[lesam]

Do you have any sense why this is true?

I get preferring (10x or 0x) to (1.5x). I don’t get preferring a near-certainty of 0x to some recovery of their capital with a pivot to selling a smaller-but-sustainable business.

Is it something like they’re measured by LP’s (or someone?) on only non-zeroed investments?

[vidarh]

I've worked at a VC, and consider that it is a low margin business until/unless you returns significantly above your targets. You get a management fee, which is a low yearly percentage of the invested amounts, and then you get carry - a proportion of the returns above a set target for the fund as a whole.

But carry doesn't kick in until you start exiting - for a typical VC fund it takes many years. (I left a year ago, and we were 6 years in when I left; I retained a portion of my carry rights, but still won't know for a couple more years how much I get if I get anything at all)

And surviving on the management fees after the initial phace of placing the investment requires being lean and not putting effort into your low performers.

Meanwhile while a 1.5x is better than nothing, a company that sells at 1.5x is likely to be near 0x for you, because odds are high that to get there there'll be one or more funding events along the way to help that happen at/triggering terms that will dilute you massively. And odds of failure remains high.

And you need the 10x or 100x's, but the low ones means little - most successful funds pay back the entire initial investment from just a couple of investments, and make their return on a couple more. Quite often a single "fund returner" carries the entire fund.

A small recovery here and there at makes almost no difference.

So even a 1% chance of salvaging a "moonshot" is better - most cases where you get back less than 1x is going to be a rounding error of your funds overall performance.

A VC is not where to get capital of you want to pull back and pivot when things get tough.

(And yes, you should keep that in mind if taking a job at a VC backed company as well, and it's part of why stock/options should be on top of your normal salary, not compensating for a low one, unless you get founder-level stock amounts, and even then, think it through; I once almost torpedoed a VC deal as a founder because I demanded a commitment to raising salary levels after the next raise, and I don't regret it for a moment because life would have sucked without it)

[rjzzleep]

Don't VC companies basically gamble with other peoples money? So yes, the person that actually put the money into the fund might want 1x or 1.5x out over 0x, but for the VC firm it doesn't matter, right? It's not their money to begin with.

[vidarh]

LPs in a VC fund know very well what the fund is incentivised to deliver. I worked for one, and our LPs would aggressively write low performers down to zero. It didn't matter to them either. Obviously wouldn't turn it down if still possible once all else has failed, but retaining even a fraction of a percent shot at a higher return was what mattered most, even knowing it was extremely unlikely.

Investors in these funds are diversified - they invest in VCs to take the high risk bets. They invest elsewhere for the steadier, lower risk returns.