Dear SaaStr: What don’t they tell you about venture capital firms?
A few things that aren’t obvious when you raise venture capital:
- Your VC partner may leave. There has been much more transition in VC firms in the past 5+ years. Partners leave to found their own firms, in particular, all the time now. Non-partners leave to join hot firms. You are stuck with the fund as an investor forever. But will the partner you are working with stay? At most firms with more than 2 partners, really only 1 runs the place. And the others may leave, if and when they can.
- VCs are well paid, but not close to top founders. The top founders make so, so much more. So yes, many VCs live a pretty good life. And that can be grating as a founder, when they trek over to your crummy office (when we had offices) in their Teslas and such. But the very top founders make so, so much more. The math here: VCs or Founders: Who Makes More? | SaaStr
- No, VCs will not pressure you to sell — not usually. Many folks think VCs will pressure them to sell, to get liquidity. While that happens sometimes, the opposite is more common. VCs want you to keep going. So their investment is worth more. Even a $400m “exit” (sale) may not even move the needle for a larger fund. If a VC fund owns say, 15% of a start-up that sells for $40m, the fund makes $60m. But if it’s a $600m fund … well … that only “returns” 10% of the fund. The fund will still be very much in the red. So, most VCs would prefer you push on and try to go bigger. See, e.g.: The Era of the SaaS Decacorn is Here | SaaStr
- Individual partners don’t make that many investments. Funds overall tend to make 20–40 investments per fund, over 2–4 years. But that’s with multiple partners. Many individual VCs only make 1–2 investments a year, 3–4 max. Pre-seed investors do more, but most Series A and beyond investors will just make a few investments per year.
- VCs are fine losing a little bit of money. Most VC funds model about a 20% loss ratio by dollars invested (sometimes more by # of investments, up to 40%). So a small loss is not a huge deal. If say, a $150m fund puts $750k into your seed round, it’s not a huge deal to lose it all. Once an investment crosses 2% of the fund size, it starts to be a bigger deal. Once it crosses say, 5% of the fund size, it sort of has to work. A bit more here: Don’t Worry About Losing All Your Investors’ Money | SaaStr
The Harsh Reality of Venture Capital Returns pic.twitter.com/zACASqVcED
— Jason ✨Be Kind✨ Lemkin (@jasonlk) June 17, 2023
And a few bonus smaller learnings that aren’t obvious:
- Most of your VCs may sort of check out if you grow too slowly. At some point, if it’s been a few years, many just sort of quietly … move on. Stop following up, stop going to board meetings, etc. It can be frustrating, or in some cases liberating, but it does make sense. If you can’t make a VC fund a material amount of money, most move on at some point. At least quietly.
- It really varies on which VCs will write you a second check, and when. You have to ask. Never assume any investor will give you a second check.
- Time doesn’t help a deal. VCs tend to invest fast. You know the best ones when you meet them. Or at least, later when you get an update with more traction. More meetings, more data, usually doesn’t help. But — do follow up if you don’t hear back. Don’t sweat it when VCs ghost you. It’s usually a sign they just aren’t interested enough. More on that here.
A few more here: 5 Non-Obvious Things To Know About VCs | SaaStr
(note: an updated SaaStr post)