Probability of Failure and Size of VC Round

I think there might be a direct correlation between the probability that your startup will fail and the size of the VC round you raise. There are other variables in raising a round (terms, board structure, etc) so your mileage may vary.

I don’t have time to track down all the data (which I’ll admit is a huge cop out) but based on my experience I think the following holds true.

The more money you take the higher probability that your startup will fail. The key point is the mythical man month. You can’t put more engineers on a problem and have it solved faster. Pick a small area of innovation, stake your claim, move fast, and execute.

If you factor in both graphs below (including size of exit / investment) then there’s a sweet spot on the lower end of the funding scale. Raising a smaller round (say $500k – $2M) will allow you to lower your probability of failure and increase your exit since you can innovate a bit faster.

Of course if you can get there on revenue so much the better since you don’t have to spend 90% of your time pitching VCs.

The main reason I decided to post this was because I keep seeing entrepreneurs raising large rounds ($8M, $30M) for ideas which don’t have legs. They’re just increasing their probability of failure and lowering their exit potential.

Sure there’s the occasional Youtube but these are very rare. These guys were REALLY lucky and were headed right for a wall. My estimates were that they had 4-6 months left on their burn rate before they needed to raise another round of VC.

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