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The way I interpreted it was more, failure in VC terms is "not blowing up".

That $15 mil investment might be acquihired, or continue to be unexcitingly profitable, or put up on the chopping block for its patent portfolio. They might not even lose money, but.

Also keep in mind that VC funds as an asset class are historically a bad investment: http://www.slate.com/blogs/moneybox/2012/05/07/most_venture_... http://avc.com/2013/02/venture-capital-returns/

It's not just that the VC expects the average startup to fail; it's also expected that the average VC fails - or at least underperforms the S&P500.


I agree, especially in light of the preference structures that she mentions (and that I believe are industry-standard). But these arguments seem to lead to the conclusion that you shouldn't be an LP, not that you shouldn't take venture money. The only way that this becomes an issue is if the VC has enough of a stake to run their own decision making and executing process, and that (as I understand it) is the line between VC and PE.
>But these arguments seem to lead to the conclusion that you shouldn't be an LP, not that you shouldn't take venture money.

I have a very limited understanding, but the impression I got is that VCs typically have short maturity dates and thus are riskier in nature, whereas PE funds typically have the luxury of biding their time. How this is structured, or why exactly is beyond my ken.

So upside being, VCs are incentivized to encourage larger risk taking than what would be otherwise optimal from the perspective of a bootstrapped founder.

I can't speak for the PE side, but VCs aren't investing their own money. They have limited partners (LPs) that provide the money, and expect returns on it. This LP money goes into funds (vehicles to make investments out of). Each fund has a limited lifespan (the company I work for has fund lifetimes of around 8-10 years). This means that all of the money should be returned to investors over that time period. Since VCs can't make all of their investments at the beginning of the fund (for many reasons, chief among them scarcity) they need to show returns in an even shorter timeframe.

The bootstrapped founder, on the other hand, doesn't necessarily need to exit the investment in those 8-10 (or shorter) years. There are, of course, serial entrepreneurs for whom that is their goal, and for them (as the article points out) their incentives are aligned. For "lifestyle company" founders (not meant to be disparaging), an exit may not be necessary at all. The key differences are time horizon and exit.

FYI: The carry distribution schedule mentioned in the article (carry after 3x) is way off market for a VC GP-LP relationship.

The most typical arrangement is 20% after 1x in LP distributions, with some variation in what are called hurdle rates (that is, different percent carried interest at different multiples or IRRs).

Thanks for the info, I knew something was a bit off!

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