Embedded Bets and Expected Value
Flip one card, get paid, repeat.
Startups have two inherent types of risks:
1. Card flips. These are big bets happen at a moment in time and with relatively binary outcomes. They are right or wrong and after you flip a card you know/have proven something definitive.
2. Execution risks. These are ongoing processes or challenges that have precedent and you know can be done successfully though not necessarily by you. They are solved problems in the universe.
Once you can categorize your risks/bets as either card flips or basic execution risks, you can start to understand the expected value of your startup.
How many coin flips need to go right for you to make money?
Even assuming they’re all 50/50 odds (in reality they’re much worse) you start asymptotically approaching a 0% likelihood of success or $0 of EV as you add incrementally more bets, no matter how high the potential payout is. This is the “double backflip problem.”
Instead, maximize your EV by minimizing the number of unique bets/card flips that need to be right for you to get paid. That is, if you’re gonna do something hard you have to get paid for it. Don’t do a hard thing to earn the right to do another hard thing.
To be an interesting venture bet, you need to be raising capital against at least one true card flip with a high payout, with line of sight to more down the line. But three or more card flips to unlock more capital and you start to become worthless on an EV basis.