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Looking at those numbers, it seems like VC focus exclusively on high risk - high reward companies. What do the businesses do that have less risk and less rewar

Looking at those numbers, it seems like VC focus exclusively on high risk - high reward companies. What do the businesses do that have less risk and less reward but where a portfolio of these companies can make the same average profits? I am thinking of the Ben and Jerrys [1] kind of businesses. Apart from getting loans, is there a way for them to rise money? [1] https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-ben-and-jerrys-vs-amazon/ https://www.joelonsoftware.com/2000/05/12/strategy-letter-i-...

alexheikel 7y ago
If you don’t take high risk you can’t have high returns.
- toohotatopic 7y ago
  True. But all those failed adventures bring down your average return on investment. There must be a class of businesses that have half the risk and half the profits compared to the businesses that VCs accept. From an investment point of view, the ROI would be the same, but VCs wouldn't invest. How do those people get money to fund their businesses?
  - woah 7y ago
    Giving new businesses with no assets and no cash flow unsecured capital is inherently risky. It only makes sense if there’s a potential for outsize returns. The only thing that would make an investment like this less risky is collateral, not worse potential returns.
- EGreg 7y ago
  Why not? You can have a lot of “potential energy” stored up and make sure you don’t fail because you have endless opportunities to try high-return ventures. This happens because software has near-zero marginal cost to copy. Take for example https://worldaftercapital.com https://worldaftercapital.com written by a VC Or https://qbix.com/token https://qbix.com/token ecosystem which aims to achieve a new economic model for open source projects
  - adventured 7y ago
    I agree with this skepticism. There is no strict link between high risk and high return. Microsoft was not high risk (as noted by Gates), and it provided a return that is so large it might as well be off the scale for the purposes of this discussion (their market cap was recently up around $1.3 trillion; Gates will have pulled over a hundred billion dollars out of his ownership in the company over ~45-50 years). - Microsoft had very high margins from the beginning. They operated thin and were very cash rich within the first few years. Just a few years in, Gates had Microsoft hoarding multiple $500,000 government bonds (~$1.5m in today's money) from accumulated profit, because they were already very profitable (there is a story about the secretary misplacing one of these bonds). - Microsoft was founded for relatively little money - $10,000 - and with zero outside VC money. Gates & Allen came up with that capital from working various industry jobs in the prior years. - They nailed down a serious customer (MITS) and then founded a company, rather than the other way around (found a company and then try to find business for it). - Sales went from $16,000 in 1976 (first months of operation), to $8m for 1980, and $17m in 1981 with 40 employees ($17m is $50m inflation adjusted). Three years in they were gushing cash.
  - didericis 7y ago
    The first link looks interesting, but I was turned off a bit by the implication that land scarcity was only and issue when we were an agrarian society; current housing prices are a pretty clear signal that land scarcity is very much still a thing.
  - onion2k 7y ago
    Why not? Because low risk companies are always relatively easy to copy, so as soon as you see any success you'll have clones pop up and take market share, which will lower your returns. Any business where the risk is low is, by definition, not doing anything other people can't do. If only you can do it then you have to build the market yourself, which would represent a high risk.
- dredmorbius 7y ago
  I STR that relationship's been challenged in recent years.
gumby 7y ago
The VC asset class is a tiny segment of PE specifically intended for high risk investments. BTW this de facto definition evolved roughly in the mid 80s — the metrics and process you are referring to were used for early investments like Intel and Apple. If your business doesn’t have this profile (opportunity for better than 10X return in a few years) then it is not of interest to those wanting to invest in this asset class. But those more conventional businesses make up the bulk of all new businesses (restaurants, various service companies, manufacturers, etc) and the bulk of all new business investing. Most of the new business investment infrastructure is around them. Loans, as you say, F&F, and investments from investment pools, investment companies and the like.
- kakoni 7y ago
  > Most of the new business investment infrastructure is around them. Would be interesting to hear how fellows HNers see this situation in their country. In Finland its pretty difficult as a new business to secure loan from bank (unless you are willing to put your house or other tangible assets as collateral)
  - gumby 7y ago
    This is pretty common in most OECD countries including USA. If you are opening a shop or restaurant that's about your only alternative to asking your friends. In the US if you are expanding your shop to a few sites, or doing a "concept" (e.g. Jamba juice) you can look for some professional money, as I mentioned, but the process is just as painful as a bank. All those people want you to put some of your own money in to show that you are committed. The money being lent out is often a large proportion of the lender's capital. For PE (incl VC) the partners typically put up only a nominal amount of capital -- they are investing their customers' money. So requiring an investment by the company founders is an unnecessary requirement that could be a barrier to a good deal happening. The positive side of this is that these investors are more concerned with upside than downside. Investors in Europe and Australia are mostly more worried about losing money than gaining some.
  - adventured 7y ago
    In the US it's very difficult to get a bank loan for a new small business, unless you have strong collateral to put behind it. Banks gradually became not-so-great sources for small business lending in the post WW2 era; essentially as bank lending fully switched from being personal, with some influence for community relationships and reputation, to being almost strictly based on formula. As an alternative, the US has many types of government small business loan programs (meant to stimulate industry), along with private sector versions, for just about every business type and scenario. Some are easy to get (typically smaller), most require that you go through annoying and drawn-out processes to get. You have to deal with the bureaucracy basically. The US has an agency called the Small Business Administration, which works with lenders and provides loan backing. One of their requirements in their loan programs is that you demonstrate an inability to get lending from any other financial lender. Then there are small business grants that federal and state government provide, again to stimulate industry. I suspect most developed economies have versions of these types of programs.

