The prosperity delta

I want to share something that a lot of investors don’t like to talk about: It’s the delta between a company’s “public” success and the venture returns that it produces.

Contrary to popular belief, public notoriety and venture returns aren’t always equal. It’s one of the things that makes venture investing difficult.

Here’s a short crash course on what that means:

Let’s say you speak to an ambitious founder who’s building a company called Bark Bath, a startup that will revolutionize the dog washing business. But, to do so, she needs $20M in Series A funding.

As a savvy investor, you see the market opportunity and decide to lead the Series A round, contributing $10M at a $100M post-money valuation. When the Series A round closes, your firm owns 10% of this dog washing empire.

Now, let’s assume that after 10 years, this founder has done exceedingly well. She agrees to sell her company to Walmart for $1B. Pretty great right?

Not exactly. The game of startup investing is not that simple. Over the course of those 10 years and several more rounds of funding, your 10% stake has been whittled down to a mere 2% at the time of the acquisition.

When you finally collect the profits from the sale, your firm receives $20M. Sure, you doubled your money (2X), but that’s a mediocre outcome by venture standards. Especially over 10 years locking your money up in an illiquid asset. You’re trying to make 10-100X with each investment.

That’s the discrepancy that I’m talking about.

By all public accounts, Bark Bath as a company was a runaway success! They achieved unicorn status before being acquired by one of the largest retailers on the planet.

And you... You had the foresight to know that this was a great business with a great founder a decade before the rest of the world knew it.

But, the world isn’t aware of the fact that the success of this investment wasn’t as substantial as the success of the company. So why is it that most early- and growth-stage investors don’t talk about this?

Well, because the publicity is still beneficial.

Sure, you didn’t make a 10X return on your money for this investment. BUT, you’re still an early investor in Bark Bath. And, that buys you something just as valuable as top-quartile returns: Reputation.

The reason that investors don’t talk about that discrepancy is because these cosmetic venture successes still help the investor and the fund build a lasting reputation within the industry. Which ultimately helps their LPs too in the long run — I've seen many VCs make an investment just to get the logo on their portfolio page.

While the Bark Bath investment might not return the entire fund, it’s proof to your peers, your LPs, your portfolio, and future startup founders that you know how to pick a great company. Simply put, it gives you better access than you had before.

The crazy thing, though, is that the reputation and social proof that it buys you can actually be worth it in the long run.