Loss ratios in VC

Loss aversion and FOMO are powerful forces that drive VC behavior. The pendulum has swung from one extreme to the other. Both are dangerous.

Companies measure dollar and logo churn rates. VCs do the same with dollar and “logo” (aka investment count) losses.

Losses are part of business. According to Cambridge Associates, 20% dollar losses are average. That spiked to 50% after the bubble.

I was surprised this loss rate is only 2x more than buyouts given VC backed companies often have cash burn and are riskier, albeit with asymmetric upside!

What this doesn’t show is “logo” losses. Logo losses are likely much higher in VC. And should certainly outstrip dollar losses.

Losses are painful. But they are part of the business. I find it a lot scarier to think about losing someone else’s money than losing my own.

I have to keep reminding myself that it doesn’t matter if you lose, it matters *how* you lose – ideally fast and extremely gracefully – and how big you win when you hit.

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