After yesterday’s post on Investing in Idea and Growth Stage Startups, But Not Seed and Early, a friend mentioned that it’s similar to the Barbell strategy in bond investing. From Wikipedia:
In finance, a Barbell strategy is formed when a Trader invests in Long and Short duration bonds, but does not invest in the intermediate duration bonds.
Instead of bonds, investing in idea stage startups and growth stage startups aligns with the Barbell strategy in that idea stage startups have a long time horizon to exit (7 – 10 years, with most going out of business within 18 months) and growth stage startups have a shorter time horizon to exit (3 – 5 years). Due to the varied time horizon, there’s an opportunity for the larger growth stage investments to recycle capital sooner, and provide needed liquidity, that can then be used to do more idea stage investing.
Another component of growth stage investing is that once a startup hits some level of scale — say $20 million in annual recurring revenue — a much larger pool of investors emerges that buy secondary shares from existing shareholders. Meaning, there’s more opportunity to sell part or all of the investment to new investors, and achieve some liquidity, even if the company doesn’t have an exit. With idea stage investments, there’s no such opportunity.
What else? What are some more thoughts to this Barbell strategy of startup investing?
David Cummings on Startups 