Quick: Which baseball player has the highest career slugging percentage?
Was he fat or thin?
The answer: Famous Fattie Herman “Babe” Ruth
Second in line is the the much svelter Ted Williams – and the leading active player is the far more muscular and athletic looking Albert Pujols.
Fat or Thin, historically, it hasn’t mattered to the slugging percentage leaders.
Recently there has been a great debate between Ben Horowitz and Fred Wilson on the merits of fat or thin start ups. The posts are excellent as are the comments – and I would urge you to read through both and make up your own mind. For my part – I believe the commentaries show the dichotomy between someone who is primarily an entrepreneur and one who is primarily a VC General Partner. Weighing in further is Super LP who gives his take on the subject here.
In this last article Super LP says:
“And then I started thinking about some of the cleavages of interest that may arise from fatter startups. Most directly, the dollar value of carry to a GP of 2x outcome on a $100 million investment is greater than that of a 5x on $10 million. I know which outcome I would rather have, but I’m not sure that a random GP’s answer would be the same.”
I can’t say that I disagree with his reasoning, but I think it is a bit misleading in that LP’s cannot cherry pick deals in a VC portfolio – so the choice is never between a 5X outcome on a $10M deal and a 2X outcome on a $100M deal. For the GP – yes the math is clear – one produces a 20% carry on $100M in profits and the other produces exactly half of that.
Since you cannot invest in a single “at-bat” you have to invest in a portfolio – or a whole season of “at-bats”. Thus, as an investor, what you really care about it the slugging percentage of the fund you are in – which is simply defined as the total $ return of the fund over the number of investments made (or in this case the number of $’s invested). Sequoia has an off the charts slugging percentage thanks to a number of grand slams (Google, Youtube, etc…). However, like Reggie Jackson, they probably have a large number of strikeouts due to the fact that they mantra is to swing for the fences every time. Others have high slugging percentages due to a large number of doubles and triples – with very few strikeouts.
So fat or thin really depends on which viewpoint you are taking in terms of a new media or consumer facing start-up (you have to exclude green tech or biotech deals – these are all fat) If you are an entrepreneur, you are likely to want to run fatter – you get more pitches to look at and a greater number of players on your team. If you are a VC, you want companies to run lean – you get more turns at bat given your fund (more investments you can make to spread the likelihood of a grand slam) and you keep your teams on a tighter leash.
However, if you are an investor – you should really be somewhat agnostic between the two – because each company has a different and specific situation they are in. What an investor really wants to know is what the long term slugging percentage of the managers they are investing in is. Assuming they can get comfortable with that – then the debate is settled.