Venture capitalists need to hit home runs

eProf was asked: “What’s been your favourite JOLT session/workshop so far and why?”

So far, eProf’s favourite workshop is Randy Smerick’s take on venture capital. His point was VCs hit home runs. They have to if they want to give their limited partners a reasonable yield on their investment.

The venture capital industry in technology is extremely high risk, especially at the early stage.  This means the vast majority of companies in a VC’s portfolio do not provide adequate returns. They fizzle out; they go bankrupt.

In this environment, the only way for VC funds to raise money, get a return and provide their LPs with an exit, is to swing for the fences. VCs are not interested in your company’s valuation growing at a GAGR of 20%.  They need 10, 20 and 30 baggers (multiples of their investment). If the star companies in a VC’s portfolio returned 20%, the fund would face wholesale redemptions and dry up.  In other words, venture capitalists need their investment in your company to make up for the underachievers in the fund.

This has big implications for entrepreneurs. VCs are not interested in your lifestyle business. They have two things on their minds: IPO, or initial public offering, and acquisition. It doesn’t make them vultures, it makes them clean-up hitters.

This is fine by us.  As far as we are concerned, eProf’s interests are aligned with venture models. Go big or go home.