Reserves, sunk-cost fallacy, and follow-on objectivity

Dan Gray is the Head of Insights at Equidam.

If you’re a tech and investing nerd like us, you’ll love this conversation. We cover everything Dan’s learned reading dozens of academic research papers on startups and venture capital, debunking many popular narratives of the industry.

We talk about the dangers of pre-mature startup scaling, the importance of origination stage investing, the concept of startup catering and why so many startups look the same, and the role of mega funds play in the ecosystem.

We also discuss what the data says about concentration vs diversification, what VC’s get wrong about pattern matching, and why pivoting is more valuable than you think

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Timestamps:

(6:43) What’s the required rate of return in VC?

(9:29) Venture capital needs new definitions

(16:10) QSBS

(18:23) Are we in an AI bubble?

(24:07) Re-branding early and late stage venture

(28:25) We need more origination stage capital

(40:05) Survivorship bias in emerging manager outperformance

(42:57) Incentives driving larger fund sizes

(48:10) Raising overvalued rounds re-risks a startup

(52:08) Startup catering: why all startups look alike

(58:42) Are VC mega funds still an experiment?

(1:08:06) Late stage VC is competing with PE

(1:13:42) a16z’s Fund 1 strategy

(1:18:18) How diversified should VC funds be?

(1:25:06) Performance of Generalist vs Specialist firms

(1:30:35) How to value a startup

(1:40:58) Why VC firm location correlates to returns, but startup location does not

(1:44:05) Founder background doesn’t predict success

(1:48:27) Startups with one pivot are most successful

(1:50:24) Premature scaling kills 70% of startups

(1:54:47) Does mega fund model work for origination investing?

(1:56:15) Value of Twitter and writing online

Referenced Research Papers

Venture Predation: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4437360

Process Alpha: https://angelspan.com/process-alpha-how-to-construct-and-manage-optimized-venture-portfolios-joe-milam-journal-of-portfolio-management-august-2022/

The Sunk Cost Fallacy in VC: https://www.sciencedirect.com/science/article/pii/S0929119924000518

Predictably Bad Investments in VC: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4135861

Startup Catering to Venture Capitalists: https://afajof.org/management/viewp.php?n=58968

Premature Scaling: https://innovationfootprints.com/wp-content/uploads/2015/07/startup-genome-report-extra-on-premature-scaling.pdf

Referenced Books

The Otherland Tetrology: https://www.goodreads.com/series/43762-otherland

Permutation City: https://www.goodreads.com/book/show/156784.Permutation_City?from_search=true&from_srp=true&qid=lf7FuUR9se&rank=1

Necromancer: https://www.goodreads.com/book/show/6088007-neuromancer?ref=nav_sb_ss_1_29

Other Referenced Items

QSBS changes: https://www.dwt.com/blogs/startup-law-blog/2025/07/qsbs-big-beautiful-bill-tax-code-upgrades

Mega funds and the great re-risking: https://nextview.vc/blog/megafunds-and-the-great-re-risking/

Rex Woodbury’s post on hot companies: https://www.digitalnative.tech/p/the-taxi-cab-theory-of-venture-capital

The VC Performance Paradox: https://www.linkedin.com/pulse/performance-paradox-venture-capital-dan-gray-2fqre

Prior episodes mentioned

Dan Feder: https://youtu.be/_Ou6D9PLSBI

Michael Dempsey: https://youtu.be/UzSbG6DL8CM

Solugen: https://youtu.be/ofkNiB2nI3Q

Follow Dan

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Blog: https://credistick.com

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LinkedIn: https://www.linkedin.com/in/turnernovak

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