’s banking system nearly collapsed?

That wages were stagnant?

That America’s national debt was downgraded?

Are we now forgetting that at virtually every moment of the last 15 years, smart people argued that the market was overvalued, recession was near, hyperinflation was around the corner, the country was bankrupt, the numbers were manipulated, the dollar was worthless, on and on?

I think we forget these things because we now know how the story ends: the stock market went up a lot. If you held on tight, none of those past events mattered. So it’s easy to discount – even ignore – how they felt at the time. You think back and say, “That was so easy, money was free, the market went straight up.” Even if few people actually felt that way during the last 15 years.

So much of what matters in investing – this is true for a lot of things in life – is how you manage the psychology of uncertainty. The problem with looking back with hindsight is that nothing is uncertain. You think no one had anything to worry about, because most of what they were worrying about eventually came to pass.

“You should have been happy and calm, given where things ended up,” you say to your past self. But your past self had no idea where things would end up. Uncertainty dictates nearly everything in the current moment, but looking back we pretend it never existed.

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My wife and I recently bought a new house. Like most of the country, it cost – let me put this mildly – a shitload more than it would have a few years ago.

We started talking about how cheap homes were in 2009. In our region they literally cost four to five times more today than they did then – plus, interest rates were low in 2009, and there was an endless supply of homes on the market to choose from. We said something to the effect of, “People were so lucky back then.”

Then we caught ourselves, shaking off delusion, and thinking, “Wait, do we really have nostalgia for the economy of 2009?” That was literally the worst economy in 80 years. All anyone talked about was how terrible everything was. Homes were cheap because unemployment was 10% and the stock market was down 50%.

Looking back, we know 2009 was not only the bottom but the beginning of a new boom (albeit with volatility). But we didn’t know that back then, and it gave us plenty to worry about that’s easy to forget today. What felt like risks then now look like opportunities. What felt like dangers then now look like adventures.

In a similar way, Americans are still nostalgic about life in the 1950s. White picket fences, middle-class prosperity, happy families, a booming economy. There was also the ever-present risk of nuclear annihilation. Today, we know the missile was never launched. But the 5th-grader doing nuclear attack drills by ducking under her school desk? She had no idea, and had plenty to worry about that is impossible to contextualize today, since we know how the story ends. So of course she wasn’t as happy as we think she should have been.

I subscribe to a few Instagram accounts devoted to 1990s nostalgia. I was a kid then, so I’m a sucker for this stuff. The comments on those posts inevitably say some version of, “Those were the best years. The late ‘90s and early 2000s was the best time to be alive.” Maybe it was pretty good. But we also had: A bad recession in 2001, a contested presidential election, 9-11 – which utterly reshaped culture – two wars, a slow economic recovery, on and on. It’s easy to forget all of those because we know the economy recovered, the wars ended, and there wasn’t another major terrorist attack. Everything looks certain in hindsight, but at the time uncertainty ruled the day.

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Of course, things could have turned out differently. And for many people – those who were laid off, or did lose their home, or did die in war – the happy nostalgia of remembering what life was like before might well be valid.

But as Thomas Jefferson said, “How much pain have cost us the evils which have never happened.”

Part of the reason nostalgia exists is because, knowing what we do today, we often look back at the past and say, “you really didn’t have much to worry about.” You adapted and moved on. Isn’t that an important lesson as we look ahead?

Understanding why economic nostalgia is so powerful – why it’s almost impossible to remember how uncertain things were in the past when you know how the story ends – helps explain what I think is the most important lesson in economic history, that’s true for most people most of the time:

The past wasn’t as good as you remember. The present isn’t as bad as you think. The future will be better than you anticipate.

The ultimate success metric is whether you get what you want out of life. But that’s harder than it sounds because it’s easy to try to copy someone who wants something you don’t.

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I’ve seen this play out twice: An incredibly talented young writer with a big blog following joins a major media company where they quickly fizzled into irrelevance.

It was the same story each time: When the writer was young and independent they could write with their own voice, their own style, their own flair. They could run with their own intuition.

They were artists, which was what made them great.

Then they joined a big media company, which said, “That’s not how we do things here. Here’s our style book, you must follow it to a T. And meet Gordon, he’s your new editor. He will tell you what to write and when to write it. Good day, sir.”

They became employees, which was their downfall.

And these were very successful media companies. They knew what kind of writing worked and what their readers wanted. But of course it didn’t work out. What was right for the company was wrong for the writer. A talented person can quickly become mediocre when you force them to be someone they aren’t.

Even if you’re not an entrepreneur, there’s so much to learn from that.

