Nitpick: VCs are optimizing for % return, not on an dollar return basis.
I would say that the risk profile is not irrelevant: if you're betting that 1/10 of your investments are returning your fund, then just one miss is the difference between a good year and "I don't have a VC firm anymore". Compare that to betting that half of your investments are returning your fund: one miss is the difference between a good year and an "ehh" year.[0]
That's true; when you compare both of them to a 30x, the difference between a 1x and 0x is small. But what I'm saying is that at a $15m investment, very few VCs expect to see a 30x, and when you compare it vs. a 3x or a 5x acquisition, the difference between no money back and your 1x liquidation pref paying out is much larger, proportionally.
The same power law may apply, but you see more of the tails in when you have a much larger sample size. If there were just as many $15m investments happening as $20k investments, you'd see the same result, but there aren't.
Off-topic: are you the same Scott Klein I talked to over the summer re: statuspage.io?
[0] Of course, that glosses over different probabilities of success and failure, but what I'm trying to say is that VCs are risk averse.
> if you're betting that 1/10 of your investments are returning your fund, then just one miss is the difference between a good year and "I don't have a VC firm anymore"
To add to this, the top 10 VC firms make up around 85% of all of the returns of VC firms combined, and the top 15 VC firms make up around 95%. (don't quote me on those specific numbers, but I believe they are roughly accurate based on a report from a16z).
Long story short - very very few VC funds see worthwhile returns. The one's that do are absolutely killing it.
The best VCs have basically created a self-fulfilling prophecy: many of these firms do well BECAUSE the top VC firms invested in them. If a16z or KPCB invests in you, it makes it a lot easier to get press and additional rounds of funding from other VCs because one of the top firms "blessed" you.
I would say that the risk profile is not irrelevant: if you're betting that 1/10 of your investments are returning your fund, then just one miss is the difference between a good year and "I don't have a VC firm anymore". Compare that to betting that half of your investments are returning your fund: one miss is the difference between a good year and an "ehh" year.[0]
That's true; when you compare both of them to a 30x, the difference between a 1x and 0x is small. But what I'm saying is that at a $15m investment, very few VCs expect to see a 30x, and when you compare it vs. a 3x or a 5x acquisition, the difference between no money back and your 1x liquidation pref paying out is much larger, proportionally.
The same power law may apply, but you see more of the tails in when you have a much larger sample size. If there were just as many $15m investments happening as $20k investments, you'd see the same result, but there aren't.
Off-topic: are you the same Scott Klein I talked to over the summer re: statuspage.io?
[0] Of course, that glosses over different probabilities of success and failure, but what I'm trying to say is that VCs are risk averse.