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Joel Spolsky: The Biggest Problem With VC Is They Need You to Swing for the Fences

By Joel Spolsky · Investing · 1 min read

A $5 million-a-year business sounds amazing to you. Your VC needs a billion-dollar exit. That misalignment is the biggest problem with raising venture capital.

Key Points

VCs need one or two companies in their portfolio to really succeed big — the rest can die
An individual entrepreneur wants to lock in a $5M/year business. The VC wants you to swing for a billion.
You can't have cautious entrepreneurs locking in small gains — that doesn't return the fund

You can't have a bunch of cautious entrepreneurs locking in small gains. The investor wants you to take that one-in-a-thousand chance of a billion dollars.

The Misalignment

Spolsky: The biggest problem when you raise venture capital is a misalignment between the founders and the VCs. A VC has a portfolio of companies. They only need one or two to really succeed big. They hope for maybe one or two to return the portfolio, three or four that make some profit, and the rest just sort of die. They don't really care.

You can't have a bunch of cautious entrepreneurs locking in small gains. An individual entrepreneur will tend to say — wow, I figured out a way to make this a $5 million-a-year business, and I can keep all five million. I'm stopping. That sounds much better than a one-in-a-thousand chance of a billion dollars. But the investor wants you to take that chance.

I figured out a $5 million-a-year business. I'm stopping. But the investor wants the one-in-a-thousand billion.

Burned Bridges

Spolsky: With Stack Overflow, all of us saw this as 'go big or go home.' So we were aligned. We also had a backup plan — I still had Fog Creek Software going on the side.

Some VCs thought that was negative. Because I hadn't burned sufficient bridges, or they thought I'd be distracted. And they're kicking themselves for not investing.

Some VCs thought my backup plan was negative — I hadn't burned sufficient bridges. They're kicking themselves now.