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Comment by benj111 | Hacker News Reader

Why are these articles always aimed at the 'victim' companies, rather than the actual venture capitalists?

If the thesis is correct, they are the main losers, with incentives to find the 'right' size for companies.

Edit: I am aware of the current business model of venture capitalists.

It just seems to me that the value maximising outcome would be to enlarge every company to the largest it could be but no bigger.

Why isn't this happening?

Is it that venture capitalists are psychopaths and bad investors to boot? Is it that identifying the 'right' size of company is hard? The question that then arises is why are founders so good at identifying the right size, when investors find it so hard? Is there survival bias here? Sour grapes? If founders are genuinely better, why hasn't that been picked up on and harnessed?

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They're not losers if the profits from a few big winners outweigh the losses from the losers.

That works out for VCs because they're diversified. A founder lacks the diversification, so while their average expected return is the same, their specific outcome is likely to be poor. They'd be much better off with a strategy that has lower expectation but also less variance.

VCs also have a resource that is much more scale-able, especially in a horizontal direction, money.

Most founders don't have the ability to diversify anywhere near the same degree because the resources they have personal control over (time, energy) are generally much more limited.

I think the thesis is that if you can spread your risk out across 100 companies then the math can work out and it can be a good bet, because you only need one of those to be a huge success and make up for all the failures. But if you are only invested in one startup, it's a horrible bet. So it can definitely make rational sense for the VC but not for the founders.

The corollary is that taking vast VC money is the best way to grow to be a $1B business (obviously there are some exceptions). Again, all these things can be true. If you're a founder and determined to have a billion dollar company, you should take VC money. But your chances of success are miniscule. If, on the other hand, you're a founder and just want to build a $20m business, don't take VC money and the odds improve dramatically.

The idea is that the venture capitalist's motivations aren't necessarily aligned with the company's. They're interested in creating a unicorn, because that one company will create the returns necessary to turn a profit on a huge number of attempts. So they attempt to quickly build huge companies with everything they touch, in an effort to get that one that will pay off. Many companies end up being overbuilt to a point where their sales can't sustain their size, in the interest of attempting to have the capacity for future sales.

Yes but the venture capitalist that manages to identify non unicorn, but still big companies has an advantage.

A fund that gets 1% unicorns might be successful, one that gets 1% unicorns and 5% big companies still has an advantage.

Which fund would you invest in?

As a VC? The unicorn fund. Which agrees with what the market has been supporting this last decade.

Given the same investments in each, the unicorn provides a bigger return. Because of economies of scale, it's more likely to gain traction and continue its success, especially in a place like tech where marginal cost is almost non-existent. Not to mention the overhead on managing a single investment vs. many. Not to mention the administrative costs of 5 companies vs one. Not to mention the benefit of choosing a company based on your interests and abilities, since most VCs have a more hands-on role than traditional investors.

It just aligns with the culture; the whole idea in most tech startups is to leverage economies of scale as much as possible. Often their profit per customer is tiny. They're relying on millions of people using the product.

>As a VC?

No as an individual investing in VCs.

VC A invests in 100 companies, 1 turns into a unicorn, 99 go bust.

VC B invests in 100 companies, 1 turns into a unicorn, 5 turn into (slightly less) large successful companies, 94 go bust.

I agree with the OP’s point. In a race of unicorns the length of the horns matter.

A Facebook trumps a portfolio of LinkedIn, Tumblr, Snapchat, Box, Nest anyday.

I've restated it twice now, I'm confused as to why I'm being misread.

Unicorn _and_ 5 big companies.

A portfolio of Facebook _and_ LinkedIn, Tumblr, Snapchat, Box, Nest would trump both.

See, I treat LinkedIn as a unicorn.

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