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parmenidean | 3 years ago
The VC mode of thinking becomes a lot clearer when you realize that their returns are completely driven by moonshots. Something like 1% of the portfolio will drive 56% of the returns. As a result:
(1) It costs them nearly nothing if a startup goes to 0. Most of their portfolio will go to 0. (2) Conversely, it will cost them a ton if they miss a potential moonshot. Even if the idea sounds dumb on face, if there's a chance it becomes big, the VC needs to be in it in order to survive. (3) There's reputational risk at play for the individual VC investor. Every VC will have a low hit rate, so they're not worried about looking dumb losing money on some startup going to 0. What they are worried about is being known as the person who passed on the next Airbnb despite getting a look. (4) Later stage VC funding becomes an access game — there's more capital than good ideas, and so these companies can have their pick of the litter. This means, as a VC, you need to prioritize being founder friendly and having a pre-existing relationship with a company. As such, you'll see VCs throw in $1m to $10m checks without much though, with the hope that if the company every does scale, they'll be able to write a sizable follow-on.
It's weird to think about if you're used to public markets, where hit rate matters a lot more and diligence is centered on "why should I invest". In VC-land, the burden of proof is flipped.
hashtag-til|3 years ago