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Comment by tachyonbeam | Hacker News Reader

It's the silicon valley mantra. Grow for multiple years at a loss so you can be the first and biggest player in your business segment and instigate a monopoly, giving nobody else a chance to establish themselves. They all want to be the next Google, Amazon or Facebook.

I remember seeing a silicon valley VC, in an interview, saying that he wouldn't invest in a startup if he couldn't see a path to a billion dollar valuation. Of course, this guy has the right to his own investment strategy, but it also seems kind of idiotic to suggest that every business that can't have a billion dollar valuation is worthless. There are plenty of niche business out theres that occupy smaller market segments that the tech giants will likely never come into. Personally, I wouldn't say no to owning a significant share of a 600 million dollar business.

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The economics of venture capital don't work out if you invest in companies that you think will be worth less than a billion dollars. There's a really enlightening blog post that goes through all the numbers (maybe someone can find it again for me), but it basically comes down to this:

90% of all companies funded by this VC will fail. Of the remaining 10%, some will be middling successes. One or two companies will be really great. But the VC has a problem: his LPs expect a return over 10 years (or whatever the lifetime is) that is as good as the market (simplifying, but this is basically true). If the one or two companies that succeed only become worth a few hundred million, he's actually delivered a sub-par return for his LPs. So the one or two companies that succeed must _really_ succeed, or else the VC is going to have trouble with their next fund. Someone did the math and showed that a 10x return on those successful investments is the minimum for the fund as a whole to provide a good return for its LPs.

All this means that when a VC looks for deals, he can't waste time on lifestyle businesses and the like. Billion dollar companies or bust. Keep in mind that this is not true for people who write smaller checks (like angels).

>Someone did the math and showed that a 10x return on those successful investments is the minimum for the fund as a whole to provide a good return for its LPs.

And they were called ten-baggers before they were called unicorns - roughly speaking.

That math makes sense if “90% of investments fail”, which is a reasonable number if you only invest in companies that need to grow to $1B to succeed. But if you were willing to invest in companies that top out much smaller, theoretically you could chose companies based on likelihood of profit instead of growth, and get a much lower failure rate. The other thing you’d need to be careful of is drain on your time. You’d need to be much less available to companies over time, or you’d get spread too thin by too big a portfolio.

> But if you were willing to invest in companies that top out much smaller

Then that person would literally not be practicing Venture Capital.

Venture Capital is a very specific type of funding with a specific type of risk profile. If you don't like the implications, then don't seek Venture Capital.

This is what people don't understand. No one is forcing you to be a venture backed company.

Is that a semantic argument - that low risk investments should be called something other than "venture capital"? What term would be best for that? Note that VC does have a wide variety of risk profiles - with later stage usually being lower risk and earlier stage being higher. Who serves the market of early, low-medium risk (and therefore lower returns)?

And what does the math look like for the folks that are actually running the startup?

> There's a really enlightening blog post that goes through all the numbers (maybe someone can find it again for me) ...

Perhaps this blog post with slides at the end by Mark Suster?

https://bothsidesofthetable.com/how-to-build-a-startup-under...

Here’s some math around power law investing, maybe this post is what you’re looking for?

http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-i...

It's because a startup is defined as a looking for a _scalable_ business model (https://en.m.wikipedia.org/wiki/Startup_company). I honestly don't believe most people, even among entrepreneurs, know this but that makes it very different from most companies. Of course, what is scalable can be debated. $600 million sounds good to me (even though I can understand the VC having his particular strategy worth good thoughts behind it as pointed out by the other comment) but a lifestyle business is not a startup in early stages and never will be a startup. It is rather the early stages of a lifestyle business.

The whole point of the notion of a startup is to separate out specific types of early stage businesses, because certain logic applies in these scenarios (such as being almost the only relevant early stage businesses to investors - to balance out the high level of risk the payout need to be a certain level).

Anyhow, it still baffles me a lot of people in the entrepreneurial community don't really know what a startup is. Hopefully this can enlighten a few so less energy and frustration needs to be spent due to this mixup and more energy could be spent on the discussing the differences in strategies and tactics that apply for each type of early stage business.

The VC is not saying that businesses that don’t reach $1B are worthless, they simply don’t work for their business model, which relies on finding companies that “return the fund”.

Agreed. Wholeheartedly.

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