Unicorns Distract Us from a Graveyard

Venture capital’s reliance on unicorns provides cover for the huge failure rate of startups, and investors make no effort to reduce it

Venture investing is fundamentally uncertain. You’re making big bets on people, ideas, and markets that might never work out, and there are more ways to fail than succeed. As a result, investing has to take into account the likely failure of many efforts. If your financial model assumes each of your investments will be a success, you will have a short career indeed.

Many investors have written about how they need some companies to win big in order to cover for other companies failing completely. As a simple example, Fred Wilson at Union Square Ventures tells his investors to expect a third of his investments to fail, a third to return their capital (which is also failure—they sell for a small enough amount that investors just get their money back, and in most cases the founders and employees get nothing), and a third to “succeed,” where his definition of success is that they return five to 10 times the original investment.

Wilson says his actual record is a bit better than that, but like Warren Buffet, he’d rather set achievable expectations.