No one wants to invest in life-style start-ups. They are too hard to monetize.
Put let me answer the question a bit differently — funds managing less than $50m or so can afford to not focus entirely on hunting unicorns. Funds > $100m or so though start to have to become unicorn hunters.
The math here is simple.
- In most VC funds (500 Startups aside), the model assumes at least the one best investment per fund can at least “return the fund”, i.e. at least one investment can make returns = 1x the size of the entire fund.
- Assume a smaller, $50m fund’s goal is to buy 10% of a start-up each time it invests. (Larger funds often try to buy 20% or more, but smaller funds are often more flexible here).
- Assuming it’s best exit is a $500m sale (which is very rare, actually).
- So a $500m exit x 10% = $50m = 1x on a $50m fund. Math works.
As soon as you have a fund managing $100m, let alone $1b … then for a single exit to “make the fund” … it has to be a unicorn exit.
It’s tough math. The smaller the fund, the less important unicorns are to success of the fund, and the more “good exits” (5x+ returns on capital) are good enough.
