There is so much VC content out there, on Twitter, on Medium, on blog posts, and so much of it really is transparent and helpful. The industry is so much less opaque than it was just a few years ago.

But it’s also sort of confusing, how much of it there is.

And in particular what’s confusing is:  What Do VCs Really Want?

Here’s the simple answer:

  1. Seed and “Early” Series A investors are looking for you to have a shot at doing 100x their money.  True early stage investors will have a lot of misses, and only 1 out of 25, or even 50, start-ups will be a hit.  So to make the math work, that 1 winner out of 25 or 50 has to do 100x on their money.  If 1 out of 500 does 100x, and you put, say, 2% of the fund into that winner … then that 100x deal makes you 2x the fund.  If all the rest collectively make 1x the fund, you’ve overall tripled the fund over 10-14 years — the goal here in VC.  Now, pre-seed and seed VCs can tolerate a high failure rate in the model.  But it also means if they invest at, say, an $8m valuation … they have to at least think you might be worth $800m, maybe.  Add in dilution, and that’s $1B.  The magical unicorn.
  2. Series B and Series C, and later-stage Series A … anything much higher than a $60m valuation or so … is looking to 10x their investment in you.  At this scale, 100x can happen (Zoom, Datadog, Snowflake) and that’s great when it does.  But 10x is more the model.  If they put 5% of the fund each into, say, 4 10x winners, that returns 2x the fund.  And if all the other companies in the portfolio do 1x, then you again add up to a 3x fund.  Here, you’ll see VCs don’t quite expect 100x.  10x will do it.  But it has to happen more often.  If they need 4 deals at 10x out of, say, 30 investments, that means 1 out of 10 and sometimes even 1 out of every 5-6 investments needs to be a 10x hit now.
  3. Pre-IPO investors are looking for 3x.  Pre-IPO investing, i.e. unicorn stage, are looking in general for at least 2x-2.5x returns.  3x ideally, like seed and middle stage.  But at this stage, there is risk, yes, but more certainly.  They are hoping out of a portfolio of 10-30 late stage investments, that one does 10x, 3-6 do 3x, and 1-2 make money but less than 3x, and maybe 1 or 2 loses money.  Net net, if they invest at $1B valuation, they are looking for at least a $3B IPO.  A $2B valuation, a $6B IPO.  Etc. etc.

Some simple math that summarizes a lot of complexity, portfolio strategy, etc.

But it’s just about right.

Take VC money at each stage, and this is what they expect.  They hope for more.  They can afford it if you do your best, and come up a bit short.  But this is what they are expecting from that venture capital.

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