On the Edge: The Art of Risking Everything

by Nate Silver

So here’s my theory of the secret to Silicon Valley’s success. It marries risk-tolerant VCs like Moritz with risk-ignorant founders like Musk: a perfect pairing of foxes and hedgehogs. The founders may take risks that are in some sense irrational, not because the payoff isn’t there but because of diminishing marginal returns. (If you had a net worth of $1 million, would you gamble it all on a 1-in-50 chance of winning $200 million—and a 98 percent chance of having to start over from scratch? The EV of the bet is +$3 million, but I probably wouldn’t.) But if the VCs can herd enough hedgehogs into a fund and make many of these bets, they can capture the EV without much risk of going broke.