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The title of the article should be: - Investment decreases Expected Return [1] More money won't increase the risk of your business failing, it will simply dec
by tcgv 13y ago
The title of the article should be:
- Investment decreases Expected Return [1]
More money won't increase the risk of your business failing, it will simply decrease your share of the profits if your business succeeds.
[1] http://en.wikipedia.org/wiki/Expected_return http://en.wikipedia.org/wiki/Expected_return
- tptacek 13y agoNo, because accepting VC forecloses on a class of exits: the single-digit or low-double-digit-millions ones, which are the most common kind of exit, and which would be highly lucrative if you hadn't accepted an investment. You could accept such an exit after taking VCs, but your share of the profits won't be so much "decreased" as "destroyed". Getting to a mid-double-digits or better exit requires a different kind of execution and a different kind of luck than the lower kind, so, in fact, your risk does go up, because the bar gets set higher.
- tcgv 13y agoI believe we're addressing two different things here. On the one hand I'm talking about the "risk of business failure", on the other hand you're talking about the "risk of making less money". Hence, I agree it makes sense to say that "investment increases the risk of making less money", which is almost the same thing as saying "investment decreases expected return".
- tptacek 13y agoAgain, no, because in practice you won't even entertain those marginal exits: they will have no upside for you. They are foreclosed upon financially. Your return on investment isn't merely reduced in those cases; it is practically eliminated.
- tcgv 13y agoWould you care to elaborate how this relates to the "risk of business failure"? How would taking money from investors increase the risk of a startup not being able to develop a successful business model and become profitable?