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I read that argument several times, but always wonder: Shouldn't VCs factor in the subjective risk of the individual venture, like banks do (by requiring higher
by cx01 18y ago
I read that argument several times, but always wonder: Shouldn't VCs factor in the subjective risk of the individual venture, like banks do (by requiring higher premiums for riskier credits)?
So for example, if a venture has a (subjective) 10% chance of success, the VC should require at least a 10x payoff, but if it has a 50% chance, a 2x payoff would suffice.
Or am I missing something here?
- gravitycop 18y agothe VC should require [...] if it has a 50% chance, a 2x payoff VC's do not invest in ventures with high (e.g. 50%) chances of success. A high chance of success impies a low return multiple. See: http://www.youtube.com/watch?v=HaeWyLuJsJ4 http://www.youtube.com/watch?v=HaeWyLuJsJ4 Investors in Startup companies are not interested in hearing about conservative startups.
- prakash 18y agoSo for example, if a venture has a (subjective) 10% chance of success I recently asked a VC on how they evaluate risk in their portfolio, and do they bucket investments into low, medium & high risk and how they identify & classify each of these investments into various buckets -- his answer was simple, they would invest in any company that could potentially get them a 10x return -- as simple as that.
- gravitycop 18y agothey would invest in any company that could potentially get them a 10x return It's like an SAT score, though. If 10x is borderline, to be competitive against other funding-seekers you should be approaching VC's with much-riskier (e.g. higher-return) opportunities (100x; 1000x; etc.).