Venture Capital Math By William Cate[http://home.earthlink.net/~beowulfinvestments/] [http://home.earthlink.net/~beowulfinvestments/globalvillageinvestmentclubwelcome/]
Venture Capitalists (VC) and Angel Investors are betting against
odds. It's exciting. That's good since it can't be consistently profitable. They would be better served betting their money playing craps in Vegas or Atlantic City.
What Are House Odds?
In craps, house as a 1.41% edge against bettors. The U.S. Small Business Administration (SBA) tells us that fifteen startup companies will succeed out of every one hundred that open their doors. However, among those fifteen winners, almost all are local franchises of national companies or professional firms, like veterinarians, accountants, attorneys, etc. A realistic estimate is that one startup company, with a national market for its goods or services, will succeed out of every one hundred that open their doors. This means that Venture Capitalists and Angel Investors are betting upon a 100-to-1 long shot. Assuming they randomly bet on these startups, their one winner would have to return one hundredfold to breakeven. However, a successful private company investment is far more likely to return five to tenfold than anything near one hundredfold return needed to breakeven. There is always a steady extinction of angels and VCs. There will be a major extinction when market takes a major turn downward as it did with bursting of DotCom bubble in 1999.
The Angel Investors' Secret Formula To Investment Failure
Angels can easily be easily sub-divided into two groups. There are individuals who have become relatively wealthy thanks to their education. This would include doctors, attorneys and accountants among others. There are individuals who have become relatively wealthy thanks to creating or inheriting a successful business.
For most students to succeed in school, they must accept textbooks as gospel. Over years that they work their way into professional school they come to believe that what is written is true. It's this belief, combined with a failure to understand odds against them, that ensures their investment failure. They tend to strongly rely upon startup company's business plan. They accept it as true. Assuming that they like entrepreneur, they invest with full expectation of business plan proving to be reality. They are truly surprised when this doesn't happen.
