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Venture Capitalists Expect to Lose Money on Some Investments

April 12, 2010 Leave a comment

Wall St. Cheat Sheet argues that there is a bubble in software companies and that it is going to end badly for investors.

The thing is, all of the companies cited are funded by venture capitalists and angel investors, all of whom build into their businesses a number of failures. So, I don’t really see where the bubble is, or why its consequences would be like that of the dot-com bubble. The distinction here is that a lot of the dot-com companies were publicly traded and so the man on the street could gamble with them. The small software companies building web apps, like AppMakr, ManyMoon, BaseCamp, and FourSquare (all of which are cited by Wall St. Cheat Sheet) are not financed by public equity holders, and so are not analogous to the dot-com companies. These companies are funded with private money.

The business model of venture capitalists and angel investors has always been that a few outsized hits will more than recoup the losses that most of their investments incur. This is why venture capitalists and angel investors are known for their “high risk/high reward” business model. (This is also why most individual investors had no business investing in dot-coms, but that is another story entirely.) But the notion that these companies represent a dot-com-style bubble is rather far-fetched.