Why Venture Capitalists Should Invest Like Poker Players
written by Claudia Zeisberger & Kamal Hassan
No matter your level of experience, early-stage investments are considered high-risk & a gamble. Why not treat it like one?
The private equity model is well established. You analyze hundreds of companies and opportunities in detail and buy a minority or majority stake in a good company to manage it over a few years with the goal of achieving a profitable exit. Rarely do PE funds deal with write-offs, and PE-owned companies in distress are known to do better than their publicly listed peers.
The venture capital (VC) model follows the same approach. Partners in venture funds review over 100 different opportunities to pick one winner and build, over a five-year investment period, a portfolio of 15–20 start-ups. They screen against multiple criteria, yet the industry-wide outcome shows a pretty weak track record. Statistically, according to Correlation Ventures, over 60% of all companies invested in by VCs will return less than the invested capital. We asked: Can this model be improved?
How have VCs done?
The Correlation Ventures data on VC returns shown on the graph above is quite discouraging. If two-thirds of companies are largely written off, you need the remaining third to average at least a 6x return…
