You need to understand venture capital if you want to raise funds from VCs. To really understand venture capital, you need to understand risk.
Higher risk needs to carry higher potential payoff to make it worth an investor’s while. Tweet This Quote
Fundamentally, risk is uncertainty about the future. Higher risk needs to carry higher potential payoff to make it worth an investor’s while.
Fundamentally there are two primary types of risks for VCs: technical and market. 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 two types of risk have a very different effect on VC returns. Technical risk is horrible for returns, so most VCs shy away from it. Market risk is typical for some of the best returns VCs ever made: Apple, Google, Facebook, AirBnB, Uber—none of these companies were technical risks, but all were market risks.
Good VCs are looking for deals with high market risk and associated high returns. Tweet This Quote
Good VCs are looking for deals with high market risk and associated high returns (AirBnb could have gone down as a neat, little place for students to rent out a room—or, as the future of hotels). Average VCs shy away from the risk (and generally pay the price in the form of meager returns to their limited partners).
A version of this post originally appeared on Pascal’s blog.