Entrepreneurs
VC Funds Expect To Lose On 90% Of Their Deals — And They’re Totally OK With It
The world of investing is complex and unique. What seems like a trend today might soon see its death tomorrow.
In stock market investing, an analyst who is able to predict market movements with a 70% accuracy is considered good. One with a hit rate of 80% and above will be a top candidate for investment banks.
However, in the start-up space, the success rate can be as low as 10%. Start-ups have a whole lot of challenges. They might fail as there is no market need for the product. Some start-ups might run out of cash while some might have an incompatible founding team.
So what is it that attracts investors to the highly volatile and unpredictable start-up industry? Why do they continue to pour in billions of dollars into companies that are most likely to fail?
What’s going to bring in the money?
Venture Capitalists (or VCs) look for three things in a company. The right idea at the right time with the right founding team. While VCs would love for the company to be successful, they are primarily in the business of raising capital.
VCs have a unique business model. They make money in three ways. The first is by charging an annual management fee to cover the cost of daily activities. This generally accounts for 2% of the fund size.
The profit accrued by the VC fund is divided by the Limited Partners and the VC firm typically in an 80:20 ratio. Finally, some VCs invest their own capital (in addition to that of partners) to have real skin in the game.
Most VCs have a hurdle rate, where they need to deliver at least 7% returns to partners. The average life of a VC fund is around 10 years. The management fee and other costs account for 20% of capital leaving 80% for investments.
The thumb rule in VC investing is that 33% of start-ups fail, 33% return capital invested and 33% are successful.
So if we look at a $100M fund size, it has $20M allocated for VC costs and $80M invested in companies. Taking a 33% success ratio suggests that $26.6M will turn into $293M over the next 10 years if we consider a 10x return.
This means a profit of $193M or an internal rate of- return amounting to 20% that will keep the partners very happy.
Early-stage investing is risky
According to this report published on LinkedIn, 45% of companies failed to return 100% of capital while 34% returned less than 50% of capital. The median loss rate was a whopping 39%.
How do VCs pick companies?
With some of the lowest success rates in the business, investing in early-stage start-ups continue to be challenging.
There has been no one way or rule to managing this uncertainty. VCs, like other investors, look to diversify risks by investing across industries and sectors. They are on the look-out for a start-up which will turn into a billion dollar unicorn.
In case the start-up manages to get acquired or become get publicly listed on an exchange, VCs can exit their investments and book mind-boggling profits. Sequoia Capital invested $60M in WhatsApp and the return was a massive $3B.Sinovation Ventures saw a 40x return on investments when Meitu filed for an IPO.
There are several other success stories in the VC world. Uber, WeWork, and Airbnb are now valued at billions of dollars based on venture investments. These do not have an exit strategy in place with Wall Street wary of over-valued IPO’s.
VC investments continue to rise
The investments in start-ups continue to experience an uptrend. According to CB Insights, VCs poured in $21.1B across 12,016 companies in Q1 2018. This was 39% higher than investments of $15.2B in Q1 2017.
Investors keep pumping in capital with the hope of multi-fold returns. The VC space is not for the faint-hearted. It is, however, exhilarating.
A recession can be a challenging time, but it can also present opportunities for investors to make smart investment decisions.
During a recession, certain industries tend to perform better than others, and identifying these opportunities can be the key to success.
Here are the top 10 investment opportunities to capitalize on during a recession:
1. Defensive Stocks
Defensive stocks are those that tend to perform well EVEN during economic downturns.
These include companies that provide essential goods and services, such as healthcare, utilities, and consumer staples.
Defensive stocks may not offer the highest returns, but they can provide stability and protection during a recession.
Defensive stocks include Johnson & Johnson, Procter & Gamble, PepsiCo, and Walmart, among others. (You can buy them all inside the NYCE app.)
2. Gold
Gold is often seen as a safe haven during times of economic uncertainty.
As a tangible asset, it can provide a hedge against inflation and currency fluctuations. During a recession, the price of gold may rise as investors seek a safe haven for their money.
READ: 3 Ways To Invest In Gold (In 3 Minutes Or Less)
3. Real Estate
Real estate can be a good investment opportunity during a recession. Especially if you are looking for a long-term investment. (Hence why NYCE exists.)
While property values may dip during a recession, they tend to recover over time. In addition, rental properties can provide a steady stream of income, even during a recession.
