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Yeah, the reason VC's can stand higher variability is the aggregation, but the reason they want it is approximately your argument, that the distribution makes i
by aston 18y ago
Yeah, the reason VC's can stand higher variability is the aggregation, but the reason they want it is approximately your argument, that the distribution makes it so that their worst case is not that bad, but their best case is great (due to the clamp at $0). The wide range of big payoff possibilities must raise the EV, but the individual entrepreneur doesn't care because of the variablity he can't take.
- mattmaroon 18y agoVCs also can stand the variation because they get paid even if they fail. Were VCs paid only a % of the profits, and had to reimburse for failures at the same rate, you'd see their risk tolerance drop greatly.
- aston 18y agoAlso true, though their LPs do get paid only on the profits (less the aforementioned management fees). If they weren't comfortable with the risk, they wouldn't invest, right?
- mattmaroon 18y agoYeah, though they can invest in many high risk VC funds much the way VCs invest in many high-risk startups. Harvard's endowment, for instance, is ~$35 billion. They're risk-tolerant on a level that Sequoia can only have wet dreams about. So though VCs will be less risk-tolerant due to sample size than entrepreneurs, LPs will be that much less than VCs. Even the best VC firm is only a few poorly-performing funds away from the scrap heap.