Why does Venture Capital Require High Returns?

Intuitively, we can understand how venture capital requires high discount rates because of the high potential of failure of ventures and speculative projects. However, I wanted to see if it was possible to build a model to describe and bridge the gap between "traditional" valuation modeling and modeling for venture capital firms. What do I mean? I wanted to price a theoretical company using two methods:

1. A traditional venture capital method which accounts for failure in the high discount rate.
2. A variation of a standard method which uses a lower discount rate, but uses probability to account for failure in the cash flow itself.

Company Details (Assumptions):

Next Year's Cash Flow per stock: $10
Super Normal Growth for 3 years: 15%
Perpetual Growth: 2%

Note - Raw Cash Flow Would be:

Year 1 2 3 4 5 (2% - Growth)

Raw Projected Cash Flows $10.00 $11.50 $13.23 $15.21 $15.51

Method 1: Typical Venture Capital Model

Use a high discount rate to account for the failure rate, but assume project will work.
Venture cost of capital (ke) = 20%

Using DCF, the value of the stock is:

Year 1 2 3 4 TV Price

Raw Projected Cash Flows $10.00 $11.50 $13.23 $15.21 $5.07
Method 1 (PV) $8.33 $7.99 $7.65 $7.33 $2.44 $33.75**

Method 2: New model using standard discount rates, but also accounting for possibility of failure (not collect cash flow).

Failure rate: 55% every year
Typical discount rate (ke): 8% (exclude effects of leverage - assume venure can't raise debt)

Year 1 2 3 4 TV Price

Method 2 (Undiscounted)* $10.00 $5.18 $2.68 $1.39 $23.56
Method 2 (PV) $9.26 $4.44 $2.13 $1.02 $17.32 $34.16**

* Cash flow in this method is calculated as Raw cash flow * (1 - Failure Rate)^(Years in Operation - 1) - Note this assumes the company's first year is guaranteed (Big assumption)

** The price is about the same (same ballpark) using both methods, which makes sense with the law of one price.

The difference between the two methods is that Method 1 accounts for the chance of failure in the high discount rate, but Method 2 accounts for the chance of failure as a probability of receiving the cash flow. The same concept would apply with junk / high yield bonds.

The point I'm trying to investigate is the idea that there is an intrinsic relationship (possibly even isomorphic in the same way Womack called Price isomorphic to yield with bonds) between a high required rate of return and high failure rate.