After all: Real estate has created more millionaires than any other asset class.
4. High-Quality Bonds
High-quality bonds, such as U.S. Treasury bonds, can be a safe investment during a recession.
These bonds are backed by the full faith and credit of the U.S. government, which makes them less risky than other types of bonds. (Though this has become less safe today than in the past.)
They may not offer the highest returns, but they can provide stability and protection during a recession.
5. Consumer Discretionary Stocks
Consumer discretionary stocks are those that are tied to consumer spending, such as retail, travel, and entertainment companies.
During a recession, these stocks may suffer as consumers cut back on non-essential spending.
However, if you believe that the economy will recover, investing in consumer discretionary stocks can be a good bet.
6. Healthcare Stocks
Healthcare stocks tend to perform well even during economic downturns, as people still need healthcare services regardless of the state of the economy.
In addition, the aging population in many countries is driving demand for healthcare services, which can provide long-term growth opportunities for investors.
7. Technology Stocks
Technology stocks can be a good investment opportunity during a recession, as many companies in this sector have strong balance sheets and cash reserves.
In addition, the shift towards remote work and online shopping during the pandemic has increased demand for technology products and services.
8. Emerging Markets
Emerging markets can be a good investment opportunity during a recession, as these countries may be less affected by the economic downturn than developed countries.
In addition, emerging markets often have higher growth rates than developed countries, which can provide long-term growth opportunities for investors.
9. Dividend Stocks
Dividend stocks can be a good investment opportunity during a recession, as they provide a steady stream of income even during tough economic times.
Look for companies with a history of paying dividends and a strong balance sheet.
10. Cash
Finally, cash can be a good investment during a recession, as it provides flexibility and liquidity. Having cash on hand can allow you to take advantage of investment opportunities as they arise.
In conclusion, while a recession can be a challenging time for investors, it can also present opportunities for smart investment decisions.
By identifying the top investment opportunities during a recession, you can position yourself for long-term success.
Entrepreneurs
From Zero to Millionaire: How 9-5 Marketing Guy Made A Fortune Selling Pet Rocks As A Joke (1)
No BS—this is actually a real story.
The pet rock—a seemingly ridiculous idea—became a sensation and made its creator, Gary Dahl, a millionaire in the 1970s.
Dahl, a marketing executive, came up with the idea as a joke during a conversation with friends.
He packaged rocks in a cardboard box with holes and called them “pet rocks,” complete with an instruction manual on how to care for them.
There was virtually no upfront investment, as the rocks themselves were free, and the packaging was inexpensive.
“It was a joke,” Dahl told ABC News years later. “It was a satire. It was fun. And it became an overnight success.”
The pet rocks became an instant hit, with Dahl selling over a million of them in six months.
LEARN: How to build a $100K side hustle in 1 hour.
He appeared on popular TV shows and even wrote a book about his success. The pet rock craze died down after a year, but Dahl had already made his fortune.
After the pet rock craze died down, Gary Dahl continued to work in marketing and advertising.
He also tried to launch other novelty products, such as “sand-breeding kits” and “mood rings,” but none of them achieved the same level of success as the pet rock.
“I think that’s one of the things that is wrong with business today. People are so serious, they forget to have fun,” Gary Dahl said.
The success of the pet rock shows that sometimes the most unconventional ideas can lead to great success.
Case Study: How A $49 Investment Could Make You $100K+ In 6 Months
Why Gary’s story matters to you…
The story of Gary Dahl and his pet rock is a testament to the power of thinking outside the box. Sometimes, it’s the seemingly ridiculous ideas that can lead to the biggest successes.
Dahl’s story is not only inspiring, but it’s also a reminder to keep a sense of humor and not take ourselves too seriously.
In business, it’s easy to get bogged down in strategy and analysis, but we should never forget the importance of creativity and fun.
The success of the pet rock is also a lesson in the power of marketing.
Dahl’s packaging and instruction manual turned a simple rock into a desirable product. It’s a reminder that sometimes it’s not the product itself that’s important, but how it’s presented to the world.
So if you’re feeling stuck in your business or just need a little inspiration, take a cue from Gary Dahl and his pet rock.
Keep an open mind, don’t be afraid to take risks, and don’t forget to have a little fun along the way.
Who knows…you might just come up with the next big thing.
About author:
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