Why VC’s need billion dollar outcomes
Founder and VC relationships would be way better if founders knew the audience they were selling to.
And knowing the audience means knowing the incentive.
“Tell me the incentive and ill tell you the outcome” Charlie Munger
So here is some simple ‘back of fag packet’ maths to explain why VC’s need ‘go big or go home’ billion dollar outcomes.
VC’s tell investors they’ll return a suitcase of money 3 x bigger in 10 years time and this super simplified model illustrate how they get there (Im not going to go into fees)
1/VC has £80m fund
2/Return required from VC ownership stakes: £240m
3/Assume 10% VC ownership at the end of life = portfolio value of £2.4bn
4/ Its been well established VC follows a power law where all returns come from 1–2 companies
So VC’s are incentivises to find 1–2 companies who can be worth £1bn plus. The rest don’t matter.
Its just how the maths works out.
What this means at seed
Knowing VC’s need billion dollar outcome means your only job is to tell a billion dollar story.
Nothing else matters. There’s no point going past page 3 of your deck without a belief this can happen.
Not enough founders know this. Most in Europe tell stories that are too small.
99% of the time founders are running perfectly good companies…just not the ones that fit the VC model.