VC Minute – quick advice to help startup founders fundraise better.
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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.
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