It’s so common to on one hand recognize how much variety there is among people – different personalities, backgrounds, goals, skills – but on the other hand ask, “What’s the best way to do this thing?” as if there can be one universal answer for vastly different people.

One area this impacts people is with money, where more damage is caused not by dumb financial plans but by reasonable ones that just aren’t right for you.

How you invest might cause me to lose sleep, and how I invest might prevent you from looking at yourself in the mirror tomorrow. Isn’t that OK? Isn’t it far better to just accept that we’re different rather than arguing over which one of us is right or wrong? And wouldn’t it be dangerous if you became persuaded to invest like me even if it’s wrong for your personality and skill set?

Or take how we spend money. You like this, I like that. Who cares? It gets dangerous when you assume that if someone else is spending their money differently they either must be doing it better than you or doing it wrong. And that’s actually very common, because it’s easy to interpret someone spending money differently than you as an attack on what you’ve chosen to spend money on.

It’s possible to be humble and learn from other people while also recognizing that the best strategy for you is the one closest aligned with your unique personality and skills.

A few things happen when you do.

You do your best work and have the most fun when you’re not burdened by fear that someone else thinks you’re doing it wrong.

You measure how you’re doing against your personal benchmarks, which can both push you to your potential and prevent you from chasing someone else’s.

You have a much better shot of getting what you want out of life. Which, again, is all that really matters.

Ryan McFarland came from a long line of motorsports junkies given that his grandfather had been a race car engineer and his father ran a motorbike store. As a result, it shouldn’t come as a surprise that McFarland grew up riding dirt bikes and stockcars, or that he eventually went into the family business as well. It also shouldn’t come as a surprise that he was eager to pass on the McFarland “love of wheels” to his own son.

As any parent knows, getting a young child to ride a bike is a significant challenge. McFarland’s experience was no different. So, like many of us, he purchased an endless number of things to help his son get riding — toddler tricycles, trainer bikes, and even a training wheel equipped motorcycle.

Nothing worked. More importantly, each failed to teach his son the most important part of riding a bike — learning how to balance.

Think about it. While training wheels or a tricycle might stabilize a rider, neither allow a kid to equalize their weight on a bike.

The reason?

The extra wheels do all the balancing. They simply serve as a crutch.

So what did McFarland do?

He decided to engineer a very different type of bike, but rather than adding something to the bike, he chose to take something away — in this case the pedals.

The result was the Strider Bike, which enabled kids to focus exclusively on their balance and has since become one of the best-selling bikes of all-time, as well as a godsend for parents everywhere.

Within a few days, McFarland’s son was riding the Strider Bike. Within a couple weeks, he was riding a real bike. Within a few years, his company had sold millions of bikes. In short, McFarland had solved a significant challenge with a simple (and far less expensive) solution.

This story is far from the only case where the best solution came from using less of something rather than more. In fact, I have dealt with this dynamic personally over the past two years.

See, I grew up with eczema as a child, which I thankfully outgrew when I was about eight years old. Unfortunately, it reappeared in patches back in early 2021, so I went to see numerous doctors, dermatologists, and allergists. Each recommended a new cream, pill, and eventually a shot, which led to very mixed results. Finally it dawned on me to ask an allergist for a patch test, which is essentially a way to test to see if you are allergic to any specific chemicals that are commonly found in various soaps, shampoos, creams, and countless other products. I took the test and found out I was very allergic to two of the 150 things they tested for, one of which is prevalent in something called Aquaphor, which is a Vaseline-like ointment that we had been using on my both of my sons’ skin.

Care to guess when we had started using it?

You guessed it, early 2021. Precisely the same time that I started having a recurrence of my eczema.

So, what did we do?

We removed Aquaphor from daily use in our house, I stopped taking the various medications I was using, and my skin problems have slowly improved.

Whether it applies to training wheels or skin medication, this begs the question — why are we so inclined to add things rather than take them away when searching for solutions?

The answer is simple — human nature and incentives.

The fact is, people are biased towards solving problems through addition rather than subtraction.

The reason?

Because adding something makes you feel like you are advancing, while taking something away makes you feel like you are retreating. Couple this with the fact that most companies are incentivized to sell us endless “solutions”, and it should come as no surprise that the desire take something away is practically non-existent.

We see this dynamic across all parts of the economy, and society at large.

