Don’t worry about venture capital earnings if you can exit the startup early

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If you were Watching the recent spate of shows about disgraced startups (from Theranos to WeWork), you might get the impression that startup founders have no sense of responsibility.

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However, in my experience, the opposite is much more common: Entrepreneurs tend to feel guilty about something that is just part of the life of a startup. For example, many founders feel very bad simply admitting that they would not say no to a good enough acquisition offer, or telling their investors that they would.

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What does it matter if founders tell investors they can leave before their company goes public? I think the reasoning goes something like, “What’s good enough for me may not be good enough for my backers,” or the amount of money that will change a founder’s life may be too small for an investor.

And sometimes these fears are driven not only by guilt, but also by the fear that venture capitalists will not allow an acquisition if it happens too early in the startup’s life cycle.

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There are many reasons why you’re stuck with your startup, but if you’re worried about your investors when you’re faced with an exit, here’s why you shouldn’t.

Time is another element of the venture math that founders don’t always factor in: A 3x increase in six months is not the same as a 3x increase in three years.

In VC Land 1 > 10

Letting people down is never nice, but that’s how you can feel about selling a startup early. Will investors be disappointed that your company never fulfilled its purpose? Well, yes, but only to a certain extent, and this is where portfolio math comes into play.

Investors hedge their bets by making many investments, although they still hope that each of these bets will pay off. However, they also know that this will not happen. They are fully aware in the game that some of their investments will simply have to be written off, and a few more will be somewhere between success and complete failure.

But it still makes sense to invest in startups because emissions will return their original investment value many times over.

In venture capital, big home runs have become commonplace. They also have a name: “fund builders” and they mean investments that generate more liquidity than the entire fund that backs them.

AT 2014 post on TechCrunch, venture capitalists John Backus and Hemant Bhardwaj coined a new term for these fund makers: “dragons”. They urged fellow investors to favor them over unicorns. “Unicorns for the show. Dragons for the dough,” they wrote.

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