Q: 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?
- 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
A few more here: 5 Non-Obvious Things To Know About VCs | SaaStr
Published on May 17, 2020