In healthcare, nearly every condition people face is addressed by adding something. Have a skin issue? Try this cream. Having trouble sleeping? Take this pill. Can’t lose weight? Take this new injectable called Ozempic (ironically a drug that aims to *take away *our appetites). Casey Means wrote extensively about this in her new book — Good Energy — that is now #1 on the Amazon charts. In short, she makes the case that instead of jumping immediately to medications that almost always have side effects, we should instead start by identifying what is causing the problem and trying to eliminate it. For example, if you have a skin issue, start by cutting out soaps with countless active ingredients. Can’t sleep? Cut back the amount of alcohol you drink and/or TV you watch before bed. Dealing with a stomach or weight issue? Try reducing the amount of processed food and sugar you eat.

In software, this concept of favoring less over more is known as the “Mythical Man Month” (or more simply, “Brooks’ Law”), which was discussed at length on a recent podcast Patrick O’Shaughnessy did with Bret Taylor (Co-Founder of Sierra, former Co-CEO of Salesforce, and a current board member at Open AI). Taylor pointed out that,

“If you want to make a software project take longer, add more people to it. This is based on the premise that when you are developing a complex system, smaller teams who complete each others’ sentences, each own part of the system, truly understand it, and work in unison create a magical, yet fragile, dynamic. This is the case because adding more people means more bureaucracy, which risks disempowering some of your best people and slowing things down. Just look at Healthcare.gov as a perfect example.”

Retail is another obvious example. Look no further than Starbucks’ recent troubles. One of the main culprits? The decision to add countless options to their mobile app. In short, by designing its app to enable customers to hyper-customize their favorite drinks (according to one report there are over 170,000 ways to customize a Starbucks order), it led to orders like the one below:

Instead of increasing revenues and customer retention, this hyper customization led to poor customer service, employee turnover, longer wait times, and often incorrect drink orders. Eventually, it even led to Starbucks firing its CEO and replacing him with Brian Niccol, who made a name for himself running a company that has nearly perfected the concept of “taking things away” — Chipotle.

In short, by having far fewer options and ingredients, Chipotle created a juggernaut in the fast casual category by maximizing efficiency, throughput, and quality, which is a very different business model than a company like McDonalds, which has an endless number of options on its menu and is constantly adding new ones.

As a result, last year Chipotle’s restaurants collectively generated more than $10 billion in annual revenues and close to $2 billion in annual operating profits (up from $900 million and $250 million respectively fifteen years ago). This model has resulted in a stock that has compounded at more than 25% annually over the past decade-and-a-half, which means that $1,000 invested in 2009 would be worth more than $40,000 today.

Unfortunately, too many investors manage their portfolios like McDonalds or Starbucks instead of Chipotle. In an attempt to improve or upgrade them, they almost always look to layer on new investments, commitments, asset classes, and securities, often shooting well past an appropriate level of complexity:

Worried about a market crash? Layer on expensive hedges.

Concerned about volatility? Buy complicated options.

Want to generate higher returns in a low interest rate environment? Add leverage.

Trying to keep up with other investors? Chase a hot buyout or venture capital fund.

The trouble is that when they do this, the more vulnerable their portfolios become. It causes them to lose track of what they own, reduces their portfolio’s liquidity and transparency, and forces them to pay higher fees in the process. It also often leads to investors being forced to make decisions they swore they never would, typically at the worst possible moments.

We saw this first hand in the lead up to, and during, the Covid crazed market of 2020-2021. “One man band” venture capitalists were able to raise money with ease, firms like Tiger Global sprayed money in every direction with little diligence, term sheets from unknown investors landed on general partners’ desks, “extension funds” were waved into portfolios without even the slightest objection from limited partners, leverage was easy to come by, and investors happily traded daily liquidity for decade liquidity. Yet this is just the tip of the iceberg, as there were countless other examples of investments and structures being added to portfolios in pursuit of higher returns.

However, in 2022 and 2023, this dynamic changed materially as “one man VCs” started to disappear, the Tigers of the world were humbled and retrenched, those blind term sheets stopped coming, extension funds were tabled, limited partners starting guarding liquidity with their lives, and investors more broadly started pulling in the reins as they attempted to determine what lay ahead.

So, experiences like this beg a few questions:

Is increased complexity the path to better performance, or would investors be better off if they simply removed a few things?

Should investors hold one hundred 1% positions in their portfolio (i.e., be overly diversified), or should they concentrate their bets in their highest conviction positions, watch them closely, and add to them when they get dislocated?

Should investors deploy capital at a torrid pace during bull markets, or would they benefit from slowing down a bit?

The answer in each case is very likely an emphatic “yes” to the latter.

In fact, this probably goes for most things in life.

Think about it this way. What would happen if you reduced the number of things you focus on in your daily life by 20%? How about 30%?? Say 50%???

What are the chances you wouldn’t miss the things you cut out?

Would you possibly become more focused on the things you decided to keep?

Would you end up being a happier person? A better colleague? Parent? Spouse?

