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by mattmanser 3220 days ago
It's the fundamentals behind investing. Basically, you make no money gambling $10 ten times on 10% chance of success with $100 returns, but you make money if the returns are $10,000.

So, for investing in companies, there is no point funding companies aiming for millions as you can't get a good return because of the failure rates. They're basically taking up one of the slots of a potential billion $$$ company.

The point is for every 10 companies funded, have 1 become a billion $$$ company, while most of the rest will fail.

Say YC has a 6% stake, which gets diluted down to 1%(? I don't really understand this side of it) and then the company sells for $10 mill. Great for the founders, but YC only make $100,000. That doesn't cover the other 9 companies that failed (10 * $16,000 = $160,000 = $60,000 loss).
2 comments
jacquesm 3220 days ago
It is, but the corollary to that is that nobody knew ahead of time which companies where going to be the $1B and up companies and which were duds, also-rans or simply solid small to mid sized businesses.

No investor ever invested in a billion dollar start-up to be knowing that start-up was going to be a billion dollar company one day.

So those stats are based on one thing only: survivor bias and each and every investor will have to be satisfied with investing in what they believe to be solid performers with potential upside.

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wastedhours 3220 days ago
As much as I appreciate that's the VC model, perhaps less would fail if VCs didn't push for billions in revenue? The failure rate might be less than 9/10 if it wasn't "all or nothing"? Guessing it still wouldn't make enough home runs as an investment vehicle though?
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sharemywin 3218 days ago
The problem is the fund size. when you have make a good return on 100m you need something that will eventually get there.
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Joboman555 3220 days ago
Failure rate doesn't matter. 99% failure * 1B > 90% failure * 1M
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CryoLogic 3220 days ago
That's assuming 90% failure when looking for sustainable businesses. There are some upcoming VC's which are doing well funding smaller companies. Momentum Ventures is one I know of.
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