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This is fundamentally a play in how smaller companies can take higher risk, more agile approaches to solve big problems. When a VC looks at this, he or she sees
by gjmulhol 13y ago
This is fundamentally a play in how smaller companies can take higher risk, more agile approaches to solve big problems. When a VC looks at this, he or she sees an asymmetric risk profile: huge risk bounded by losing everything. For example, if an investor puts in 100k, the most he or she can lose is 100k, but the upside is much much more than 100k. For me as a founder, though, this is the reason I love startups -- they can change the world. Taking big risks and having world-changing (even more than monetary) success is something that startups can do that mature companies sometimes struggle to do (with exceptions, of course).
- mathattack 13y agoAbsolutely. It's like a very out of the money call option. Doesn't cost much to play, but huge upside. The strange thing is this goes against some traditional thinking, which says that larger firms are more able to bear risk than smaller ones since they can diversify away the costs of failed projects. To your point, it's actually the VCs that do this diversification rather than the large companies.