A $500m fund with a $1B IPO owning 15% = only 0.3x of fund. Your job is 3x.
A $50m fund with a $1B IPO owning 5% = 1x of fund. Great, still, your job is 4x.
A $10m fund with a $1B IPO owning 1% = 1x of fund. Great, still your job is 6x.
— Jason ✨👾SaaStr 2025 is May 13-15✨ Lemkin (@jasonlk) March 26, 2021
One of the most tiring things for founders can be always being compared to Unicorns and now Decacorns. Certainly, sometimes it’s inspirational. I loved it when many of the founders come out of each SaaStrAnnual saying they needed to grow faster:
But the reality is as a founder there are different ways to make real money and build something meaningful. Go back to our case study of Marketo vs. Eloqua vs. Pardot here.
For VCs that manage a fund any bigger than $150m or so though (which is relatively small for a VC) — there really is only one way. Unicorns.
If you understand this, at least you’ll understand why VCs are the way they are.
Because the (maybe semi-sad) thing for VCs is, only Unicorns make the business model work:
- Say you have a $200m VC fund (not that large, really, but an example for a Series A fund).
- Your own investors (the LPs) are looking for gross returns (before expenses) of about 4x, so let’s call it $800m.
- You get to make about 30 or so investments from that fund.
So those 30 investments have to return $800m.
The Harsh Reality of Venture Capital Returns pic.twitter.com/zACASqVcED
— Jason ✨👾SaaStr 2025 is May 13-15✨ Lemkin (@jasonlk) June 17, 2023
How can they do that, if they own, on average, say, 15% of each company?
- Well, $800m (4x the fund before costs and profits/carry) / 15% ownership on average = $5.333 billion in market cap to achieve 4x gross in the fund
- So a $200m VC fund needs $5.333 billion in exits (measured by the 30 companies’ collective value when the VC can finally sell their stock post-IPO or acquisition) to hit its own investors’ expectations. In “just” a $200m VC fund.
- Multiple unicorns, in fact. Just one at a $1 billion or $2 billion market cap won’t be enough. A decacorn will be enough though. 🙂
And now you can also see why VCs care so much about how much they own. If that 15% average ownership dips down to say 10%, it just gets that much harder.
Scale that up for billion$+ funds.
Unicorn and now Decacorn Hunters, so all VCs must be. At least, any VC working at a fund of any material size.
"How seed VC works:
You have to find one true decacorn founder a year. See it, find them, pick them.
And they have to pick you back" with @HarryStebbings pic.twitter.com/v1ZhcKzrAb
— Jason ✨👾SaaStr 2025 is May 13-15✨ Lemkin (@jasonlk) February 11, 2025
(note: an updated SaaStr Classic post)
What’s the average valuation you initially invest it? And if that is increasing, how much of that is a factor in forcing VCs to get unicorns?
It’s a factor, but only just one. You need to own enough unicorns to return the capital no matter what the valuations, really. Anyhow I invest from $4m pre to $29m pre.
Does the 1/30th of fund per company formula sustain for a $600mm or $1.2bn fund? Ie is their average investment per company $20m and $40m, respectively? If so, it seems that part of that amount is driven via higher proportion of B and C round investments, but I wonder if it’s also partly driven through higher valuations at A rounds? Ie does it mathematically follow that bigger funds are more aggressive on A round valuations?
The larger the fund, the largest the checks you try to write for sure, especially over the lifetime of the investment (all the rounds). Yes this can also lead to somewhat higher valuations from Big Funds in early rounds.
To get these returns that strain capital to its limits, you do need Unicorns. The problem with most young gun fund managers is that look for them in every corner of every Industry. Or worse yet, they think that every new company in the correct Industries can be a Unicorn. Unicorns are very unique creatures and you need to be looking where they exist and not where you are comfortable. We are one in an Industry that creates them. 800% YoY revenue growth and we are looking at a 2400% YoY profit growth. This is in the middle of 1/6th of the overall economy. Interested? Look me up…
What’s the formula for finding the unicorn? What are some of the features it MUST have and what characteristics dramatically reduce the chance of success?
In SaaS, you’re going to need a phase of Hyper Growth. Probably, going from $1m to $10m ARR in 5-6 quarters or less.
Jason, thanks for so many great SaaS posts on Quora. Much appreciated.
I disagree with this post. You assumed 30 investments out of 200M buy you 15% at exit. That’s about a 47M average post money valuation. So you could get every company to exit without further dilution at 200M to achieve your desired returns, or get half of them to exit at 400M, or assume more dilution and proportionately higher exit, or any other such combination. Or you could invest earlier at a lower valuation. My company QLess has already given a return of over 30x to its first investors and it’s not yet known as a unicorn. What you wrote is true only if you take the “lazy” or unwise approach of letting most of your investments fail.