alexheikel 7y ago

If you don’t take high risk you can’t have high returns.

toohotatopic 7y ago
True. But all those failed adventures bring down your average return on investment. There must be a class of businesses that have half the risk and half the profits compared to the businesses that VCs accept. From an investment point of view, the ROI would be the same, but VCs wouldn't invest. How do those people get money to fund their businesses?
- woah 7y ago
  Giving new businesses with no assets and no cash flow unsecured capital is inherently risky. It only makes sense if there’s a potential for outsize returns. The only thing that would make an investment like this less risky is collateral, not worse potential returns.
EGreg 7y ago
Why not? You can have a lot of “potential energy” stored up and make sure you don’t fail because you have endless opportunities to try high-return ventures. This happens because software has near-zero marginal cost to copy. Take for example https://worldaftercapital.com https://worldaftercapital.com written by a VC Or https://qbix.com/token https://qbix.com/token ecosystem which aims to achieve a new economic model for open source projects
- adventured 7y ago
  I agree with this skepticism. There is no strict link between high risk and high return. Microsoft was not high risk (as noted by Gates), and it provided a return that is so large it might as well be off the scale for the purposes of this discussion (their market cap was recently up around $1.3 trillion; Gates will have pulled over a hundred billion dollars out of his ownership in the company over ~45-50 years). - Microsoft had very high margins from the beginning. They operated thin and were very cash rich within the first few years. Just a few years in, Gates had Microsoft hoarding multiple $500,000 government bonds (~$1.5m in today's money) from accumulated profit, because they were already very profitable (there is a story about the secretary misplacing one of these bonds). - Microsoft was founded for relatively little money - $10,000 - and with zero outside VC money. Gates & Allen came up with that capital from working various industry jobs in the prior years. - They nailed down a serious customer (MITS) and then founded a company, rather than the other way around (found a company and then try to find business for it). - Sales went from $16,000 in 1976 (first months of operation), to $8m for 1980, and $17m in 1981 with 40 employees ($17m is $50m inflation adjusted). Three years in they were gushing cash.
- didericis 7y ago
  The first link looks interesting, but I was turned off a bit by the implication that land scarcity was only and issue when we were an agrarian society; current housing prices are a pretty clear signal that land scarcity is very much still a thing.
- onion2k 7y ago
  Why not? Because low risk companies are always relatively easy to copy, so as soon as you see any success you'll have clones pop up and take market share, which will lower your returns. Any business where the risk is low is, by definition, not doing anything other people can't do. If only you can do it then you have to build the market yourself, which would represent a high risk.
dredmorbius 7y ago
I STR that relationship's been challenged in recent years.

gumby 7y ago

The VC asset class is a tiny segment of PE specifically intended for high risk investments. BTW this de facto definition evolved roughly in the mid 80s — the metrics and process you are referring to were used for early investments like Intel and Apple. If your business doesn’t have this profile (opportunity for better than 10X return in a few years) then it is not of interest to those wanting to invest in this asset class. But those more conventional businesses make up the bulk of all new businesses (restaurants, various service companies, manufacturers, etc) and the bulk of all new business investing. Most of the new business investment infrastructure is around them. Loans, as you say, F&F, and investments from investment pools, investment companies and the like.

kakoni 7y ago
> Most of the new business investment infrastructure is around them. Would be interesting to hear how fellows HNers see this situation in their country. In Finland its pretty difficult as a new business to secure loan from bank (unless you are willing to put your house or other tangible assets as collateral)
- gumby 7y ago
  This is pretty common in most OECD countries including USA. If you are opening a shop or restaurant that's about your only alternative to asking your friends. In the US if you are expanding your shop to a few sites, or doing a "concept" (e.g. Jamba juice) you can look for some professional money, as I mentioned, but the process is just as painful as a bank. All those people want you to put some of your own money in to show that you are committed. The money being lent out is often a large proportion of the lender's capital. For PE (incl VC) the partners typically put up only a nominal amount of capital -- they are investing their customers' money. So requiring an investment by the company founders is an unnecessary requirement that could be a barrier to a good deal happening. The positive side of this is that these investors are more concerned with upside than downside. Investors in Europe and Australia are mostly more worried about losing money than gaining some.
- adventured 7y ago
  In the US it's very difficult to get a bank loan for a new small business, unless you have strong collateral to put behind it. Banks gradually became not-so-great sources for small business lending in the post WW2 era; essentially as bank lending fully switched from being personal, with some influence for community relationships and reputation, to being almost strictly based on formula. As an alternative, the US has many types of government small business loan programs (meant to stimulate industry), along with private sector versions, for just about every business type and scenario. Some are easy to get (typically smaller), most require that you go through annoying and drawn-out processes to get. You have to deal with the bureaucracy basically. The US has an agency called the Small Business Administration, which works with lenders and provides loan backing. One of their requirements in their loan programs is that you demonstrate an inability to get lending from any other financial lender. Then there are small business grants that federal and state government provide, again to stimulate industry. I suspect most developed economies have versions of these types of programs.