Risk is uncertainty about the future. High technical risk means not knowing if a technology will work. High market risk means not knowing if there will be a market for your product. These are the primary risks that the VC industry as a whole contemplates. (There are other risks extrinsic to individual companies, like regulatory risk, but these are less frequent.)

Each type of risk has a different effect on VC returns. Technical risk is horrible for returns, so VCs do not take technical risk. There are a handful of examples of high technical risk companies that had great returns—Genentech,43 for example—but they are few.44 Today, VCs wait until there is a working prototype before they fund, but successful VCs have always waited until the technical risk was mitigated. Apple Computer, for example, did not have technical risk: the technology worked before the company was funded.

Market risk, on the other hand, is directly correlated to VC returns. When Apple was funded no one had any way of knowing how many people would buy a personal computer; the ultimate size of the market was analytically unknowable. DEC, Intel, Google, etc. all went into markets that they helped create. High market risk is associated with the best VC investments of all time. In the late ’70s/early ’80s and again in the mid to late ’90s VCs were comfortable funding companies with mind-boggling market risk, and they got amazing returns in exchange. In the mid to late ’80s they were scared and funded companies with low market risk instead, and returns were horrible.

"If your employees hate you, it's only a matter of time until your customers hate you."

For example, we have 100 different student venture partners at 40 schools. We get to know these young, future entrepreneurs really well. We’ll help them get jobs when they graduate, place them in startups so they can learn, and we’ll even invest in the startups they go to work for.

If you start by making something people actually want, focus on making users happy, make sure you have a good growth rate and don’t overhire, you’ll be in a very happy position. You will be master of your own fate in a way that very few people ever get to be.

An underrated element of venture capital is that VCs manage other people’s money. VCs raise capital from investors called “Limited Partners” who are typically high-net-worth individuals, family offices, corporations, or institutions such as endowments, foundations, and pensions. These LPs invest in VCs for various reasons, but generally, LPs are targeting 3x+ returns on early stage funds over a ~10-year time period.

In making investment decisions, VCs often evaluate whether a given investment has the potential to “return the fund”. Here’s a quick example. If a $50M seed fund owns, on average, 10% of each portfolio company at exit, the company will have to sell for $500M for the investment to “return the fund”. In order for the investment to 3x the fund, it would have to sell for $1.5B, and so on. The actual analysis regarding portfolio “survival rate”, dilution, follow-on investments, exit magnitude, and time period will vary from firm to firm, but this simplification illustrates why VCs generally shy away from sub-$1B potential outcomes, let alone sub-$100M ones.

Even more important than whether VC is a good fit for the business is whether VC is a good fit for the founder.

Peace of mind: While the additional accountability may be a net positive, let’s be honest, having investors can be a pain in the neck. If you became an entrepreneur because you cannot stand to work for anyone else, having VCs may not be your cup of tea, either!