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Feb 28th, 2016 Share: Share on Twitter Share on Facebook Share on LinkedIn

Technical Versus Market Risk

You need to understand Venture Capital if you want to raise funds from VCs. To really understand Venture Capital you need to understand risk.

Fundamentally risk is uncertainty about the future. Higher risk need to carry higher potential payoff to make it worth an investors’ while.

Fundamentally there are two primary types of risks for VCs: Technical and market risk. High technical risk means not knowing if a technology will work. High market risk means not knowing if there will be a market for your product.

These two types of risk have a very different effect on VC returns: Technical risk is horrible for returns, so most VCs shy away from it. Market risk is typical for some of the best returns VCs ever made: Apple, Google, Facebook, AirBnB, Uber — none of these companies were technical but market risks.

Good VCs are looking for deals with high market risk and associated high returns (AirBnb could have gone down as a neat, little place for students to rent out a room — but also as the future of hotels). Average VCs shy away from the risk (and generally pay the price in the form of meager returns to their limited partners).

With all that being said: Minimize technical risk and make sure the potential payoff in your market risk makes it worth taking.

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