VC Binary Investment Logic

A breakdown of venture capital investment logic, particularly focusing on how VCs manage risk through preference shares, using Clubhouse as a case study.

Investment Protection Strategy

• VCs use preference shares as downside protection
  • Get paid back first in case of company sale
  • Protect initial investment even if company sells for less than valuation

Investment Size Context

• Large investments (like $100M) are relative
  • For major VCs, represents standard bet size
  • Not "betting the house" despite large numbers
  • Part of broader portfolio strategy

Binary Outcome Logic

• Investment thesis based on binary outcomes
  • Either goes big (massive return)
  • Or goes to zero (protected by preferences)
• Exit Scenarios:
  • Success: Price looks cheap in retrospect
  • Failure: Can still recover investment through preferences
  • Example: $50M exit = VCs get paid first due to preferences

Real World Example (Clubhouse)

• Andreessen Horowitz investment:
  • $100M investment
  • $4B valuation
  • Despite declining metrics
  • Protected through preference structure
  • Can recover capital even in modest exit

Risk Management Philosophy

• Not focused on moderate outcomes
• Structure deals to:
  • Capture massive upside potential
  • Protect downside through preferences
  • Maintain first position for capital return
• Makes seemingly risky bets more palatable