Suppose we select the top 100 start-ups according to whatever criteria we use.
We can now proceed in one of two ways.
a) Make the minimum offer that we know all of the start-ups will accept.We now have a portfolio of 100 investments.
b) Make a lower offer that only some of he start-ups will accept. We now have a portfolio of say 90 investments.
The question is which portfolio will portfolio will perform better. If there is no difference in average quality of start-up between the portfolios in a) or b), then portfolio b) will do better (because we have obtained better terms).
There is no guarantee that this will happen. It could be that he or she has lost the only 10 companies that will be successful.
We can now proceed in one of two ways. a) Make the minimum offer that we know all of the start-ups will accept.We now have a portfolio of 100 investments.
b) Make a lower offer that only some of he start-ups will accept. We now have a portfolio of say 90 investments.
The question is which portfolio will portfolio will perform better. If there is no difference in average quality of start-up between the portfolios in a) or b), then portfolio b) will do better (because we have obtained better terms).
There is no guarantee that this will happen. It could be that he or she has lost the only 10 companies that will be successful.
This is the problem that the VC has to face.