My guess is the answer would be a “yes” across the board here too.

But you might say, my life or portfolio is already SO complicated, how can I possibly uncomplicate it?

My response?

Just because things have gotten complicated doesn’t mean you can’t reverse it. Afterall, if Elon Musk can do it with his Raptor rocket engines, you can too.

In this day and age the case can be made that we live in an era of too much. Too much information, too much stuff, too many choices, and too many distractions. As a result, there is a good chance that the path to happier lives, and yes, better portfolio performance, might start by taking things away.

I recently sat down with legendary investor Howard Marks, co-founder of Oaktree Capital Management.

We talked about investing, debt, endurance, and what really makes a difference in lifetime investment results.

You can check it out on Apple, Spotify, and YouTube.

President James Garfield died because the best doctors in the country didn’t believe in germs, probing Garfield’s bullet wound after an assassination attempt with ungloved, unwashed fingers that almost certainly contributed to his fatal infection.

It sounds crazy – 1881 wasn’t that long ago – but historian Candice Millard writes in her book Destiny of the Republic how controversial germ theory was to 19th-century doctors:

They found the notion of “invisible germs” to be ridiculous, and they refused to even consider the idea that they could be the cause of so much disease and death.

Even the editor of the highly respected Medical Record found more to fear than to admire in [antiseptic pioneer] Lister’s theory. “Judging the future by the past,” he wrote, “we are likely to be as much ridiculed in the next century for our blind belief in the power of unseen germs as our forefathers were for their faith in the influence of spirits.”

Not only did many American doctors not believe in germs, they took pride in the particular brand of filth that defined their profession.

They spoke fondly of the “good old surgical stink” that pervaded their hospitals and operating rooms, and they resisted making too many concessions even to basic hygiene … They believed that the thicker the layers of dried blood and pus, black and crumbling as they bent over their patients, the greater the tribute to their years of experience … They preferred, moreover, to rely on their own methods of treatment, which not infrequently involved applying a hot poultice of cow manure to an open wound.

Even a child reading this today recognizes how insane this is. And it’s hardly an isolated example. Doctors used to prescribe chloroform for asthma and cigarettes for hay fever. They injected cow’s milk into the veins of tuberculosis patients, hoping the fat would transform into white blood cells.

Mercifully, we’ve moved on. We believe new crazy stuff, but not that crazy stuff. Everyone learned, those learnings were universally accepted and passed down the generations who are now better off because of it. Reading about medicine from 100 years ago makes you feel utterly disconnected from today’s world, like you’re reading about a different topic altogether.

But take something like money.

These lines were written 130 years ago by author William Dawson:

It would seem that the anxieties of getting money only beget the more torturing anxiety of how to keep it.

More lives have been spoiled by competence than by poverty; indeed, I doubt whether poverty has any effect at all upon a strong character, except as a stimulus to exertion.

The thing that is least perceived about wealth is that all pleasure in money ends at the point where economy becomes unnecessary. The man who can buy anything he covets values nothing that he buys.

Or this, written by Earnest Hemingway in 1936:

He remembered poor Scott Fitzgerald and his romantic awe of [the rich] … He thought they were a special glamorous race and when he found they weren’t it wrecked him as much as any other thing that wrecked him.

Or this, written by a lawyer in 1934, taking account of the bubble preceding the Great Depression:

In normal times the average professional man makes just a living and lives up to the limit of his income because he must dress well, etc. In times of depression he not only fails to make a living but has no surplus capital to buy bargains in stocks and real estate. I see now how very important it is for the professional man to build up a surplus in normal times. Without it he is at the mercy of the economic winds.

Or this, describing the 1920s Florida real estate:

From 1919 to 1929, both forms of personal debt—mortgages and installment credit—soared. The volume of home mortgages more than tripled, and the amount of outstanding installment debt more than doubled.

Or this account of Seneca, who lived 2,000 years ago:

Enemies accused him of preying on affluent elderly people in the hope of being remembered in their wills, and of “sucking the provinces dry” by lending money at a steep rate of interest to those in the distant parts of the empire.

It’s all so relatable. Like nothing has changed. We’ve always been asking the same questions, dealing with the same problems, and falling for the same false solutions. We probably always will.

Reading old finance articles makes you feel like the ancient past was no different than today – the opposite feeling you get reading old medical commentary.

Of course there are things we knew about medicine 200 years ago that were true and things we believed about money 100 years ago that were false. But in degree there is no comparison – there’s no financial equivalent of everyone denying germs only to eventually agree that it’s so obviously true it’s not worth debating.

