There is a common misconception among people on the outside looking into the exciting world of technology venture capital that a lot of these venture capital firms are loaded with money. While it may be technically true that they are loaded with money, they are loaded with other people’s money because that money is intended for investment. In terms of the actual money that these venture capital firms generate, the picture isn’t as bright as some people would imagine it to be. There has yet to be a venture capital firm that hits a home run every time they step up to the plate. Just like the best baseball players can barely hit the wall when it comes to hitting more than one third of their at bats, venture capital firms suffer from the same statistics.
According to industry observers, roughly 33% of venture capital investments don’t earn any money. Why? Those companies fail, in other words, the venture capital firm lost its money. That’s the risky thing when you invest. It’s not like a loan where the borrower is legally obligated to pay the money you loaned regardless of whether the borrower’s business is successful or not. Investments can go south. In fact, they do so a lot. The other third of a VC’s typical investment barely breaks even. In other words, they put in all this time, effort and money into researching, analyzing and getting into the deal with the startup company and at the end of the day, they don’t get much.
Whether the startup company gets acquired or is liquidated, at the end of the day, the venture capital firm didn’t earn much money off the deal. It is the other third that makes the whole process worthwhile. This is when the venture capital firm makes that hundred thousand or $1M investment into a company that later on become the next Facebook or Goolge— it happens. Also, they make a lot of money when the company that they invested in was bought out by a larger company that has a lot of money. This is why it’s a good idea for people who are looking into working in this industry or covering this industry to pay attention to the mix of investments that a typical venture capital firm makes. It’s not exactly gambling but it’s not exactly a slam dunk either.