Monday, April 25, 2011

That 10X Return Thing

Web startupsImage via WikipediaWhen VCs invest in your startup, they want a 10X return. So if they invest a million, they want you to turn that into 10 million dollars.

Why? Because they are greedy bastards? Maybe.

It's a numbers game. Say nine out of all 10 startups fail. That is pretty close to the actual numbers, by the way. So money was lost on nine out of 10 deals. One million turned into zero dollars. That stunt is still a lot of hard work on the part of many people, believe it or not.

But one makes it, and gives a 10X return. So 10 million dollars were invested in 10 different startups. Nine of them went down. One turned that one million into 10 million. That is a break even situation. The VCs started with 10 million dollars, they ended up with 10 million dollars. Where's the game?

The thing is most VC firms fail. They end up losing all their money. The top ones end up skimming the top returns.

Say you are a top VC firm. You put one million into one startup that failed. But you were the one who put that million into that startup that gave a 10X return. You started with two million, you ended up with 10 million. That's good work. I think there is a medal for that.

The entire ecosystem pays the price for the few star players, on both the VC and the entrepreneur side. The ecosystem deserves respect.

The thing is even the best ones don't really know which ones are the winners. At the starting point many look like winners. And it is less about the startup team members, and more about the market winds. Noone really knows how to predict which way the winds will blow.
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