[adaml_623]

" You’ll never be a billion dollar business if you’re not deliberately working to get there. And in venture capital, it doesn’t make sense to invest in anyone who isn’t at least trying to build a business that size."

It doesn't make sense to invest in anyone who might just grow to a 50 million dollar company? I think VCs must be missing out on a lot of opportunities.

[patio11]

It's very difficult to make the math work out for Series A/B/C if you exit at $50 million. If a VC firm invests $5 million and gets a 3rd of the company, then you sell for $50 million, they get ~$15 million on that deal. Yay. Unfortunately, to get there, they had to spend $30 million on 10 similarly situated company, in excess of half of which have a liquidation value of zero. Absence of yay.

I think the parlance for tripled-our-money is "base hit." You don't play baseball to hit base hits. (Well, unless you're the Oakland As -- and talk to Dave McClure et al if you want to hear this metaphor in a lot more detail.)

There exist angels and other seed-stage investors who would not be unhappy with a $50 million exit, to put it mildly. (To say nothing of the founders and the employees.)

[birken]

Minor baseball analogy nit:

This year the Oakland A's were 3rd in the MLB in home runs (out of 30 teams), last year they were 7th. In the famous moneyball season (2002) they were 4th. They very much build their teams around hitting home runs, just like most VCs :)

I realize you are mentioning the analogy second hand, but I just want to make sure people don't get confused about the A's! There certainly are some smallball [1] teams in the MLB, but the Oakland A's are not one of them.

[1]: http://en.wikipedia.org/wiki/Small_ball

[AznHisoka]

Who are the smallball teams today, then? The Pirates? The Giants?

[michaelochurch]

The problem is that no one can predict the future, so VCs end up backing people who promise billion-dollar potential. More realistic people who say, "yeah, this could do $50 million, maybe a little more", get hosed. But the either/or dichotomy ($50M lifestyle business vs. billion-dollar world-changer) is stupid. There's nothing that says that one can't get to the $50M point and then, once out of the gravity well, make a bigger and bolder play.

All these numbers are bullshit when starting out, anyway.

There exist angels and other seed-stage investors who would not be unhappy with a $50 million exit, to put it mildly. (To say nothing of the founders and the employees.)

Actually, $50m exits under current conditions are horrible for employees, just because employee equity is so low. After preferences, it ends up being equivalent to the kind of bonus bankers get when the firm's trying to get rid of them.

Aside from just regular greed, I think one of the reasons VCs push for pathetic option pools is to create a company where a $100 million exit will piss off almost every single employee, which means that even if the founders would prefer it, there are plenty of key players who'll only do their best in a quest for a $10B+ result.

[tptacek]

This comment isn't responsive either to 'patio11 or to the thread. The question is, "are VC's missing out on lots of successful exits because they're allergic to 50MM outcomes?". The answer seems to be "no", because the returns on 2 50MM exits in a 10 company portfolio don't make up for the goose eggs from the other 8.

The fact that many of us believe that any given "billion dollar" prospect is counterfeit is neither here nor there. Sure, most VCs also fail with the "bet on billion dollar companies" strategy. Most VCs fail. But that doesn't mean that they should select instead a strategy that appears to be mathematically predetermined to fail.

[michaelochurch]

What makes you think that only 2 of the exits will succeed? Or that the projects slated for $50M won't turn out to be worth $500M when new approaches or uses for the work are discovered?

There are too many hidden variables and no one knows what they are doing. I don't.

[tptacek]

If you have a strategy for investing in 10 companies and having 5 of them exit at 50MM+, you should raise money for a fund.

[patio11]

Suffice it to say that, because the trajectory of a company which goes to $10 million a year in sales and then exits at $50 million is quite different than one which IPOs, including having likely a far smaller number of employees and stock grants set more by "what a founder felt appropriate for his five closest friends" rather than "how to split 20% 200 ways", a $50 million exit can and has been a motivating event for some employees.

For more detail on this, talk to people.

[001sky]

Its not the math but the execution risk that is the issue.

[tptacek]

No, it's the math, because you can't wish the execution risk away.

[001sky]

I'm not sure I follow you. The 'fact' that you can't wish execution risk away says nothing about "the Math". Many things do impact ~probabilities, and at the same time are not "wishes". For example, YC has an application process. They could get rid of it, but why? "You can't wish the execution risk away".

[_delirium]

Depends on the scale of the investment. It doesn't make sense to invest $30m in a company that might grow to $50m, because the potential growth isn't enough to make up for the risk of losing the $30m entirely. It could certainly make sense for a different kind of investor to invest $1m in such a company, though.