The prior piece in this series worked through why the seed stage is a coverage problem, not a selection problem: fund as many companies as a fund can afford at a check size that still matters, while holding back real reserves to concentrate once signal arrives. This piece is the personal version of that framework: if I were building a fund, what would the actual investment thesis be, on top of that structure?
The answer is: invest where information is genuinely imperfect — and only where I specifically hold the missing piece of it.
Two Very Different Things Both Look Like “Imperfect Information”
This distinction matters enough that the whole strategy fails without it.
Version one: real edge. The market is mispricing a deal because most capital can’t properly evaluate it. This happens in categories that require domain knowledge most VCs simply don’t have — operational businesses, physical retail and food, home services, anything where understanding the business requires having actually run something like it. If a VC’s underwriting process is built for software metrics and the deal in front of them is a business with real supply chains, seasonal cash flow, and thin operating margins, they either pass or misprice it. Someone who has actually operated a business like that isn’t taking on more risk by investing — they’re pricing a deal more accurately than the market around them.
Version two: adverse selection. Nobody has the missing information, including you. The deal looks uncrowded not because the market is inefficient, but because experienced investors correctly recognize it as a bad bet and passed for good reason. This is the trap version of “imperfect information” — mistaking the absence of competition for the presence of opportunity.
The test that separates them: can I name, specifically, what I know about this deal that a typical seed investor doesn’t — and is that knowledge actually relevant to whether this company succeeds? If yes, that’s edge. If the honest answer is “no, I just have a hunch nobody else is chasing this,” that’s adverse selection, and the strategy says pass.
Where My Actual Edge Sits
Ten years running a real, hands-on consumer business — supply, pricing, hiring, customer behavior, margins, the day-to-day mechanics of keeping a physical operation alive — is a specific, narrow information advantage. It applies to categories adjacent to that experience: food and beverage, retail, home services, consumer businesses with real operational complexity. It does not apply to, say, enterprise SaaS or deep biotech, where the missing information is technical or scientific, not operational. A strategy built on “invest where I have edge” only works if the edge is named honestly and the category list stays narrow enough to match it.
Folding This Into the Breadth Formula
The prior piece built a formula for how much seed breadth a fund can afford:
O_min = (M × F) / E
c_min = O_min × V_post
D = F × (1 − r)
N_max = D / c_min
Where F is fund size, M is the target return multiple from one outlier deal, E is a realistic outlier exit value, V_post is typical entry valuation, r is the reserve ratio held back for follow-on once signal arrives, and N_max is the maximum number of seed checks the fund can afford.
Investing where real edge exists changes one input directly: entry price. Categories with genuine information asymmetry — where most capital can’t properly evaluate the deal — tend to have less competition for the round, and less competition means a lower entry valuation for a business of comparable underlying quality.
That can be added to the model as an edge discount factor (a), representing how much cheaper entry tends to be in a category where real information advantage exists:
V_post_effective = V_post × (1 − a)
This flows directly into the existing chain:
c_min = O_min × V_post_effective
N_max = D / c_min
Same target ownership, same reserve discipline — but a lower effective entry price means each check needs less capital to buy the required stake, which means the same reserved capital (D) buys more real, full-conviction breadth, not just more logos.
Worked Example
Figures below are illustrative, chosen to isolate the effect of
the edge discount — not researched data on real category valuations or
discount sizes. A real fund would need to substantiate a
with actual comparable deal data, not assume it.
Shared inputs:
- Fund size (F): $20M
- Target return from one deal (M): 1x fund
- Realistic outlier exit (E): $500M
- Typical seed post-money, no edge (V_post): $10M
- Reserve ratio (r): 50%
Baseline (no edge discount, from the prior article):
O_min = (1 × $20M) / $500M = 4%
c_min = 4% × $10M = $400K
D = $20M × 0.5 = $10M
N_max = $10M / $400K = 25 companies
With a 25% edge discount (a = 0.25), reflecting less competition in a category where real domain edge exists:
V_post_effective = $10M × (1 − 0.25) = $7.5M
c_min = 4% × $7.5M = $300K
D = $10M (unchanged — same reserve discipline)
N_max = $10M / $300K ≈ 33 companies
Reading it: the same fund, holding the same reserves for the same follow-on discipline described in the prior piece, can afford roughly a third more real, full-conviction seed investments — not by taking smaller stakes, but because genuine information edge means paying less for the same ownership target. That’s the concrete difference between “invest broadly” and “invest broadly where I actually know something others don’t.”
What This Doesn’t Change
The reserve ratio (r) stays exactly where the prior piece put it, for the same reason: an information edge at seed doesn’t tell you which of the 33 companies will show real signal later. It only affects how cheaply — and therefore how broadly — the seed round can be covered. The discipline of holding capital back to concentrate once the market actually reveals the winner applies here just as much as it did without any edge thesis at all. Edge changes the price of coverage. It doesn’t replace the need to leave money on the table for what comes after.
The Strategy in One Sentence
Invest broadly at seed, at a check size that still matters if it wins, in categories where I can name a specific reason I’m pricing the deal better than the market around me — and hold real reserves back, so that when the market eventually agrees with me about which company is working, there’s still capital left to say so with money.
Explain It Like I’m Four
Imagine two lemonade stands are for sale, and you have money saved up to buy a piece of one.
The first stand is on the busiest street in town. Everyone walking by already knows exactly how good it is — how many cups it sells, how much the lemons cost, how much money it makes. Because everyone already knows all of that, lots of people want a piece of it, and the price to buy in is high.
The second stand is tucked down a side street. Fewer people have looked closely at it. Most of the people who could buy a piece of it don’t really understand how lemonade stands work — they’ve never run one, so they can’t tell if it’s actually good or if it just looks messy and unproven. But you — you’ve run a lemonade stand yourself for ten years. You know how to look at this one and tell whether it’s actually doing well, even though it looks confusing to everyone else. Because fewer people can tell if it’s good, fewer people are trying to buy in, and the price is lower.
That’s a real advantage. You’re not taking a wild guess — you’re using something you actually know that other buyers don’t, to get a fair piece of a good stand at a lower price.
But here’s the trap: sometimes a stand is on a quiet side street, and cheap, for a totally different reason — because it’s actually not a good stand. Nobody’s buying in not because they can’t tell, but because they can tell, and they’re right to stay away. If you buy that one just because it’s cheap and quiet, you haven’t found a hidden gem. You’ve just bought a bad lemonade stand.
So the real skill isn’t “look for the quiet, cheap stands.” It’s “look for the quiet, cheap stands where you specifically can tell something everyone else walking by can’t.” If you can’t say exactly what that something is, it’s probably the second kind of stand — cheap for a reason — not the first.
One sentence version: a good deal that’s cheap because people can’t see its value is a bargain — but a bad deal that’s cheap because people can see it clearly is just a bad deal, and you have to know which one you’re looking at.
Where’s the line, for any given deal, between “I know something the market doesn’t” and “nobody knows anything here”?
About Me
I'm Michael Philippou, co-founder of Big Love, a plant-based ice cream business in Santa Monica that I've been running with my wife Victoria for over ten years. Before ice cream, I was a lawyer. I write about the real, unpolished lessons of running a small business — no gurus, no hype, just what's actually worked and what hasn't. Watch more on YouTube (Real Business Real Lessons) or follow along on LinkedIn.
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