VC dilemma: How many “No”s before a “Yes”?

VC dilemma: How many “No”s before a “Yes”?

By Rajesh Setty on Mon 17 Dec 2007, 11:59 PM – 2 Comments

The investment track record for Venture Capitalists is not that great. Everyone knows that. Eight out of ten of their investments go south.

It is easy to get a “No” from a VC. Since they are always looking to cover their risks, one or two risk areas can prompt a “No” from them.

The big dilemma is how many ideas should they reject before they say “Yes” to an idea. I don’t know the number but the number has to be high. Here’s why:

Let us say a VC says “Yes” to three consecutive deals. It doesn’t look right because none of the ideas will seem to be uncommon. If an idea is not uncommon then naturally you should not expect uncommon results. In other words, they have to say “Yes” to an idea after only after rejecting MANY ideas so that they get a “feeling” that they have funded an uncommon idea.

In reality, however, a funded idea may not be an “uncommon” idea as 80% of projects that a VC funds will go south. Something is wrong somewhere here. But there is no way to figure that out easily. The easiest defense, therefore, is to keep rejecting a lot of ideas and chose one. That way, at least it feels that they have funded a “winner” out of many “losers” they have come across.


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2 Comments so far, Add Yours

Karthik Sundaram  on December 18th, 2007

Raj: the key phrase you seem to have forgotten here is the “venture” in venture capital. If they fund only successful companies, they are farming loans. Also, VCs tend to fund people, not ideas. Speak to legends like John Doerr, Yogen Dalal, Mark Kvamme and others, and you will realize that the idea could be simple: it is the people who will make the idea successful.

To reflect on your observations (not sure how correct the 8-out-of-10 conclusion is), the number of no’s depend on the number of weak teams and weaker business plans that are thrown at these folks. Agreed, not many of the VC partners have run companies in the past (that is a completely different topic), but they do have a very good sense of knowing BS when they see it. People in the Valley take it for granted that VCs HAVE a duty to fund every idea.

Many ideas have worked without venture funding too, simply because the entrepreneur has chosen to build the POC based on his/her superior team skills. Comes back to people, eh?



Rajesh Setty  on December 18th, 2007

Thanks Karthik.

The last couple of years I have been involved on both sides and have seen multiple variations of this such as:

* good people with good ideas not getting funded

* good people with bad ideas getting funded

* questionable teams with questionable ideas getting funded

* questionable teams with great ideas getting funded

and so on.

The legends that you mention in the VC world sadly are an exception than the rule :(

I agree with you on the people aspect and it is true whether the discussion is about funding or not.

Thank you.



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