Why not? You can have a lot of “potential energy” stored up and make sure you don’t fail because you have endless opportunities to try high-return ventures.
This happens because software has near-zero marginal cost to copy.
I agree with this skepticism. There is no strict link between high risk and high return.
Microsoft was not high risk (as noted by Gates), and it provided a return that is so large it might as well be off the scale for the purposes of this discussion (their market cap was recently up around $1.3 trillion; Gates will have pulled over a hundred billion dollars out of his ownership in the company over ~45-50 years).
- Microsoft had very high margins from the beginning. They operated thin and were very cash rich within the first few years. Just a few years in, Gates had Microsoft hoarding multiple $500,000 government bonds (~$1.5m in today's money) from accumulated profit, because they were already very profitable (there is a story about the secretary misplacing one of these bonds).
- Microsoft was founded for relatively little money - $10,000 - and with zero outside VC money. Gates & Allen came up with that capital from working various industry jobs in the prior years.
- They nailed down a serious customer (MITS) and then founded a company, rather than the other way around (found a company and then try to find business for it).
- Sales went from $16,000 in 1976 (first months of operation), to $8m for 1980, and $17m in 1981 with 40 employees ($17m is $50m inflation adjusted). Three years in they were gushing cash.
Because low risk companies are always relatively easy to copy, so as soon as you see any success you'll have clones pop up and take market share, which will lower your returns.
Any business where the risk is low is, by definition, not doing anything other people can't do. If only you can do it then you have to build the market yourself, which would represent a high risk.
The first link looks interesting, but I was turned off a bit by the implication that land scarcity was only and issue when we were an agrarian society; current housing prices are a pretty clear signal that land scarcity is very much still a thing.
True. But all those failed adventures bring down your average return on investment.
There must be a class of businesses that have half the risk and half the profits compared to the businesses that VCs accept. From an investment point of view, the ROI would be the same, but VCs wouldn't invest. How do those people get money to fund their businesses?
Giving new businesses with no assets and no cash flow unsecured capital is inherently risky. It only makes sense if there’s a potential for outsize returns.
The only thing that would make an investment like this less risky is collateral, not worse potential returns.
