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 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.
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 $2 billion market cap won’t be enough.
And now you can also see why VCs care so much about how much they own. If that 15% average ownership dips down to say 10%, it just gets that much even harder.
Scale that up for billion$+ funds.
Unicorn Hunters, so all VCs must be.
(Cross-posted @ SaaStr)