The purpose of start up investing is to find companies that are going to become more valuable. In order to do that you need to predict what other later stage investors are going to find valuable. You're not there to change the world, you're there to flip a dog-walking service for 10x return. So that dog walking service better be run by a tall white guy who practices yoga and constantly talks about transforming the world.
VCs invest assuming roughly 90% of their deals will be written down to almost nothing. Of the last 10%, some will return some money back but few will break 1-3x. The last few need to be at least 10x to give a useful return to the LPs. Because remember the fund itself took 2% for expenses and has a 20% carry to overcome.
On the other hand, angels don't need a massive ROI to be effective. Since this is a small part of their portfolio (vs being their job), if they can write relatively small checks and get 10x back, the numbers work. Remember, they don't have the expenses or the carry to overcome. In addition, odds are angels are involved when it's still a Qualified Small Business so there's (near-)zero taxes on a significant portion.
This is an overstatement. For most VCs, if failure rates within your portfolio exceed 50%, it gets hard to generate top quartile returns (unless you stumble on the rare unicorn). A more typical distribution for an early stage institutional investor (ie not a seed fund but a fund that leads investments, sits on boards, etc) is 40% of the fund failing. 25% producing >3x return (ideally with at least one or two >10x). and 35% sitting in middle.
It seems your analysis isn't very generous. Your example would likely fail the litmus test laid out in the first paragraph on at least these points (at the very least):
- a mission that attracts talented people into the startup’s orbit
- a product so good that people spontaneously tell their friends about it
- a network effect and low marginal costs
- and a product that is either fundamentally new or 10x better than existing options.
I'm sure the wag founders are talented. I'm sure that some of wag's customers love it. I'm sure that you can argue that it has the same network effect as uber. I'm sure the founders of wag will effuse about a paradigm shift in the canine ambulatory marketplace of ideas.
