A $500m fund with a $1B IPO owning 15% = only 0.3x of fund. Your job is 3x.
A $50m fund with a $1B IPO owning 5% = 1x of fund. Great, still, your job is 4x.
A $10m fund with a $1B IPO owning 1% = 1x of fund. Great, still your job is 6x.
— Jason ✨BeKind✨ Lemkin ⚫️ (@jasonlk) March 26, 2021
One of the most tiring things for founders can be always being compared to Unicorns and now Decacorns. Certainly, sometimes it’s inspirational. I loved it when many of the founders come out of each SaaStrAnnual saying they needed to grow faster:
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, really, but an example for a Series A fund).
- 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.
How can they do that, if they own, on average, say, 15% of each company?
- Well, $800m (4x the fund before costs and profits/carry) / 15% ownership on average = $5.333 billion in market cap to achieve 4x gross in the fund
- 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 $2 billion market cap won’t be enough. A decacorn will be enough though. 🙂
And now you can also see why VCs care so much about how much they own. If that 15% average ownership dips down to say 10%, it just gets that much harder.
Scale that up for billion$+ funds.
Unicorn and now Decacorn Hunters, so all VCs must be. At least, any VC working at a fund of any material size.
With 500 Unicorns, if you've been investing for > 8-10 years and haven't invested in one,
You should quit venture capital https://t.co/Y6hZE3Qw0m
— Jason ✨BeKind✨ Lemkin ⚫️ (@jasonlk) November 30, 2020
(note: an updated SaaStr Classic post)