The option exercise market

Two aspects of the venture capital fund model are of interest to this discussion: a diversified portfolio of long-dated out-of-the-money options, and the reserves to exercise a few of these as the underlying stock value grows.

The first is most pronounced in the seed and early rounds of the startup cycle, the second in the doubling down that comes later. The first is a selection of big win possibilities, the second is a sifting through the outcomes and homing in on some probables.

It may be argued that during the progression from the first to the second case, the portfolio itself becomes more concentrated, as its value distribution as well as its financial allocation starts to skew.

Taken to a theoretical extreme, it’s conceivable to see a final outcome where there is one holding only, as the portfolio is through the course of maturation trimmed. It might also theoretically be argued, if first looks on optionality were not of consequence, that one could wait until that time and buy the most proven winner, or the one with the most potential from the group.


There is a case to make, in an environment in which trends and growth potential are reset, that capital is generally venture capital. There are many ways to play it, as there should be, given differences in risk appetite, hold periods, and liquidity objectives of the various investor types.

One could also argue that all the cash-rich and debt-free are in a similar position to the SPACs, enhanced in certain cases by select foundations that persist.