VC funds need about $2B in “exits” for each $50m they raise
Why? True average ownership of 10% fully-diluted x $2B = $200m. That’s 4x “gross” $50m or just about good enough today.
So raise a $300m fund, you need about $12B in exits. Or better.
— Jason ✨BeKind✨ Lemkin ⚫️ (@jasonlk) November 3, 2021
In the early days of SaaStr, I was just starting to invest and it took me a while to figure out how VC really works. I summarized in a classic post, “VCs Need Unicorns Just to Survive”, and set out the math. It was a pretty popular post.
Fast forward to today, and we have ~1000 unicorns globally, so they’ve become downright commonplace.
So what metrics are VC firms held accountable for themselves these days? I tried to boil it all down in one tweet: for every $50m a VC fund raises, it needs at least $2B in “exits”. I.e., an IPO at $2B. Or 3 sales of portfolio companies each at $700m ;). Or some combination thereof.
Why? Basic math:
- A VC fund today to do well needs to at least 4x its capital before paying fees, etc.
- So even a $50m fund needs to make $200m.
- Assuming, after dilution, a seed fund is lucky to own 10% today of each investment.
- $2B in exits x 10% = $200m.
And if your ownership is lower, you have to do even better. So every with a seemingly small fund of $50m, you still need your startups to be worth at least $2B collectively. At least.
Now raise a $250m fund, and the math goes up 5x. You need $10B in exits. One big decacorn, or a whole herd of unicorns.
For a little while, it seemed a bit less hard. When unicorns popped up daily.
But it’s a high bar. And the one, importantly, your own VC investors are held accountable to.
A $100m seed fund buys 10% in a seed round for $1.5m
7 years later, the startup incredibly has a $1B exit!
So how much do the partners at the fund make? Probably $0 for now if they don’t have other big exits
Why?
First, assume that 10% was diluted to 5% over 3-4 rounds…
— Jason ✨🇬🇧SaaStr LDN June 4-5✨ Lemkin (@jasonlk) May 21, 2024
