So venture capital turns out to be a pretty tough business.  Imagine a $150m seed VC fund that buys 15% stakes in each startup.  They write some follow-on checks, but ultimately, typically get dilutive to about 10% ownership.

Then one start-up in the fund is sold for $500m.  An epic amount!  How much does that return for the VC fund?  $50m.  A lot.  But … but … it’s only 33% of the $150m fund.

And the job of the fund is to do at least about 4x “gross”, or to turn that $150m into $450m.  So that $50m barely gets you 10% of the way there.  And note while VCs are often well paid, they don’t make profits or “carry” unless the full fund is first returned.  Until that $150m is payed back.

So you can see here, even a $500m “exit” isn’t a fund returner for a $150m fund.  It’s not even close.  It’s not enough.  You need a bunch — in every fund.

A variant on that math here with a $100m fund and 10% initial stakes, diluted to 5% over time:

And those $2 Billion VC funds writing those Series A and Series B checks?  It’s even harder there, in some ways at least.  Yes, you get more time to see how the startups are doing, so that’s easier.  But it’s so, so much more cash you have to return to their own investors, the Limited Partners.  Even a $10B+ exit plus 3 billion+ exits and IPOs won’t be enough.

That math here:

OK so you can see why VCs are obsessed with Fund Returners.  Those rare investments that return enough money to the VC fund to pay off at least 1x the total fund size. 

And you can see VCs are often pretty careful to make sure structurally, any given investment can do it.  A 1% stake?  Maybe it can happen with a Stripe or Databricks or SpaceX, but otherwise, small equity stakes are tough to turn into Fund Returners.  Investing in the #3 or #4 in a space?  Yes, you can make money.  But can it be a fund returner?  It’s much harder.

So going into an investment, most VCs have to believe you can truly be a Fund Returner.

But here’s the non-obvious part … that calculation changes over time.   

As the years go by, some investments don’t make it.  Hopefully at least 1 per fund breaks out over time and becomes a “Fund Returner”.  Some get acquired.  And some keep going … but likely won’t ever be a fund returner.  At some point, it’s just clear that they are a good startup, but aren’t going to have that $1B, $5B, $10B+ exit it might take to be a Fund Returner.

And when that time comes, as long as you don’t need much more money from that VC … the VC tends to get a bit zen.  They just want you to get the best outcome you can.  And in some cases, anything where they make even a 2x return is great, when it’s not clear there will be even a 1x return.  It’s not what anyone hoped when they invested.  But VCs do get zen when they have a sense over time of the outcome — and more capital isn’t required.

So I know on social media it can seem like there are many horror stories of VCs pushing founders to raise too much, or spend too much, and that does happen.  But it mostly happens with the ones that are, or look like they can truly be, Fund Returners.  The rest kind of, at least a few years in, sort of get left alone if they don’t need more money.

A much deeper dive here, including the math above:

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