Dear SaaStr: What Happens if a VC Loses All Their Money on an Investment?
It’s OK — if it’s not too much. As long as the founders did everything they possibly could to make it work. Everything. And were honest.
There are two types of losses for VCs and professional investors:
- losses than fit into your “expected loss rate” … and
- unexpected, and often, abnormally high losses.
The first is OK. The second can be Game Over, especially for a newer partner without some big wins under their belt.
Statistically, every early-stage investor is going to see some % of her investment fail, and a large other % not really make much money. As a true angel, your effective failure rate could be as high as 90%. As a seed investor, your effective failure rate could be as high as 40%. As long as there is one Cloudflare, HubSpot or Datadog in there — you’re doing fine 🙂 By contrast, late-stage investors can’t really afford too many large losses at all. Because the upside is also more bounded.
But net-net in all this … investors know what they are doing. They know the risks they are taking. At least, when there isn’t fraud or misleading metrics and disclosure.
You should only feel bad if (i) if you were dishonest, or otherwise didn’t disclose key risks — you misled the investors, such that they couldn’t 100% see the risks — or (ii) didn’t give it every ounce of your soul to make it a success.
Be aware though that the more you raise, the more the stakes go up.
Shut down after 1 round? It’s probably OK. Shut down after 4-5 rounds? That’s a lot of stress. A lot of stress.
When investors get hurt hard is when something isn’t supposed to lose money … loses a lot of money. E.g., I write a $500k first into a start-up. Then I put another $2m in. Then $10m in a third round. Then another $20m in the Series C. Now we’re up to $32.5m. In, say, a $250m fund — that’s a lot. Just losing the first $500k? Not a big deal in a $250m fund. It’s OK. Losing $32.5m now though — that’s a Career Ending Move.
