By Fred Wilson
FORTUNE -- Early stage venture capital is a lot like baseball: If you get a hit one out of every three times, you are headed to the Hall of Fame. And if I look back over my career, and also over the track records of the firms and funds I have helped manage, that is pretty much the hit rate I have seen. By "hit" I mean an investment that returns 5x or better. But of course, many of these hits return 10x or even 100x every once in a while.
So what happens with the other two-thirds? Well that is the part of the startup world that we don't talk too much about. Sometimes an entrepreneur will take an early exit. They will have raised a small amount of outside money, will still control the company, and will get an offer they can't refuse and take it. That's a win for the entrepreneur but not for the VC. But it is a happy outcome for everyone anyway. That's maybe 10% of the total outcomes. So at least 50% of the outcomes are not a win for the VC or the entrepreneur.
So what happens when things don't work out? There are generally two scenarios.
The first is the "slog it out" scenario. This one is in many ways the most painful. It means that there is a business that can be built, but it won't be one that makes the VCs much money, and because it takes so much time and money to "slog it out," it doesn't make the entrepreneur much money either. And in many cases, the entrepreneur chooses to leave, and the company has to recruit outside management to operate the business.
In the "slog it out" scenario, the VCs are often left holding the bag. They have a lot invested in the business and have a responsibility to figure out how to get it out. In some cases, the entrepreneur sticks around and slogs it out along with the VCs. I have great admiration for the entrepreneurs I have worked with who have slogged it out. There is very little upside for them in this scenario. Mostly they do it out of a sense of responsibility. These "slog it out" businesses can go on for a long time. I am involved with some that are well into their second decade, and I am afraid that they may be headed into a third decade.
I have heard these kinds of companies called "zombie companies" and "the living dead." That's a bit unfair, because there is no way a company can operate for two or three decades without being able to sustain itself. VCs do not keep pouring money into these businesses, maybe they do that for the first five years, but not after that. These "slog it out" companies turn into real companies eventually but just not companies that have the growth trajectories or strategic profiles that make them great acquisitions.
The second scenario is "hit the wall." In this scenario, the company runs out of cash, and there is no more coming from the investors. The company cannot sustain itself and one of two things happens. There is a fire sale or an acqui-hire, or there is a shutdown.
The fire sale is the preferred outcome, and VCs and entrepreneurs have gotten pretty good at finding homes for the teams in recent years. There is such a vacuum of talent out there that a fire sale can often be arranged just for the talent that a company has assembled. But often the fire sale cannot be arranged, and the company has to be shut down. Again, the responsibility for an orderly shut down often falls onto the VCs to manage. In a shut down, the employees must be notified and paid through the date of the shut down. All required tax payments must be made. Liabilities such as leases and bank borrowings must be managed. In particularly messy situations, a bankruptcy filing is required.
There are two interesting things here that I always think about. The first is that even the very best investors in the VC business only get a hit about 1/3 of the time. That means that they have their share of "slog it outs" and "hit the walls" too. I am certainly in that camp. The second is that we end up spending an incredible amount of time and energy (hopefully not money) on the 2/3 of our investments that don't work out. When everything goes well, you really don't need that much from a VC.
Of course, I have added value in all of my winners. But its the ones that don't work that I have left my blood, sweat, and tears on. And that's the paradox of being a VC that cares. Which is the only kind of VC you want to work with.
A current HBS student explains why his peers plan to leave Boston upon graduation.
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FORTUNE -- On the last day of my Launching Technology Ventures class at Harvard Business School, our professor asked why so few of us plan to stay in Boston and become entrepreneurs here. After all, Boston is cash-flushed with venture capitalists and a great talent pool from some of the world's top universities. Not MOREMar 18, 2013 1:55 PM ET
For startups, your investor is about much more than money.
By Ricky Pelletier, contributor
FORTUNE -- Taking a VC investment should not be viewed as a transaction – it should be approached as a partnership.
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By Martin Zwilling, contributor
Your startup needs a name, and it may be the most important decision you make. The name of your business has a tremendous impact on how customers and investors view you, and in today's small world, it's a world-wide decision.
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By Sahil Lavingia, contributor
A recent trend is the advent of quite a few "lab" companies. Milk is the most relevant, Color is another. I think almost all of these are doomed to fail because of flaws in the core of the concept that prevent really big, stable companies from being born.
Switching too quickly
If a product dies within a labs company, the company doesn't die. MORENov 21, 2011 1:40 PM ET
By Martin Zwilling, contributor
Many budding entrepreneurs struggle mightily with that first step – out of their comfort zone and into the unknown. They keep asking people like me whether the time is right, and the truth is that there's never an ideal time to start your own business. It's like starting a personal relationship, if you wait for exactly the right time, you'll never do it.
I've talked to many experts, and MORENov 14, 2011 1:02 PM ET
By Jeff Bussgang, contributor
Scott Kirsner of The Boston Globe called them the startup equivalent of the Justice League of America. Six superhero CEOs gathered on Friday afternoon at the Mass TLC Unconference to discuss the challenges of scaling their young companies. The CEOs on the panel were (from left to right):Michael Simon, CEO/founder of LogMeIn (LOGM) Scott Griffith, CEO ZipCar (ZIP) Gail Goodman, CEO Constant Contact (CTCT) Niraj Shah, CEO/cofounder of Wayfair ($500m MORE Nov 1, 2011 7:38 AM ET
A lot of small markets does not equal a big market.
By Alex Taussig, contributor
One of the great things about moving from one place to another is all the free stuff people leave behind. A few weeks ago, Highland shuffled out of its decade-long digs in Lexington, MA and headed over to our brand new office in Kendall Square near MIT. Lying on the floor (the floor!) in Lexington was a paperback copy of MOREOct 31, 2011 7:40 PM ET
By Jeff Bussgang, contributor
A few days before Yom Kippur, the holiest day of the year in the Jewish calendar and a spiritual day of remembrance, I found myself in front of ten Palestinian tech CEOs talking about entrepreneurship. At the end of the session, they invited me to meet with Palestinian President Abbas to advise him on how to build a thriving IT sector (which now employs 3,500 across 300 MOREFortune Editors - Oct 13, 2011 12:06 PM ET
Youth is king in Silicon Valley, even if you're still in high school.
By Lisa Suennen, contributor
VentureBeat recently asked: "Do teens make good founders?"
As the parent of a teenager, my immediate thought was, "Yeah, sure, right after they clean up their rooms and set the table, they can be totally awesome founders, as long as they can tear themselves away from the latest installment of the Twilight series." What do I MOREAug 10, 2011 11:29 AM ET
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