A Divergence of Risk

👋 Hi, it’s CJ Gustafson and welcome to Mostly Metrics, my weekly newsletter where I unpack how the world’s best CFOs and business experts use metrics to make better decisions.

A Divergence of Risk

Scott Galloway recently had Nate Silver (of election forecasting fame) on The Prof G. pod to talk about risk taking. In the course of the conversation, Scott’s experience with taking venture funding comes up:

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“I've been an entrepreneur for most of my life and have raised a lot of money from VCs and where I thought there was a bit of a disconnect or dislocation between their interests and my interest is that they would always encourage me as the CEO or the founder of a company when it was going well to go bigger, harder, bolder because they're looking for billion dollar exits to pay for the 80% of their portfolio that doesn't even get its money back. And you know, half of them that go to zero and they need those big pops.

And I always thought, okay, I don't need to be a billionaire. I need to have economic security and this is where our interests diverge. Because I used to advocate for and usually would ultimately would win for selling the company.

I sold my first company for $33 million. Our investors were disappointed.

I sold my last company for $160 million despite my investors tripling their money in 27 months. They were disappointed because I didn't have a bunch of chips on the table, I had one big chip on one number.

And so it creates a divergence of risk.”

He’s right - founder’s only have, maybe, four swings in their careers to hit a home run. Investors have 10 to 12 swings per fund, and they raise a new fund every four or five years.

Now, I’m not saying that each venture partner gets the same economics as the founder of a company - it’s not like they’re personally clipping 25% stakes from Series B rounds.

And I’m also not saying that nibbling secondary off along the way is impossible for founders. It’s a tried and true path for getting rich (and de-risking).

But I am saying there’s a clear dislocation in risk when one side is playing multiple hands over multiple games. And if you believe in math, the VC should push the founder to shoot for a home run, and, statistically speaking, most likely not get past first base. And as a founder, that can suck, because a double (or even a walk) could be life changing.

A VC friend of mine drove the point home:

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"We invested in Box pre IPO. Their founder Aaron Levie, at time of IPO had 4% equity. It was a $1 billion outcome. He made $40M for all that work.

Someone I know just sold his company for $40M and also made $40M. He never raised any money.

Same outcome for both owners."

There are multiple ways to get rich as a founder. Each comes with a different flavor of heartburn, odds, and risk adjusted outcomes. While there’s no “right” game to play, it’s on you to study the rules before saddling up to the table.