Gambling with Venture Capital

I was talking to a guy at DevSIG a week or so ago, and he was lamenting the state of venture capital. He was telling me that the average return on venture capital investments since the year 2000 was about 2%. With those kind of numbers, who is even going to consider putting any money into a new venture?

What you have to realize is that venture capital has more in common with gambling than it does with prudent investing. You know those warnings that come with every advertisement for the lottery? (Maybe you don't, maybe that's an Oregon only thing). Every time an ad comes on for "Power Ball" or "Scratch Its" or whatever, they always close the ad by saying:

“Lottery games are based on chance, should be played for entertainment only and should not be played for investment purposes.”

This is similar to the logic saying that venture capital is not for everybody. And it's true. Venture Capital guys are not looking to make a nice reliable 5 or 10 percent return on their money. They are looking for the next big score: cell phones, iPods, Blackberries. They are willing to gamble millions of dollars on somebody's big idea IF they can imagine it being a tremendous success and earning billions of dollars. If they bet wrong and all their money vanishes occasionally, that's okay, that's the way ball bounces. Maybe the next one will hit it big. So they keep coming back, looking for that one deal in a million that's going to be the breakaway hit of the year.

Every movie is made like this. Someone sells the concept, someone puts up the money (20 million on black to win), a crew goes to work and puts the story on film. Once it's in the can, you sit back and chew your fingernails until the first gross receipt numbers come in. Then it's Champagne (if you backed a winner) or beer (to cry in if you didn't).