In some fields our knowledge is seamlessly passed down across generations. In others, it’s fleeting. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).

There are occasional periods when society learns that debt can be dangerous, greed backfires, and more money won’t solve all your problems. But it quickly forgets and moves on. Again and again. Generation after generation.

I think there are a few reasons this happens, and what it means we have to accept.

Some fields have quantifiable truths, while others are guided by vague beliefs and individual circumstances. Physicist Richard Feynman said, “Imagine how much harder physics would be if electrons had feelings.” Well, people do. So any topic guided by behavior – money, philosophy, relationships, etc. – can’t be solved with a formula like physics and math.

Neil deGrasse Tyson says, “The good thing about science is that it’s true whether or not you believe in it.” You can disagree and say science is the practice of continuous exploration and changing your mind, but in general he’s right. Germ theory is true and we know it’s true. But what about the proper level of savings and spending to live a good life? Or how much risk to take? Or the right investing strategy given today’s economy? Those kinds of questions do not lend themselves to scientific answers. They’re subjective, nuanced, and impacted by how the economy changes over time. So often there simply isn’t relevant information to pass down to the next generations. Even when firm financial rules exist, some truths have to be experienced firsthand to be understood.

Cyclical knowledge, and the inability to fully learn from others’ past experiences, means you have to accept a level of volatility and fragility not found in other fields. I can imagine a world in 50 years where things like cancer and heart disease are either non-existent or effectively controlled. I cannot ever imagine a world where economic volatility is tamed and people stop making financial decisions they eventually regret – no matter how much history of past mistakes we have to study.

Every forecast takes a number from today and multiplies it by a story about tomorrow.

Investment valuations, economic outlooks, political forecasts – they all follow that formula. Something we know multiplied by a story we like.

The trick when forecasting is realizing that’s what you’re doing.

A few weeks before he died a reporter asked Franklin Roosevelt if the Yalta Conference negotiations near the end of World War II set the stage for permanent peace in Europe.

“I can answer that question if you can tell me who your descendants will be in the year 2057,” Roosevelt said. “We can look as far ahead as humanity believes in this sort of thing.”

The deals hammered out in Yalta were the things we knew. How long they’d hold, how much they’d be adhered to, and what else could get in their way is just a story people told and believed in varying degrees.

Anything that tries to forecast what people will do next work like that.

The hard thing is that while the number we know today can be something real and verified, the story we multiply it by is driven by what you want to believe will happen or what makes the most sense. Forecasters get into trouble when the number we know from today gives an impression that you’re being objective and data-driven when the story about tomorrow is so subject to opinion.

When valuing a company, revenue/cash flow/profits is the number we know. The earnings multiple you attach to that figure is just a story about future growth.

Same with economic trends. We have lots of data, but none of it means much until you attach a story to it about what you think it means and what you think people will do with it next.

That seems obvious to me. But ask forecasters if they think the majority of what they do is storytelling and you’ll get blank stares. At best. It never seems like storytelling when you’re basing a forecast in data.

And while data-driven storytelling doesn’t mean guessing, it doesn’t mean prophecy.

We can use historical data to assume a trend will continue, but that’s just a story we want to believe in a world where things change all the time.

We can use data to assume a crazy event will revert to the norm, but that’s also just a story in a world where unsustainable trends last longer than people think.

Few things escape that reality. B.H. Liddell Hart writes in the book Why Don’t We Learn From History?:

[History] cannot be interpreted without the aid of imagination and intuition. The sheer quantity of evidence is so overwhelming that selection is inevitable. Where there is selection there is art. Those who read history tend to look for what proves them right and confirms their personal opinions. They defend loyalties. They read with a purpose to affirm or to attack. They resist inconvenient truth since everyone wants to be on the side of the angels.

In finance this point is made with the quip that more fiction has been written in Excel than in Word.

None of this is bad. I think it’s just realistic, and it means all of us should keep a few things in mind.

1. A fact multiplied by a story always equals something less than a fact. So almost all predictions have less than a 100% chance of coming true. That’s not a bold statement, but if you embrace it it always pushes you towards room for error and the ability to endure surprise.

2. The most persuasive stories are what you want to believe are true or are an extension of what you’ve experienced firsthand, which is what makes forecasting so hard.

3. If you’re trying to figure out where something is going next, you have to understand more than its technical possibilities. You have to understand the stories everyone tells themselves about those possibilities, because it’s such a big part of the forecasting equation.

4. When interest rates are low, the story side of the equation becomes more powerful. When short-term results aren’t competing for attention with interest rates, most of a company’s valuation comes from what it might be able to achieve in the future. That, of course, is just a story. And people can come up with some wild stories.