

1/3 Rule - Bluem00
http://avc.blogs.com/a_vc/2004/07/valuation.html

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dcurtis
I was under the impression that far fewer than 2/3rds of VC investments break
even. I am more surprised that 1/3rd of them "work out the way you want them
to."

Anyone have more concrete statistics on general VC success rates?

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pg
Rates vary a lot among VC firms. Union Square is one of the good ones, so they
have a higher success rate. But the median VC Fund actually loses money.

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dcurtis
That's interesting. It really is gambling.

~~~
pg
Well, not quite. The median VC _partner_ makes a lot of money from the
management fees even if the fund loses money.

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krishna2
Essentially the middle-third (get back 1-to-2x the money back) and the bottom-
third (lose money), hence canceling out each other [Assuming that the middle
gives just 1x and the bottom loses 100%].

But the top third is expected to make 5-10x. So that gives .333 * 7, (assuming
7x), which is approximately 2.33 times the original money invested.

So every year if the investment is $100 and the eventual return on it is $233,
that looks like an awesome deal. Why is everyone not doing it then ?? Whenever
any scheme yields more than the long-term-market-average (approx 15%(?)), it
is good to ask why and how it works, if it is indeed true. My guess is that
there is way more risk involved and the one-third rule is an optimistic view
as well as a very simplified theory.

So while it could hold good for a very good VC firm, it might not for every VC
firm out there.

