Standard Bite Size Portfolio Construction
Diversify against what you do not know, and put the same check into every conviction.
- Difficulty
- Moderate
- Time to result
- ~ongoing to results
- Steps
- 6
- Confidence
- 82%
At the seed stage nobody has enough data for foolproof conviction, so the portfolio itself has to do the work. Diversification here is explicitly a hedge against lack of knowledge: the less you know, the wider you spread. Against that backdrop, position sizing becomes a discipline rather than an expression of enthusiasm. Because the best deals are the hardest to get into, large allocations usually reflect access rather than insight — and the empirical pattern is that winners come disproportionately from the deals you could only put a little money into, which drags portfolio returns down when you over-weight the accessible ones. The rule is a single standard bite size taken every time conviction is genuine. If a deal has unusual room for you, that excess space is information: either you should be investing more elsewhere, less here, or getting a lower valuation for providing the signal the company will use to raise the rest.
Origin
Extracted from Naval — Naval Ravikant's angel-investing series with Nivi, covering conviction, access and how much capital to put into any one seed deal.
Core principles
- 01Diversification is a hedge against a lack of knowledge, not a lack of courage.
- 02The less data you have, the wider the portfolio has to be.
- 03Most of the time the honest answer is 'I don't know'.
- 04Large allocations usually track access, not conviction.
- 05Winners disproportionately come from the deals where you had the least money in.
- 06Excess allocation available to you is itself a signal about the deal.
How to run it
- 1
Set portfolio width from your data, not your ego
Decide how many positions you need based on how little you actually know about the stage and vertical. Low knowledge means wide diversification; that is the hedge, and it is not a failing.
Pro tip Track your data quality per vertical — you may justifiably concentrate more where you have real specific knowledge.
- 2
Fix one standard bite size in advance
Choose the cheque size you will write whenever you decide yes, and set it before deal-by-deal emotion is in play.
Pro tip Make the number a function of your total allocation divided by the number of positions the stage requires.
- 3
Default to 'I don't know'
It is very easy to overestimate your own judgment. Most of the time the correct answer is that you do not know, and only rarely should you claim conviction — and even then, carefully.
Pro tip Saying 'I don't know' out loud is a cheap way to notice when you are being talked into conviction.
- 4
Take your bite size whenever conviction is real
Once you have conviction, always try to get your standard bite size into the deal — not more because you like it, and not less because it was hard to get.
Pro tip Consistency here is what makes your later portfolio analysis meaningful, because size stops being a confounding variable.
- 5
Treat excess allocation as a signal
If a deal has too much space for you, something is off. Either you should be investing more in your other deals, or less in this one, or you should be compensated with a lower valuation because you are creating the signal the company will use to raise the bulk of the money.
Pro tip Ask directly why the round has room — the answer is often the most useful diligence you will get.
Watch out Generally, the better the deal, the less access you will have; abundant access is rarely a reward for good judgment.
- 6
Cap any position below your emotional threshold
Never put in an amount you would genuinely care about losing. Too much at risk makes you behave badly with a founder when the company is struggling, and that is exactly when your reputation is formed.
Pro tip Returns are built by the companies doing well; reputation is built by how you behave with the ones doing poorly.
Watch out Reputation damage compounds into worse access, which compounds into worse returns.
In the wild
Naval describes the common angel pattern: a lot of money into a few deals and very little into many others. Because the best deals are precisely the ones where you get least access, the large positions cluster in the deals that were easy to get into. The result is that the winners come disproportionately out of the positions where you had very little money, and the portfolio return is dragged down by the concentration. Fixing it does not require better judgment — only a fixed bite size applied consistently to every conviction.
→ Portfolio return stops being penalised by the inverse correlation between access and quality.
Naval contrasts the seed stage with Warren Buffett's level, where you can examine a company that has existed for twenty years in great detail. There you need diligence more than judgment, and one deal can be picked from many. At seed you may be looking at little more than other people's judgment, which is why social proof plays such a large role — and why you have to build a portfolio instead of a position. The number of names in the portfolio is set by how little data the stage provides, not by how confident you feel.
→ Position count derived from information quality rather than sentiment.
Common mistakes
Sizing by access instead of conviction
Putting more money where there is more room means over-weighting deals that were easy to enter, which is close to the inverse of a quality signal.
Manufacturing conviction to justify a big cheque
If you put a lot into one company and very little into another, it is worth asking whether you really have conviction or simply had more access.
Investing an amount you would grieve
Money you cannot afford to lose changes your behaviour with founders when things go badly, and that behaviour is what builds — or destroys — your reputation and future access.
Is it for you?
Best for
Early-stage investors building a portfolio over dozens to hundreds of investments with limited per-deal data.
Not ideal for
Concentrated late-stage or public-market investors who can do deep diligence on a mature business and justify a large single position.
From the transcript
“In some sense, diversification is a hedge against a lack of knowledge.”
“Once you have conviction, always try to get your standard bite-sized into that deal.”
“It's perfectly okay to say, I don't know.”
From the episode
How to Angel Invest, Part 2