By Stephen Wunker
On the TV game show Wheel of Fortune, contestants guess at consonants in a word puzzle to run up their pot of money. Sometimes, however, they spend $250 to buy vowels, reducing their uncertainty about what the puzzle says.
Buying vowels is a great idea for new markets—spend a bit to learn.
As venture capitalists (VCs) like to say, they are in the information acquisition business. When they find ventures that have lots of potential they double down on their bets, but they also abandon many investments quickly and cheaply.
Of the companies a VC will back, about two-thirds will be total write-offs. Yet VC firms tend to earn returns about 25% above their public company counterparts, which usually have a much higher success rate with their projects. The secret is to learn rapidly so you can fail fast, before you spend too much along a path that leads to doom. That way, you can invest more safely in risky ideas.
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