In the UK, roughly 80% of all startups fail. Yes, four out of five. The venture capitalists know that, and will not look at businesses that will wash their faces. They will invest only if they see a prospect of a return well over five times their investment. If they can't get that, they can't cover the losses of the four other businesses that will fail.

This was what went wrong in the DotCom bubble. VCs live by diversifying their risks, and with a new market sector opening up, they wanted to diversify into it. The common mistake was to concentrate on the diversification and not on the potential return. In fairness, because it was an unknown sector, it was difficult to estimate the returns accurately. But it wasn't impossible, and the premia paid for a lot of startups - Freeserve as a ghastly example - were way beyond the bounds of common sense. Then, when the 80% failed, the returns on investment of the successes were not adequate to cover the losses.

Of course, not every investment made by VCs is a startup, and when you are dealing with a proven management team in a proven industry, the probabilities change. But some VCs concentrate on startups.

The startups that are reported are the ones that do something spectacular. Either they fail in a way that causes general calamity or they make a fortune. The sort of business you describe in your post is the 20% success. But the owners will generally be very dissatisfied, feeling that they are "working for the VC, not themselves". Of course they are. The VC has to cover his losses.

I am not a VC and have never worked for one, but I have shares in 3i.

Regards,

John Davies

Update: fixed minor typo