Venture Capital

Why VCs Need Unicorns Just to Survive

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Jason Lemkin

One of the most tiring things for founders can be always being compared to Unicorns.  Certainly sometimes it’s inspirational.  I loved it when many of the founders I work with came out of the ’15 SaaStrAnnual saying they needed to grow faster, at a Zenefits-like level:

But the reality is as a founder there are different ways to make real money and build something meaningful.  Go back to our case study of Marketo vs. Eloqua vs. Pardot here.

For VCs that manage a fund any bigger than $150m or so though (which is relatively small for a VC) — there really is only one way.  Unicorns.

If you understand this, at least you’ll understand why VCs are the way they are.

Because the (maybe semi-sad) thing for VCs is, only Unicorns make the business model work:

  • Say you have a $200m VC fund (not that large, but basically our current fund, as an example).
  • Your own investors (the LPs) are looking for gross returns (before expenses) of about 4x, so let’s call it $800m.
  • You get to make about 30 or so investments from that fund.

So those 30 investments have to return $800m.

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How can they do that, if they own on average say 15% of each company?

  • Well $800m / 15% = $5.333 billion
  • So a $200m VC fund needs $5.333 billion in exits (measured by the 30 companies’ collective value when the VC can finally sell their stock post-IPO or acquisition) to hit its own investors’ expectations.  In “just” a $200m VC fund.
  • Multiple unicorns, in fact.  Just one at a $1 billion or $2 billion market cap won’t be enough.

And now you can also see why VCs care so much about how much they own.  If that 15% average ownership dips down to say 10%, it just gets that much harder.

Scale that up for billion$+ funds.

Unicorn Hunters, so all VCs must be.

Published on May 3, 2015
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