This is telling article re: Bill Gurley, one of the best VC investors of all time:
“I give Bill a lot of credit because Bill said, ‘I understand, this happens,’” Tolia recalled. “[Bill said] ‘most startups do fail, so the odds were that Fanbase would fail, not succeed. But you have a great team, and I feel that you guys have a lot of talent. Would you be willing to take a few months to see if you could come up with another idea?’
Let’s back up.
- A VC fund will typically do 30-ish investments per fund.
- And it will only start with say 1%-1.5% of the fund, on average, per investment.
So, if you “fail” after the first check, it’s really not the end of the world. If we have say a $200m fund, our job is to turn that into $600m (3x). If we invest say $2m into your start-up and it fails, that’s a bummer. But not the end of the world. It’s not really going to materially impact if we turn $200m into $600m. It’s just one “at bat” that didn’t pan out. It’s OK as long as a bunch of the others do pan out. We will make $598m gross instead of $600m after the $2m loss on your start-up.
But as the loss approaches 10% of the fund size — here $20m in this scenario — it starts to create a lot of stress. Typically, though, that’s over 3–4 rounds of investment. You get a chance to decide whether to play another card here, or not.
So losing the “first check”? Most VCs will be bummed, shrug. But writing off a third-check investment? A VC could lose their job there.