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.

More common today than ever, in the Cloud.  Unicorns pop up daily.

But still a high bar.  And the one, importantly, your own VC investors are held accountable to.

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