Venture Capital Portfolio : Slide 7

The venture capitalist uses his portfolio evaluation to make his optimum risk/reward ratio. It is done by picking a failure rate rather than a success rate. Assuming success means that we drive towards the no return limit of zero risk. Infinite risk (man or machines on Jupiter) is quite literally mechanisms for throwing your money away. A venture capitalist considers himself quite successful if one in ten is a "big hit". Many venture capitalists, particularly those in the later stages of investment, do not have "big hits" and tend to treat the investment more as a loan portfolio. Generally, the Angels and early venture capitalists strive for a failure rate of about 80%. Provided there is adequate income to offset the loss, the losers only lose 70% of the money invested. This means that two in ten are big winners. The gains, however, can be in the four or five figure percentiles, which will more than compensate for the failures. We count as failure, in this case, those that are among the "living dead". An investment in a company that makes jobs, employs twenty-five people, and does two million dollars a year is not bad for the community, but it is not the kind of success we are talking about. The likelihood that the venture capitalists would get liquidation and any kind of reasonable gain from such a situation, in vanishingly small.

Therefore, to offset any conceivable loss, the Angel and early venture capitalist keeps the risk high with the anticipation of greater rewards by maintaining a portfolio failure rate of 80%.

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