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Why business owners should go to the casino and save us all a lot of trouble
Why business owners should go to the casino and save us all a lot of trouble
September 26, 2012
I have just read an article claiming that 10% of companies that America’s top ten venture capital firms or VCs [ie private equity firms] invest in actually succeed. This correlates exactly with the yardstick that VCs and seed corn capitalists I know use. 10%!
One chance in ten. We know that only 10% of small businesses actually make it to year five, so it could be reasonable to suggest that anything greater than 1:10 (10%) odds would be better than you get from starting a business. Just 10%.
So, is it worth it for a 10% gamble? Well, to put all this in perspective, here are the chances of winning at the casino:
Slot machines 32%
Horse racing 41%
Blackjack 47%
Roulette 47%
Here are some conclusions (if you are in any way rational).
- If you go to a casino then do not go near the slot machines (but 68% of gamblers do.) Another conclusion might be:
- If you have money to gamble then do not open a small business (but more than 4m people have done so in the UK).
- If you are the government, then do not gamble anything on small businesses but spend the money in the casino (higher odds of success).
- As far a small business owners are concerned, maybe it is just not about the money.
Do not gamble at small business unless… Unless what?
- Robert Craven is the author of business best-seller Kick-Start Your Business (foreword by Sir Richard Branson). His latest book – Grow Your Service Firm – is out now.
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Comments
I think you are confusing return on investment with general statistical probability? The VC rule of thumb is, as you say, that 1 in 10 firms will make it big, another 3 will struggle to make money (which is the same as failing in VC terms) and 6 will go under. However that 1 that makes it big will more than pay for the other 9. I worked for a start up that took in around $100 million of investment and became worth $3bn. Skype was an even bigger payback for Index ventures when they originally sold it to Ebay.
So what is the ROI? Bet 10 equal amounts on Roulette and the odds are your money is now 47% of what it was. If you place 10 equal bets on startups the odds are that your money is now 130% of what it was! Its not much fun if you are one of the 9 companies that fail but that's a different topic.
We need a simple model to help us properly slice the pie. It needs to be flexible and fair. By fair I mean it needs to give each founder what they deserve. And by flexible I mean it needs to adapt over time to re-allocate the start up equity so that the distribution stays fair until the fledgling company takes flight. Check out Mike Moyer's book slicing pie it talks about 50/50 share and how to divide it.
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