VC Minute – quick advice to help startup founders fundraise better.
Click below to listen. 2m 16s duration.
Subscribe on your podcast platform of choice
Another reason that funds might be saying no to investing in you, but also not sharing this feedback with you, is the thinking of, “can I return the fund with this investment?”
What we’re looking for with a venture investment are venture-scale returns. What does that mean? I’m going to give you the high level, gloss over a lot of things, but let’s just say I’ve got a $25 million fund, and my initial investment gets me 4% ownership in your company at the seed stage.
If your company goes really big I expect that I’m going to get diluted by half. So now I’ve got 2% ownership at exit. I need that exit to be $1.25 billion to return my entire fund.
This is the type of investment that most VCs are looking for in every single investment. How do I return the fund, with this one check?
Because here’s the thing, out of that $1.25 billion exit—by the way, you did great in that so congratulations! How much do you think that I paid myself as a general partner from my fund out of that investment? Zero.
The only thing that that huge exit does for me is I pay back all of my capital to my investors. And then everything after I pay back my investors is when I start to make money on my carry. Even with a unicorn scale exit paying back my investors entirely, I have not even paid myself anything other than salary.
And I know what you’re thinking here, “oh, boo hoo. Poor VC only paid himself as salary. Didn’t make his bonus.” But if I want to stay in business, I need to return multiples of capital to my investors. To stay competitive as a venture capitalist, you need to at least triple the money that the investors put in.
It keeps coming back to, how do I return the entire fund from this one investment? And if a venture fund doesn’t see the path for them to return the fund from that investment, then they’re out. And they may not share that with you.
But here’s the irony, I also don’t think that you should be talking about an exit. Especially, not at the seed stage. But we’ll cover that next week.
Visit the VC Minute homepage for more episodes and mores ways to subscribe.
