The only number you know there is the 500k… everything else is just a guess.
It is definitely one way to approach startup investment and why VC funds spread their bets out on so many startups. Almost all go to 0, some go 100x.
I think it would be a good heuristic if you were able to be that precise about expenses, but I think most startups aren’t.
(Author here) I agree, but I think there is some applicability of the Kelly Criterion to startups (at least qualitativey) in explaining why an entrepreneur who is all-in on a company may be more inclined to take an exit than their investors, who have spread their bets.
The Kelly criterion is a U-shaped optimisation problem, so it is rather tolerant of imprecise estimations!