Is venture capitalists are in the business of taking risks?

The myth that venture capitalists are in the business of taking risks that is not true venture capitalists are in the business of mitigating risk relative to reward.

So Brett what the heck does that mean that means that venture capitalists are very circumspect about the risks they take on they’re much less risk preferring than most people think now they are looking you know at the early stages so in a seed stage series A they’re looking for big returns ten times return on their investment because seven out of ten of their investments will fail.

So they accept risk but they’re cautious about their risk they’re cautious about what the reward is and so compared to entrepreneurs who start a business and go and fail at spectacular rates regardless of whether or not they’re shooting for the moon or they’re or they’re trying to build a lifestyle business.

Whatever it is I mean they businesses in this country fail at a very soaring rates and entrepreneurs take huge risks put it all on the line they have no safety net. It’s their money it’s their time venture capitalists get involved considerably. Later in the game they get involved at the seed stage and some don’t get involved until the series a stage so seed means. It does not means the first money into a company is the founder money and then friends and family money. Seed stage means you know the company’s got a little bit of traction usually doesn’t have any revenue yet but it’s getting somewhere it knows.

What it wants to be sometimes it has some revenue but seed rounds are you know Silicon Valley a few million bucks so this isn’t you know real real early that’s when the venture capitalist step in okay so the team’s generally been formed to a large degree the what the company wants to accomplish has been they’ve done some research there’s been some de-risking it’s still a risky stage series.

A which follows seed stage is considerably less risky the startup has been even now isn’t a start-up its just a business it’s been de-risked even more the company has some degree of product market fit it has some almost always some revenue that’s where a lot of venture capital money comes in. So the entrepreneurs are involved way back here. There is nothing but a prayer it’s so the venture capitalists step in here and they still take some risk but they’re cautious about it.

In most venture capitalists the tier A venture fund VC funds out in Silicon Valley Kleiner Perkins, Sequoia Benchmark, Andreesen Horowitz those kind of players yeah. I’d say you haven’t looked at the stats but i’d be surprised if more than ten maybe fifteen percent of a fund is invested at that seed stage. I mean it’s they’re cautious about the dollars that go in there they’re trying to pick off really unique opportunities. Second and Third time founders are ones who’ve had successful exits very game-changing technology. Things like that it’s a small piece and then they’re looking to take a position and have a front row seat to put more money in. In the A round in the B round. in the C round and at every round the business is de-risked more and more of the VCS money comes in.

So it’s not that they don’t take risk but to say they’re in the business of taking risks is usually to fundamentally misconstrue what’s going on here and as an entrepreneur if your mindset is that’s what they do they take risks and you haven’t been around venture capitalists you’re going to probably bud up against this fact which is they do take some risk they’re cautious about it. Relative to reward they don’t take a lot of the seed stage bets and so if they say to you well that seems riskier or have you thought about that or this and you might be frustrated right. Like that’s what you do you take risk well. They do but they number one they can’t take every risk right. So they’re being very cautious about the risks they take.

Generally speaking they’re not taking huge risks, you can think about it like this. They’re not in the business of rubbing two sticks together to start the fire and they’re really not all that interested in you know putting some kindling in there and fanning the flames. I mean they’ll do a little bit of that what they really want to do is be right. There when it’s time to pour gasoline on that fire and time to take that business from sort of slight. Product-market fit maybe a million bucks of recurring revenue to step on the pedal and take that higher and the risk.

That they accept is that they’re gonna just go for it and some of those businesses won’t be ready to go for it don’t have it figured out they’re putting more money in and they will fail but they’re not taking the risks. Way down here of is they’re even a market does anyone even wanna can the team possibly execute that’s not their business so that is a misconception thanks for stopping by.

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