This doesn’t answer OPs question, IMO (or my interpretation of what OP was saying is wrong).
Sure, construction and high-growth tech startups are different investment opportunities. They have different risk profiles. As someone managing money, shouldn’t you be looking to mitigate risk to maximize returns? Why give money to the startup which has an idea and no experience running a business, managing capital, accounting, etc.? Wouldn’t money be much better spent on a startup that had all those things?
I have heard in the past that the majority of startups fail, and that successful startups are often founded by people who have founded (often unsuccessful) startups before. When looking for a company to invest in, shouldn’t these be top priority? I don’t buy that VC and high growth companies need to be as risky as they are. I suspect a lot of it is bad decisions and lack of due diligence.
> I have heard in the past that the majority of startups fail, and that successful startups are often founded by people who have founded (often unsuccessful) startups before. When looking for a company to invest in, shouldn’t these be top priority?
If they already are, either directly, or because “founding a startup” (as if it doesn’t get funded, its not really a startup) is heavily dependent on connections from the beginning, that would explain the effect itself.
You beat me to the follow-up! I actually answered this below. I'll address it directly but it may get flagged as copy / paste so apologies in advance.
> As someone managing money, shouldn’t you be looking to mitigate risk to maximize returns?
- Asset classes aren't just about returns, they also have other dimensions like volatility ("beta"), liquidity, correlation, and time horizon. Being able to sell something easily is valuable, and not being subject to crazy swings is also valuable. Unfortunately those two often are at odds. These features make for different investment mixes, and also affect how you can get leverage (loans) with them as collateral. Specifically, real estate is super easy to get a loan on since it's not very volatile. Pre-IPO startup shares are very hard to get a loan on, because they are both volatile and illiquid.
> Why give money to the startup which has an idea and no experience running a business, managing capital, accounting, etc.?
- Companies that have physical assets often have a focus on operations work (e.g., where do I economically source asphalt near Berlin?). Intellectual Property businesses often have a focus [exclusively] on product work (e.g., what new software feature does EMEA sales need to make their quarter?), where accounting, etc is less correlated with outsized outcomes. One is quite literally, building the value mile by mile at a relatively high cost. The other is more "unlocking" value that was so unbalanced something with minimal physical footprint can access it.
> Wouldn’t money be much better spent on a startup that had all those things? When looking for a company to invest in, shouldn’t these be top priority? I don’t buy that VC and high growth companies need to be as risky as they are. I suspect a lot of it is bad decisions and lack of due diligence.
- Ideally you have all those things, but sometimes you can't get all the things in a deal and shaping it is the value you provide. For non-public investments, a lot of the value is from either shaping the deal yourself or getting access to the right people. It's easy for me to invest $1000 in GE. I can't just walk up to Pixar and ask to invest $1000 in their next film. Same is true for startups. You either need to seed the deal (be the lead investor), or have the access to contribute. Building these relationships is a lifetime of work. This is why people specialize.
- Adding to above, VCs themselves are even more specialized, and different stages require different balances of due diligence vs speed. VC's typically stratify by company stage (seed, A, B, C, mezzanine, etc), industry, geography, thesis, etc. These are often driven by the philosophies of the partners, fund size, or by the LPs with specific expectations. To give a very direct example, GV with exactly one LP and invests in A-stage or later, has very different goals than YC, which has very different goals than the venture arm of a big-12 pharma company like Roche (Pharma is also intellectual property based). It's specialization all the way down.
Sure, construction and high-growth tech startups are different investment opportunities. They have different risk profiles. As someone managing money, shouldn’t you be looking to mitigate risk to maximize returns? Why give money to the startup which has an idea and no experience running a business, managing capital, accounting, etc.? Wouldn’t money be much better spent on a startup that had all those things?
I have heard in the past that the majority of startups fail, and that successful startups are often founded by people who have founded (often unsuccessful) startups before. When looking for a company to invest in, shouldn’t these be top priority? I don’t buy that VC and high growth companies need to be as risky as they are. I suspect a lot of it is bad decisions and lack of due diligence.