Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups

The debate over concentrated versus diversified portfolios usually goes like this.

Concentrated means high risk, high reward. Fewer companies means bigger swings. If you nail a couple winners, your fund prints money. But you could also lose everything. Diversified means risk mitigation. More shots on goal means you can afford lots of losses, but some worry the returns get diluted.

The best of all worlds would be a concentrated portfolio if you could guarantee hits in it. But that is the whole problem. You cannot. And the landscape of early-stage investing has changed so dramatically that the old concentrated playbook has fundamentally broken down.

When Concentrated Made Sense

Go back to the 1990s or early 2000s, and venture capital was a cottage industry. A handful of firms existed. Most startups could not find investors even when they had real traction.

This meant if you were investing back then, you could invest in companies that already had product-market fit at incredible valuations. When Benchmark invested $6.7 million in eBay for roughly 22% of the company in late 1997, eBay was already doing nearly $6 million in revenue that year. They had proven traction. And Benchmark got in at a price that seems laughable by today's standards because there were essentially no other VCs competing for the deal.

In that environment, concentrated portfolios made total sense. If you are cherry-picking obvious winners at favorable valuations, your downside risk is genuinely low. You do not need 100 positions when you can see who is already winning.

Try replicating those deals today. You cannot.

What Changed

These days, there are thousands of investors chasing deals. Most pre-seed and seed funds are investing pre-revenue. Often pre-data. Sometimes pre-anything.

When you invest that early, you literally cannot de-risk through selection alone. You do not have enough information. This is where the old concentrated portfolio advice falls apart completely.

If you are investing in 20 companies that have zero product-market fit, you are taking massive concentration risk. A couple bad batches and your entire fund goes to zero. The investor competition changed. The strategy has to change with it.

Elizabeth Yin has pointed out that even successful serial entrepreneurs struggle to find product-market fit reliably. If the best founders in the world cannot predict which ideas will work, investors definitely cannot. There is a LOT of luck involved. And when luck is a major factor, you need more at-bats to capture the outliers.

The Math Favoring Diversification

Here is the thing that tilts the argument decisively. Power law returns are uncapped. Your downside on every investment is 1x. You lose your money, that is it. But your upside? Unlimited. We are seeing 10,000x winners now. One of those completely overshadows every other position in your portfolio. The other investments literally do not matter from a returns perspective.

Research from Carta shows that seed investors typically need to invest in 25 to 35 companies for their funds to be viable and perform. Their portfolios contain a larger number of smaller investments because investors at the earliest stages need to take more shots on goal than funds investing in later-stage companies with revenue and product-market fit.

If you accept that logic, the answer becomes obvious: increase your portfolio size to maximize your probability of capturing one of those massive outliers.

As one fund manager put it: if someone offered you 3.5 times more shots for each shot you take, and you only had to find a 2x bigger outcome, you would take that deal every single time.

Two Caveats

This diversification strategy only works if you can solve for two things.

First, deal flow. Do you actually have access to enough quality companies to build a large portfolio? At some point there are diminishing returns if the quality drops. This is why being part of an investor community matters. You need a pipeline.

Second, operations. Can you support that many portfolio companies? There is real overhead involved in tracking and helping a large number of startups.

But if you solve those problems, the math says shoot more bullets, not fewer. For angel investors, Angel Squad solves both of these by providing deal flow from Hustle Fund's 1,000+ monthly reviews and a community of 2,500+ investors to share the evaluation work. Explore it at Angel Squad.

Concentrated portfolios made sense when VCs could invest in proven companies at great prices. That world does not exist anymore at the early stage. If you are investing with zero data, diversification is not defensive. It is your best shot at capturing a generational winner.