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Reflecting on My Failure to Build a Billion-Dollar Company

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2101 points jamesjyu | 1 comments | 07 Feb 19 15:28 UTC | HN request time: 0s | source
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jim-greer ◴[07 Feb 19 18:18 UTC] No.19107101[source]▶
My experience with Kongregate was different, but I did feel some of the same things. We became a vehicle for many indie game creators to make a living, which I'm very proud of. In our case we also had a sale that was very profitable for the founders and early employees, and also profitable for our investors.

But the weird thing is that if our VC investors had known at the outset that they would have a 3x return on their money in three years, they probably wouldn't have made the investment. A 50% annual rate of return is not worth their time. That's not what their LPs are looking for.

The angels made more like 6.5x and put in less time - most of them would take that deal all day long. I'm an angel now, and I definitely would. So perhaps startups that need capital but aren't looking to be billion dollar companies should consider just raising a seed round from angels... The difficulty there is that angels do want an exit, not dividends from a profitable company that stays private forever.

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dennisgorelik ◴[08 Feb 19 01:23 UTC] No.19110494[source]▶
> if our VC investors had known at the outset that they would have a 3x return on their money in three years, they probably wouldn't have made the investment.

Of course they would have made an investment.

Any guaranteed return above bank interest rate -- is appealing for investors.

Guaranteed return of 50%/year is an amazing investment opportunity.

What you probably meant is that if investors knew that the return cannot be more than 3x, but also has high probability of failure -- then the investors probably would not make the investment.

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1. jim-greer ◴[08 Feb 19 17:33 UTC] No.19116584[source]▶
Look at it this way. A VC fund has a finite number of investments to make. Typically a partner gets to say yes once or twice a year. They usually take a board seat and spend lots of time helping the company.

Knowing that many of those investments will be worthless, they want to maximize the number of shots they get towards a billion dollar company.

If 1/3 of their companies are a 3x return, and the rest become worthless, the fund has failed. They’re all aiming for the one company that will deliver the big returns that offset all the failures (and the high fees they charge LPs.)

Seed stage investors are different. YC, for instance, spends much less time with each company, and therefore can take lots of shots.

Growth stage venture is different too. They aim to invest a few years before a company goes public, and are fine with a 3x-5x return. They are taking much less risk.

The VC model also creates a fundamental tension with the founder. Founders get one shot at a time. $50M exits represent life-changing money for them (as long as they didn’t raise too much money.) VCs pressure them to take greater risks than are rational for the founder. This is why you want to look for VCs that will truly put the founder first. Or keep control of your board.

Joel Spolsky explained this well 15 years ago, so we knew about it going in and chose a founder-first VC firm.

Here’s that post: https://www.joelonsoftware.com/2003/06/03/fixing-venture-cap...

Thoughtful VCs will do what’s right for the founder. It’s rational because their reputation matters so much when competing for investments. This has changed for the better since Joel’s post.