Babe Ruth was a legendary baseball player.
Many consider him to be one of the greatest sluggers of all time. And 70 years after his death, he’s still one of the Top 3 home run hitters in history.
But Babe Ruth also holds a top record for a different statistic, one that isn’t mentioned so often.
He holds one of the highest records for strikeouts.
In fact, for five years, he led the American League in strikeouts. And throughout his career, he accumulated more than 1,300 of them.
Only a handful of hitters have ever exceeded that number.
Surprisingly, for investors like you, there’s a lesson to be learned from all this…
And it could help you earn more than 5,000% on your money.
“The Babe Ruth Effect”
In the worlds of economics, the concept of being extraordinarily successful at something despite failing at it very often has a name:
The Babe Ruth Effect.
In fact, this is the foundation for our philosophy about start-up investing.
You see, when it comes to investing in early-stage companies, the most successful investors look a lot like Babe Ruth:
They might be known for their “grand slam” investments…
But to get there, they “struck out” a lot.
How to Make Money in Early-Stage Investing
There’s a simple reason why the math works here:
In early-stage investing, the winners are so big that they make up for the losers.
It’s a variation on the “80/20” rule.
This concept was recently explained in a new research report by CB Insights.
After doing an in-depth study of the Top 25 Early-Stage Venture Capital investments of all time, it concluded that:
“In venture capital, [...] 80% of the wins come from 20% of the deals. Great venture capitalists invest knowing they’re going to take a lot of losses in order to hit those wins.”
(If you’re interested, you can see the full report here.)
By the Numbers
Now let’s take a look at how this principle plays out with real numbers:
Let’s say you invest in four different start-ups.
You put $10,000 into each for a total investment of $40,000.
Three of the start-ups go out of business and you lose 100% of your money.
That’s a $30,000 loss.
But let’s assume your fourth investment was in one of the companies featured in the CB Insights report…
Let’s say it was WhatsApp, the messaging service.
Well, when this early-stage start-up was acquired by Facebook for $22 billion, WhatsApp’s early investors made an estimated 50x their money.
That’s a 5,000% return. So that final $10,000 you invested turned into $500,000.
That means your $40,000 “portfolio” of start-up investments is now worth $500,000 — even after you lost $30,000 from the three investments that went to zero.
Overall, that’s a 1,250% overall return.
Make the Numbers Work Out in You Favor
Now, if you’re investing in only four start-ups, the odds make it unlikely you’ll get a winner like WhatsApp.
It’s like flipping a coin...
Every time you flip, there’s a 50/50 chance of getting heads or tails…
But just because you flipped heads the first time, there’s no guarantee you’ll flip tails the next. In fact, you might flip heads 10 times in a row.
But if you flipped the coin 100 times, or 200 times, there would start to be a 50/50 split. The odds start to play themselves out.
Well, it’s the same thing with early-stage investing:
For the odds to work, you can’t just invest in a few companies...
You have to invest in many of them.
In fact, multiple studies have shown that well-diversified start-up portfolios follow a similar distribution pattern...
A third of the start-ups will go to zero...
A third will break even...
And a third will return 1,000% or more.
So, as an early-stage investor, your goal should be to make enough investments that these numbers work out in your favor.
What’s “enough”? Statistically speaking, enough is 25 to 50 of them.
With that many investments, sure you’ll have plenty of strike outs…
But you could still become a world-class investor who’s known for hitting home runs.
Happy investing.
Best Regards,
Founder
Crowdability.com
