4 ms·

So why isn't there an organization that distributes the risk of startup failure across many companies (kind of like how insurance distributes the risk of catast

So why isn't there an organization that distributes the risk of startup failure across many companies (kind of like how insurance distributes the risk of catastrophe)? That way, one unicorn would satisfy everyone, and all the startups that failed wouldn't matter. (I say this as someone who knows nothing about startups and VCs of course...)

pcrh 10y ago
That's precisely what VCs aim to do.
- chmullig 10y ago
  Yup, that's literally the definition of VCs. Instead of a single LP having to choose one startup to invest their $10M into, they buy shares in the dozens of startups that the VC then invests in. The risk and reward is shared between all the LPs in that fund.
- throwaway729 10y ago
  Is there anything like reinsurance; e.g., VC firms cross-investing in each others' portfolios?
logicallee 10y ago
I have no idea why you're being downvoted. there are approximately 2.8 billion people in the world whose annual income is < $2/day which is $730 per year. If you invested $300 into a lucky 5% of them - to give them six months of runway - then it would cost you 2.8B * 5% * 300 = $42 billion and you get 142M entrepreneurs. Let's look at YCombinator's stats. YCombinator has funded something like this: https://blog.ycombinator.com/yc-stats https://blog.ycombinator.com/yc-stats Let's say 1,000 companies, 8 worth > $1B. 8 in 1000 is 1 in 125. Let's reduce 1 in 125 to - not 1 in 1250...or 1 in 12,500...but 1 in 125,500. Everyone else goes to 0. Okay, now you have created 142M / 125500 = $1131B in value at a cost of $42B. That means if you took a 10% stake (a valuation of $3000 in everyone), you have now earned an approx. 30% return on your $42B. I think the above estimates are more than reasonable and anybody anywhere in the world who wants $300 for 6 months of runway to build anything they want should be given it at a $3K valuation no questions asked - because it is free money and it is enough for 1 in 100,000 people to succeed. Those chances are better than the chances of a high schooler drawn at random (without regard to whether they have any interest whatsoever) making it into the NBA, since there are 360 people in the NBA but less than 36,000,000 high-schoolers. $300 is more than enough for every tool an Internet entrepreneur needs - and remember, we are starting with the 5% who want to be one. the figures work just fine and your question is perfectly reasonable.
- Retra 10y ago
  Entrepreneurs doing what, exactly? If someone is making $2 per day, they live with other people making $2 per day, and there isn't much spending going on. >$300 is more than enough for every tool an Internet entrepreneur needs Oh, except an education. And a way to not be immediately steam-rolled by anyone with more money than you if your business is even remotely reasonable.
  - logicallee 10y ago
    I think you missed the part where I require 1 in 125,000 to succeed? you're saying it's harder to get an education with an Internet connection and $300 than to start playing for the NBA without any particular interest or background in sports, just picking a high schooler at random? Well, okay. plus, you say "if your business is even remotely reasonable" you'll get steamrolled by anyone with more money, but under our scenario there are more investment rounds if you succeed. (since that's the only way to end up with a $1b valuation.) in short I'm afraid you've missed the point of my calculation entirely.

pcrh 10y ago

That's precisely what VCs aim to do.

chmullig 10y ago
Yup, that's literally the definition of VCs. Instead of a single LP having to choose one startup to invest their $10M into, they buy shares in the dozens of startups that the VC then invests in. The risk and reward is shared between all the LPs in that fund.
throwaway729 10y ago
Is there anything like reinsurance; e.g., VC firms cross-investing in each others' portfolios?

logicallee 10y ago

I have no idea why you're being downvoted. there are approximately 2.8 billion people in the world whose annual income is < $2/day which is $730 per year. If you invested $300 into a lucky 5% of them - to give them six months of runway - then it would cost you 2.8B * 5% * 300 = $42 billion and you get 142M entrepreneurs. Let's look at YCombinator's stats. YCombinator has funded something like this: https://blog.ycombinator.com/yc-stats https://blog.ycombinator.com/yc-stats Let's say 1,000 companies, 8 worth > $1B. 8 in 1000 is 1 in 125. Let's reduce 1 in 125 to - not 1 in 1250...or 1 in 12,500...but 1 in 125,500. Everyone else goes to 0. Okay, now you have created 142M / 125500 = $1131B in value at a cost of $42B. That means if you took a 10% stake (a valuation of $3000 in everyone), you have now earned an approx. 30% return on your $42B. I think the above estimates are more than reasonable and anybody anywhere in the world who wants $300 for 6 months of runway to build anything they want should be given it at a $3K valuation no questions asked - because it is free money and it is enough for 1 in 100,000 people to succeed. Those chances are better than the chances of a high schooler drawn at random (without regard to whether they have any interest whatsoever) making it into the NBA, since there are 360 people in the NBA but less than 36,000,000 high-schoolers. $300 is more than enough for every tool an Internet entrepreneur needs - and remember, we are starting with the 5% who want to be one. the figures work just fine and your question is perfectly reasonable.

Retra 10y ago
Entrepreneurs doing what, exactly? If someone is making $2 per day, they live with other people making $2 per day, and there isn't much spending going on. >$300 is more than enough for every tool an Internet entrepreneur needs Oh, except an education. And a way to not be immediately steam-rolled by anyone with more money than you if your business is even remotely reasonable.
- logicallee 10y ago
  I think you missed the part where I require 1 in 125,000 to succeed? you're saying it's harder to get an education with an Internet connection and $300 than to start playing for the NBA without any particular interest or background in sports, just picking a high schooler at random? Well, okay. plus, you say "if your business is even remotely reasonable" you'll get steamrolled by anyone with more money, but under our scenario there are more investment rounds if you succeed. (since that's the only way to end up with a $1b valuation.) in short I'm afraid you've missed the point of my calculation entirely.