Wednesday, March 30, 2005

Playing the Odds; Venture Capital as Roulette

A recent survey of start-up companies in the Mid-Atlantic region of the United States by Core Capital produced some interesting results. It seems that only 1 in 27 companies which successfully raise an initial ("Series A") VC investment will survive to get a subsequent ("Series B") round. I heard that the number being used in New York City this year is 1 in 30.

Those odds contrast quite severely with the traditional rule of thumb of 1 in 20 (or more markedly with the rule being used in the Dot Com days of 1 in 10).

Let this be a lesson to budding entrepreneurs: This is a tough market. The odds are that venture capital should be avoided. It is expensive money. Only those who don't need the funds can possibly afford to take them. A better avenue for most entrepreneurs is clearly to shift business models, find new customers and wait for better times to bring a new type of product to the market.

That is not to say that my advice is better for VCs. It is not! VCs make money when the 1 in 30 hits. They need to invest in order to have a chance at the occasional return. No, I am making a suggestion solely for the benefit of entrepreneurs. After all, it is your company which will go out of business at the end of the year, not the investment fund.

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