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The part that I find scandalous isn't that businesses have a high failure rate. That's been true since antiquity. It's that VCs are, to a large degree, responsi

The part that I find scandalous isn't that businesses have a high failure rate. That's been true since antiquity. It's that VCs are, to a large degree, responsible. They don't have to play get-big-or-die. There will be a nonzero failure rate no matter what, but it doesn't need to be this high. To a large degree, it's the VCs' fault for pushing their companies to take unreasonable risk. Often, worse yet, that risk is often counter-innovative... it's not creative risk but "hire 200 people next year and do Pearson's grunt work in large amounts" risk. At the low end of the risk spectrum, you have small consultancies with minimal overhead and businesses with secured assets that you can take bank loans for. At the high-risk, high-growth end, you have companies that will either be 100 times their current size, or dead, inside of 3 years. The mid-risk, mid-growth businesses, targeting 20-60% annual growth, tend to be too risky for bank loans but not interesting to VCs. Those will be 5-10x (at 10 years) most often with an occasional 200x, but rarely a 10,000x. The thing is, the goal of the game shouldn't be to maximize your chances of getting (extremely rare, and difficult to get in to) 10,000x's. It should be to make money. If you can do that with a string of 5-10x results and a lower (say, 30%) failure rate, instead of swinging for 10,000x and having a 90% failure rate, then maybe you should. Not only are those 10,000x's rare no matter what you do, but unless you're extremely well-connected you're not going to be able to put more than a small amount of money into them. Why is the Valley like this? Ultimately, it's not about making money. It's about the VCs' careers. You get a lot of credit, as an individual, for having "been in on" Facebook or Twitter. It's difficult to predict the successes in advance, which is why you get the creepy co-funding culture, which doesn't make money for anyone (in fact, they make less money because of it, because they fund lower-quality stuff) but spreads around the career credit of being an early investor in something that hits big.

tlb 12y ago
You have indeed identified an underserved market: capital for mid-risk, mid-growth companies. You could serve that market by organizing a venture fund. Keep in mind: it's not like nobody ever had that idea before. Many people did, and proceeded with it, and discovered something that caused them to either give up or pivot to the traditional (high-risk, high-growth) VC model instead. Some of the reasons why they didn't stick with mid-risk, mid-growth are bad: vanity, careerism, principal-agent problems. I believe there are some good reasons too, but you might be able to overcome them. It would be really great for the world if you figured this out. Seriously, I'd encourage you to try. There are ways to start small and have the financial mechanics taken care of, such as an AngelList syndicate. If you succeed, you'd be enabling hundreds of people to have rewarding and more stable careers.
- michaelochurch 12y ago
  "I believe there are some good reasons too" What do you think those are? I think that one issue is that it's harder to manage them, especially because they tend to be high-skill niche businesses. The thing about social media is that any fucking idiot has, at least, the technical knowledge to run one. This makes them attractive to bikeshedding investors and also ripe places to put underachieving friends who are owed favors.
  - tlb 12y ago
    The economics are marginal. You need to put in a large amount of money over long time periods before you get any returns at all, so if those returns aren't great, you might end up losing money and not being able to continue. A large portfolio of mid-risk companies is not low risk, because they are correlated in various ways. For example: - macroeconomic shocks can hurt your entire portfolio. - your entire portfolio might have a selection bias High-beta funds can let go of companies that fail. But if you're counting on most companies not failing in order to make money, you'll have to step in and rescue some companies where the founders break up, or give up, or move on to better opportunities. It's very painful to recruit and install new management.
  - danieltillett 12y ago
    The real reason is they take much more effort on the part of the investor to back companies like this. Much better to burn through hundreds of naive young guys trying to pick "outliers" than building businesses with a good chance of moderate success.

tlb 12y ago

You have indeed identified an underserved market: capital for mid-risk, mid-growth companies. You could serve that market by organizing a venture fund. Keep in mind: it's not like nobody ever had that idea before. Many people did, and proceeded with it, and discovered something that caused them to either give up or pivot to the traditional (high-risk, high-growth) VC model instead. Some of the reasons why they didn't stick with mid-risk, mid-growth are bad: vanity, careerism, principal-agent problems. I believe there are some good reasons too, but you might be able to overcome them. It would be really great for the world if you figured this out. Seriously, I'd encourage you to try. There are ways to start small and have the financial mechanics taken care of, such as an AngelList syndicate. If you succeed, you'd be enabling hundreds of people to have rewarding and more stable careers.

michaelochurch 12y ago
"I believe there are some good reasons too" What do you think those are? I think that one issue is that it's harder to manage them, especially because they tend to be high-skill niche businesses. The thing about social media is that any fucking idiot has, at least, the technical knowledge to run one. This makes them attractive to bikeshedding investors and also ripe places to put underachieving friends who are owed favors.
- tlb 12y ago
  The economics are marginal. You need to put in a large amount of money over long time periods before you get any returns at all, so if those returns aren't great, you might end up losing money and not being able to continue. A large portfolio of mid-risk companies is not low risk, because they are correlated in various ways. For example: - macroeconomic shocks can hurt your entire portfolio. - your entire portfolio might have a selection bias High-beta funds can let go of companies that fail. But if you're counting on most companies not failing in order to make money, you'll have to step in and rescue some companies where the founders break up, or give up, or move on to better opportunities. It's very painful to recruit and install new management.
- danieltillett 12y ago
  The real reason is they take much more effort on the part of the investor to back companies like this. Much better to burn through hundreds of naive young guys trying to pick "outliers" than building businesses with a good chance of moderate success.