Dear SaaStr: What Happens When a VC Loses All Their Money on a Startup Investment?
It’s a question being asked more often these days, unfortunately. And the answer?
It’s OK — up to a point:
- So long as the founders did everything they possibly could to make it work. Truly everything; and
- The total loss is relatively small compared to (1) that partner’s total portfolio and (2) the total fund size.
There are two types of losses for VCs and professional investors: losses than fit into your “expected loss rate” and profile … and unexpected, and often, abnormally high losses. The first is OK. The second can in some cases be Game Over.
Statistically, every early-stage investor is going to see some % of her investment fail, and a large other % not really make much money. As a true angel, your effective failure rate could be as high as 90%. For a seed-stage VC, it might be as high as 40% by investment and 20% by dollars invested. In the end, as long as there is one Slack or Figma in there — you’re doing fine. 🙂 By contrast, late-stage investors can’t really afford too many large losses at all. Because the upside is also more bounded.
Net-net in all this … investors know what they are doing. They know the risks they are taking.
As a founder, you should only feel bad if (i) if you were dishonest, or otherwise didn’t disclose key risks — you mislead the investors, such that they couldn’t 100% see the risks — or (ii) didn’t give it every ounce of your soul to make it a success. Quiet quitting? Not cool.
And also worry if you took a lot of money from a single VC. They may lose their job. That’s when you’ll start to see the real stress from investors and at board meetings.
For me. personally, here’s how it breaks down at SaaStr Fund. I can lose a $750k check fairly easily. Don’t want to, but it’s part of taking risk. Losing $2m would be painful. And over 3 rounds, I typically invest about $5m in my “winners”. That I can’t really lose. Not without a lot of pain.
When investors get hurt hard is when something isn’t supposed to lose money … loses a lot of money. E.g., I write a $500k first into a start-up. Then I put another $2m in. Then $10m in a third round. Then another $20m in the Series C. Now we’re up to $32.5m. In, say, a $250m fund — that’s a lot. Just losing the first $500k? Not a big deal in a $250m fund. It’s OK. Losing $32.5m now though — that’s a Career-Ending Move.