Deal or No Deal

Deal or No Deal, courtesy NBC.com

I actually watched Deal or No Deal the other night just to see what all the kafuffle is about. (I must admit that I am a reality show junky but game shows are not on my top ten.) For those of you who have never seen the game you should, just for the cultural experience. If you haven’t seen the game you can always check it out at www.nbc.com/Deal_or_No_Deal to understand what I’m talking about.

The expected value for a contestant in the game at inception is $131,000 and the expected value changes as the show goes on. As a numbers wonk, I spent most of the show mentally trying to calculate what the expected value of the remaining picks were to compare to the banker’s offer. (OK, so I don’t have a life.)

That got me to thinking about all of the eager entrepreneurs out there who are looking for venture capital funding and what the expected value of their business is with or without venture capital funding.

In Canada, the cumulative-since-inception median return for all venture capitalists is negative one per cent. (If you don’t believe me, check out the CVCA website.) Since VC deal structure means that VCs get their money out of a deal before entrepreneurs do, then the expected rate of return for an entrepreneur in a Canadian VC backed company is less than negative one per cent. It also means that the expected value of options in a Canadian VC backed company is less than nothing as well.

I’ve said “deal” before on four separate occasions with three different VCs. I’ve met scores of entrepreneurs who have said “deal” and scores who have said “no deal”. At this point in time I know way more wealthy entrepreneurs who have said “no deal” than ones who have said “deal”. With an expected value of less than zero, entrepreneurs may be better off figuring out how to build their companies without Canadian VCs than building companies with them.

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