Ah, but they can and do. That's the whole point. That is why they nearly always insist on a substantial share of these ventures, a level of share that seems greedy. It's risk/return analysis.shifty_uk said:
Venture capital is all about RISK. You know that there's a decent chance that any given investment will fail. So the maths is based on a concept like :-
..... take £1m. Invest in 5 companies, £200k each. Quite possibly 1 in 5 will succeed, and 4 in 5 will fail totally. So, what you've really done is invest £1m in the one that is a success, not £200k. It's a sort of spread bet. And, because that's the real investment, if you want 45% of the company, you're really saying you're prepared to risk £1m for that 45%, because statistically, you are indeed risking it.
The real gift for a successful VC is to exercise care in picking your investments to try to ensure that your success:failure ratio is more like 1:3 than 1:10. In the latter case, you probably would have been better sticking your money in leading stocks or gilts, because you'd have got more or less the same level of return with much less risk, or no risk at all.
And, of course, with any VC investment, you are also looking to at least recoup the investment, while keeping half an eye open for the next golden goose. Wouldn't a £200,000 45% investment in a certain unknown Bellevue (Washington state) private company software house have been a scoop in, say, 1980? If anyone hasn't worked out who I mean, 'you know who' moved from Bellevue to Redmond some years later.
Oh, and bear in mind that if these ventures weren't so risky, the applicants would be getting the money from a bank. If they KNEW their idea was sound, they'd rather pay a few percent interest than give up a third or more of their business. And if the risk was that low, the banks would be queueing up to lend. These people go to VCs because they can't get conventional bank finance, and because the expertise of people like these dragons significantly lowers the risk the applicants are taking that the venture fails because the VC is onboard. And, typically, no VC will just hand over the money and sit back and wait to see what happens. They will want some degree of involvement in the enterprise, though probably at an overview/mentoring level, rather than day-to-day management involvement.
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