The economics of venture capital don't work out if you invest in companies that you think will be worth less than a billion dollars. There's a really enlightening blog post that goes through all the numbers (maybe someone can find it again for me), but it basically comes down to this:
90% of all companies funded by this VC will fail. Of the remaining 10%, some will be middling successes. One or two companies will be really great. But the VC has a problem: his LPs expect a return over 10 years (or whatever the lifetime is) that is as good as the market (simplifying, but this is basically true). If the one or two companies that succeed only become worth a few hundred million, he's actually delivered a sub-par return for his LPs. So the one or two companies that succeed must _really_ succeed, or else the VC is going to have trouble with their next fund. Someone did the math and showed that a 10x return on those successful investments is the minimum for the fund as a whole to provide a good return for its LPs.
All this means that when a VC looks for deals, he can't waste time on lifestyle businesses and the like. Billion dollar companies or bust. Keep in mind that this is not true for people who write smaller checks (like angels).
That math makes sense if “90% of investments fail”, which is a reasonable number if you only invest in companies that need to grow to $1B to succeed. But if you were willing to invest in companies that top out much smaller, theoretically you could chose companies based on likelihood of profit instead of growth, and get a much lower failure rate.
The other thing you’d need to be careful of is drain on your time. You’d need to be much less available to companies over time, or you’d get spread too thin by too big a portfolio.
> But if you were willing to invest in companies that top out much smaller
Then that person would literally not be practicing Venture Capital.
Venture Capital is a very specific type of funding with a specific type of risk profile. If you don't like the implications, then don't seek Venture Capital.
This is what people don't understand. No one is forcing you to be a venture backed company.
Is that a semantic argument - that low risk investments should be called something other than "venture capital"? What term would be best for that?
Note that VC does have a wide variety of risk profiles - with later stage usually being lower risk and earlier stage being higher.
Who serves the market of early, low-medium risk (and therefore lower returns)?
>Someone did the math and showed that a 10x return on those successful investments is the minimum for the fund as a whole to provide a good return for its LPs.
And they were called ten-baggers before they were called unicorns - roughly speaking.
90% of all companies funded by this VC will fail. Of the remaining 10%, some will be middling successes. One or two companies will be really great. But the VC has a problem: his LPs expect a return over 10 years (or whatever the lifetime is) that is as good as the market (simplifying, but this is basically true). If the one or two companies that succeed only become worth a few hundred million, he's actually delivered a sub-par return for his LPs. So the one or two companies that succeed must _really_ succeed, or else the VC is going to have trouble with their next fund. Someone did the math and showed that a 10x return on those successful investments is the minimum for the fund as a whole to provide a good return for its LPs.
All this means that when a VC looks for deals, he can't waste time on lifestyle businesses and the like. Billion dollar companies or bust. Keep in mind that this is not true for people who write smaller checks (like angels).