This post is another theoretical post. Humans by nature are very risk averse. Start-up in itself is very risky with a high probability of failure. Failure in the start up world means lost time, lost opportunity, lost capital, lost confidence and so much more. For some of us we handle these risk pretty well and can perform excellent under these conditions, but for most of us, we would rather have these risk mitigated if we could .
One of the questions I have often pondered was how to succeed at this start up game in one go? How do I mitigate my risk to the point that failure is almost impossible?
Consider VC or even Y-combinator, the way they mitigate their risk is to acquire small equity in a lot of companies. The companies that make a killing pay for those that didn’t make one. Let suppose you had 10million to invest and you are investing 20k into each business for 10% equity and the probability of making 100million is 10%[These numbers were chosen for ease of calculation and only here to illustrate a point] . The probability that you don’t make back your 10million is 1 x 10^-23 reflecting a very minute risk.
In the case above, only the VCs are actually reducing their risk; the startup themselves are still faced with 90% chance of failure. I think startups should basically use the same strategies as VCs to mitigate their risk. Each startup donates 5% equity to what would be the equivalence of an insurance scheme, if somehow your start goes bust, no need to worry cause at the end of period you would be given profits from all the rest companies that participated which should be enough to get you back on your feet."
This isn't a new idea. There was such a founder equity swap program that Google was nearly a part of, but the other founders thought the valuation Sergey and Larry were demanding was too high.
This is from memory, and I tried to search for a source, but the keywords are practically ungoogleable. Maybe someone else knows more.
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October 12, 2010
Startup Insurance
This post is another theoretical post. Humans by nature are very risk averse. Start-up in itself is very risky with a high probability of failure. Failure in the start up world means lost time, lost opportunity, lost capital, lost confidence and so much more. For some of us we handle these risk pretty well and can perform excellent under these conditions, but for most of us, we would rather have these risk mitigated if we could .
One of the questions I have often pondered was how to succeed at this start up game in one go? How do I mitigate my risk to the point that failure is almost impossible?
Consider VC or even Y-combinator, the way they mitigate their risk is to acquire small equity in a lot of companies. The companies that make a killing pay for those that didn’t make one. Let suppose you had 10million to invest and you are investing 20k into each business for 10% equity and the probability of making 100million is 10%[These numbers were chosen for ease of calculation and only here to illustrate a point] . The probability that you don’t make back your 10million is 1 x 10^-23 reflecting a very minute risk.
In the case above, only the VCs are actually reducing their risk; the startup themselves are still faced with 90% chance of failure. I think startups should basically use the same strategies as VCs to mitigate their risk. Each startup donates 5% equity to what would be the equivalence of an insurance scheme, if somehow your start goes bust, no need to worry cause at the end of period you would be given profits from all the rest companies that participated which should be enough to get you back on your feet."