In a recent post on Growthology, Paul Kedrosky asks why so many B-school students that he meets want to be VCs rather than entrepreneurs. This is my response:
While entrepreneurship as a whole is a very positive ROI endeavor, the odds are stacked against the individual entrepreneur.
Even venture-backed companies only succeed about 1/10 times; it’s the fact that those success deliver such outsized returns that make the VC model work.
(Note–by “success,” I mean a major hit; the rule of thumb is that of 10 companies that get VC funding, 6 will go to zero, 3 will meander along as middling successes, and 1 will be a hit)
Let’s say that an entrepreneur can start a new company once every 4 years, and has a peak period in his or her career of about 20 years (age 30-50). That gives you 5 swings at a home run.
If your chance of failure is 90%, after your career as an entrepreneur is over, you’ll have a 59% chance that none of your companies ever succeeded.
On the other hand, thanks to the portfolio effect, VCs have a much better chance of recording a hit or two, and a nearly 100% chance of collecting 2-3% management fees on the capital they raise.
Now don’t get me wrong…VC is a tough business, a fact most entrepreneurs don’t appreciate, so the analysis above is a gross oversimplification. But it is true that while the average (mean) entrepreneur does better than the average VC, the median VC does a heck of a lot better than the median entrepreneur, who sacrificed his or her career to the greater good, and probably would have made a lot more money sticking to a corporate career.