An investment decision is a comparison with alternatives: another deal, a follow-on in an existing holding, keeping reserves, or not investing at all. Naming the alternative clarifies the decision.
9 min read · Level 4
I think the question 'compared with what?' improves almost every investment decision. Most regretted yeses were not bad companies; they were adequate companies that used money a better opportunity later needed.
Capital allocated to one investment is unavailable for others. The useful question is not 'is this good?' but 'is this better than my best alternative use of the same money?'.
For an angel with 25,000 to deploy this quarter:
Alternative Considerations New company A early, high uncertainty, full thesis fit Follow-on in an existing holding performing well more evidence, higher price, increases concentration Hold as reserves for future follow-ons preserves options, earns little meanwhile Do not invest privately this quarter reduces illiquid exposure
A simple comparison using the expected-value approach:
New company A: expected multiple 2.4x, highly uncertain Follow-on in holding B: expected multiple 2.0x, more evidence
Neither answer is automatically right. The follow-on offers lower expected value with less uncertainty, but it would raise holding B to a larger share of the portfolio than planned.
Because deals are usually evaluated one at a time, as if the money has no other use. That encourages saying yes to anything that clears a minimum bar, while better uses are never considered.
Naming the alternative also protects reserves for follow-ons, which often determine whether early winners can be supported.
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The reserve that was spent.
Angel allocation for early-stage investing 200,000 Planned: 100,000 into new companies, 100,000 reserved for follow-ons Actual: 160,000 spent on new companies after several appealing deals Remaining reserves 40,000
Two years later, the angel's strongest holding raises a round with pro rata rights worth 60,000. The angel can take only 40,000 of it. Each new deal had looked reasonable on its own; together they used money that the best opportunity needed.
Evaluating each deal against a minimum standard instead of against the best alternative use of the same money.
Identify what the money would otherwise do.
Look at both the likely return and how confident you are.
Confirm the decision keeps your plan for follow-ons and position sizes.
Declining or waiting is a valid choice.
Whenever capital is limited, which is almost always.
Do not let comparison become paralysis; set a regular decision cadence rather than waiting indefinitely for a perfect alternative.
Venture fund managers commonly set aside a significant share of committed capital for follow-on investments in existing portfolio companies, and industry commentary describes under-reserving as a frequent cause of dilution in the companies that turn out best.
Professional investors treat reserves as part of every new investment decision.
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