Every time VCs make an investment they believe that they are backing a company that is going to generate a healthy return. In reality, that’s not the case.

Even the most successful early stage investors experience failure rates in their portfolios that are probably surprising to people not familiar with the business. A rule of thumb is that for top performing investors one-third of their investments will ‘go to zero’, one-third will return the invested capital and one-third will provide a 5-10x return. Furthermore, in the early-stage model, the few companies that return 10-times or more on invested capital provide the vast majority of the fund’s total return to its investors (limited partners).

This reality has a few implications for entrepreneurs that are raising an early round of venture capital. First, you will need to convince investors that your company can generate a big return since VCs need to make every investment with the belief that it will do so. Second, you should expect that the market valuation for your company may be lower than your initial intuition tells you. Since two-thirds of the companies that receive venture investments generate mediocre returns for early stage investors, investors will likely perceive the riskiness of your venture to be higher than you will.