VCs have an investment fund that is divided amongst X startups. A small percentage will break even, and a very tiny percentage will return more than the entire fund (this is where profits come from). The vast majority of companies will lose money, and in this scenario it's better to move quickly to get into the startups that will succeed rather than do the proper due diligence for every investment.
Basically, speed and quantity is better than deep investigation. It's just how the numbers work out, but it's also why you'll see some crazy startups get funded even if others have more solid financials.
In addition, people are much better at disqualifying then qualifying. It's easier to say "no" then to say "yes" to something, so it could be argued that you should say no very quickly to these kind of startups. But history shows that wilder ideas are more likely to lead to the outsized returns so VCs will say yes to the things that other investment classes would always say no to. Then again, it's called "venture capital" for a reason.
so due diligence for infotech startups maybe doesn't make sense but wouldn't at least a "first pass no phebotonium" filter mean better likelihood of returns for hard sciences?
I have been closely watching indie bio do their accelerator and I'd say a full 60% of their startups are phlebotonium, or at least "this is not a crazy idea, but the choices you have made are totally crazy".
manigandham|7 years ago
Basically, speed and quantity is better than deep investigation. It's just how the numbers work out, but it's also why you'll see some crazy startups get funded even if others have more solid financials.
In addition, people are much better at disqualifying then qualifying. It's easier to say "no" then to say "yes" to something, so it could be argued that you should say no very quickly to these kind of startups. But history shows that wilder ideas are more likely to lead to the outsized returns so VCs will say yes to the things that other investment classes would always say no to. Then again, it's called "venture capital" for a reason.
dnautics|7 years ago
I have been closely watching indie bio do their accelerator and I'd say a full 60% of their startups are phlebotonium, or at least "this is not a crazy idea, but the choices you have made are totally crazy".
mbesto|7 years ago