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Comment by DavidSJ | Hacker News Reader

Viewed probabilistically, the most likely positive exit for a startup is an acquisition for less than $50 million. This outcome has little benefit to VCs, and they will happily trade it for an improbable shot at a higher outcome.

Am I misunderstanding something, or is the author asserting that VCs regularly make the sunk cost fallacy?

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I think he's referring to the distribution of VC-backed companies: since most will fail, the ones that win have to win really big.

If all of the winners in a fund get acquired too early (small wins instead of big wins) it could mean the fund is not actually successful because it's not enough to outweigh the losses.

This is accurate. Returns of VC portfolios follow a power law distribution. One or two companies generally return the entire value of the fund, and these tiny acquisitions are considered 'gravy'.

> regularly make the sunk cost fallacy

Not necessarily, e.g. better to have a 25% chance of $250mm than a 100% chance of $50mm.

Not so much sunk cost as raised stakes. VCs don't regularly pour money into companies that are struggling, but they will richly fund startups that have shown early spark of success for the slim chance that they can make it massive.

Agreed. The article says from a founder's POV that every dollar you spend is a dollar of dilution. From a VC's POV, every dollar they invest is percentage. If a company is doing well, they want to increase that percentage whether the company needs the money or not.

I don't know whether it falls into sunken cost fallacy, but yes, VCs will go to great lengths to tank deals that don't fall within their expectation of return. What's worse they usually succeed in either spoiling the deal, or getting a larger percentage that what was initially agreed since they have all the leverage in acquisition talks vs the founder.

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