Entrepreneurs’ Risks

How much risk do start-up entrepreneurs take when they start?

Take Ventures Capital.  A VC with USD 50M goes all around across countries and regions, see through 5,000-10,000 ideas within its first 4 years before settling with a portfolio of around 25-50 investees.  Per 10 deals, hopefully one will hit big.  3 break-evens.  The rest will likely to go out of business.  Except exceptional performance in 1999 (dot-com bubble), VC averagely only returns 7.8% IRR across a time span from 2003 to 2013 (Forbes).  Except a few exceptional names such as Sequoia and Y Combinator, VC itself skewed to a few winners and a pool of broken records.  For the investees, we are taking about 5,000 to 10,000 ideas and teams.

Take Private Equity.  PE goes for businesses that have already pass survival stage and went into mid-market.  PE with USD 100M may hold a portfolio of 10-20 investees after looking into more than 1,000 mid-size business models.  Per 10 deals, hopefully 5 makes 5x+ Cash-on-Cash returns, 3 break-evens, and 2 downs.  For the investees, we are talking about 5-10 years into operation, market position of top 3, and management with 10+ years of experience.

Both VC and PE are comprised by a team of experienced and high-caliber professionals, see through thousands of ideas, have wide market connections, and collect data across the economies.

How much risk do start-up entrepreneurs take when they invest every resource into one single idea, from planning to execution?


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