Venture capital investing is the riskier version of gambling in Las Vegas.
Truly. 90% of startups fail. FEW are experienced with discerning any difference between those likely to fail and those not.
What’s the rookie mistake in venture capital investing? Being a rookie.
Without experience in startups, your odds are against you as much as they are playing Blackjack with no idea what you’re doing.
Startups are NOT like new businesses. There is no model, book, nor predecessor from which to learn and likely succeed. Your experience gaining wealth in other businesses is NOT applicable. You do not know what you’re doing in startups unless you’ve worked in startups.
If you have that experience, you might improve your odds.
I’ve worked with startups for about 15 years now and I’m no Marc Andreessen (I don’t have the wealth to be so), but I’m batting about .600
I know how to play Blackjack well, and I’ve worked with startups… my odds are about the same (in fact, they’re worse at the Blackjack table but you get the idea). How are yours?
And those are great odds. I’ll take those odds any day of the week and Sunday… that’s why I keep working with startups; I’m pretty good at finding winners and more importantly, I do it because I want to, not because I expect a solid investment.
Now, appreciate though, those “winners” don’t mean $250MM exits…
First lesson, your odds SUCK unless you’ve been in the game. Don’t presume you know better because you have wealth, you’ve been successful in business, nor because you had a career in the space. Surround yourself with people who KNOW startups – this is why Venture Capital Firms exist and why our work is on behalf of your investment.
Second lesson, your odds of making money in venture capital are incredibly slim. Investing directly, yourself, is best left to those with means AND experience. Starting a Venture Capital Firm tends to work best where Partners and Executives in entrepreneurship build a company that manages investments; to do this, short north of $40MM to work with in a fund or you’re severely limiting your ability to capably fund people more likely to deliver returns.
Third lesson, your odds of having a decent exit STILL suck, no matter what.
Here’s a typical scenario
Take $10MM and play the game.
$9MM is likely lost entirely.
$1MM MIGHT work out.
$100k is likely to do well and deliver a return… if you’re lucky, that return will be in the neighborhood of $2MM.
If you hit blackjack at the table constantly, you’ll walk away a winner.
And that’s because you’re playing as a rookie.
Venture Capital investing is for people who can overwhelmingly afford to lose money.
Venture Capital investing is for people who WANT to support innovation. If you don’t want to be in these companies, you shouldn’t be.
Venture Capital is not a diversification alternative to what you’re doing on Wall Street or in Real Estate.
The rookie mistake is trying to be an Angel Investor when you have no business supporting early stage innovation; Angel being more than a capital source. Or trying to be Venture Capitalist when you can’t throw away the money. And those are different things by the way (Angels and VCs) – if you’re not familiar with the difference, you’re a rookie and should only play because the wait staff will bring around watered down drinks every hour; they’ll cost you a lot, but the table might be fun for a while.