Why It Shouldn't Really Matter If Your VC Loses All The Money They Invested in You -- On The First Check In, At Least | SaaStr (2024)

FAQs

Why can big VC firms risk losing money in their deals? ›

Unlike traditional investors that focus on diversification to minimize risk, VCs need to embrace the Power Law if they are to achieve outsized returns. According to various estimates, between 75% and 94% of startups fail. The odds aren't much better than gambling.

There are two main risks when it comes to taking on venture capital: 1) The risk of not getting the investment; and 2) The risk of not being able to pay back the investment. The first risk is that your startup won't be able to raise the money it needs from investors.

Venture Capitalists Push Fast Growth at All Costs

This timeframe often forces companies to attempt to solve complex problems before they're structurally ready to do so on a large scale. But the biggest issue with this growth obsession may be the marginal dollar problem.

Exposure: VC firms often have an extensive network of contacts in the business world, which can help to raise a company's profile and attract potential partners, customers, and employees. No repayment required: Unlike loans, venture capital investments do not require repayment.

The “loss ratio” at early-stage VC firms is often around 40% by logo, and 20%-30% by dollars. In other words, 4/10 may go bankrupt or at least lose money … but since the winners tend to get more than the losers, in the end, maybe “only” 20%-30% of the fund is lost in losers.

Financial risk is the possibility of losing money on an investment or business venture. Some more common and distinct financial risks include credit risk, liquidity risk, and operational risk. Financial risk is a type of danger that can result in the loss of capital to interested parties.

At its best, venture debt is an effective complement to equity financing, and helps accelerate a company's growth. But accessing venture debt is not without risks ². Founders should be realistic and ask themselves whether they are taking on a burden that can be repaid.

The venture capitalists have invested in the startup with the expectation that they will make a return on their investment. If the startup fails, they will not only lose their original investment but also any potential returns that they might have earned had the startup been successful.

There will always be money to be raised. And yet, despite all that cash flowing into VC-backed companies, twenty-five to thirty percent of them will fail. One in five fail by the end of their first year; only thirty percent will survive more than ten years.

Only 0.05% of startups get VC funding

Many promising startups seek venture capital as a way to secure investment, but it's extremely competitive and rare. A mere 0.05% of startups get VC funding.

Is Shark Tank a venture capitalist? ›

The sharks are venture capitalists, meaning they are "self-made" millionaires and billionaires seeking lucrative business investment opportunities. While they are paid cast members of the show, they do rely on their own wealth in order to invest in the entrepreneurs' products and services.

The lack of progress, exit activity and high interest rates created problems both for investors and founders of late-stage VC-backed companies. Many investors in the late-stage space have become increasing cautious, and this has led to far less capital availability for founders.

Silicon Valley Bank was by far the largest provider of venture loans to the startup ecosystem, with more than $6.5 billion in loans to early- and mid-stage companies in 2022 out of $26.5 billion in total venture debt funding industrywide.

October's investment total marks the acceleration of the trend: VC funding has gradually tapered off since the record year of 2021, and some investors have warned of a possible "mass-extinction event." Down rounds, often loathed by VCs and startups alike, have become far more commonplace than usual.

Typically, GPs close several investors at once on a specified closing date. A VC fund can hold one or more closings before it stops accepting pledged capital. After a fund's final close, the GPs do not accept new LPs—also called “subscribers”—to the fund. (While it's possible for funds to reopen, this is rare.)

Venture capital believes in the management risk

The leadership of a corporation has a significant role in its success or failure, which means there is always risk involved.

Otherwise known as investment risk, permanent loss of capital is the risk that you might lose some or all of your original investment, if the price falls and you sell for less than you paid to buy.

And yet, despite all that cash flowing into VC-backed companies, twenty-five to thirty percent of them will fail. One in five fail by the end of their first year; only thirty percent will survive more than ten years.

However, it comes with limitations, including loss of control, pressure to grow rapidly, and high expectations for returns. Entrepreneurs considering venture capital should carefully weigh these factors and assess whether VC funding aligns with their business goals and vision.