TheFundCFO Newsletter
Posts
#154 VC Fund Math: The Path to 10x+

#154 VC Fund Math: The Path to 10x+

May 21, 2024

👋 Hi, I’m Doug! Welcome to @TheFundCFO crew! Every Tuesday/Thursday, we publish VC/CFO insights that matter - highlights from notable VC GPs, LPs, and CFOs/finance pros. Check out our VC Fund Playbooks, Models, Budgets, & Compliance Checklists @ Streamlined.Fund! Love what we’re doing? Consider upgrading to paid for deeper dives on Thursdays (most paid subscribers expense these insights!).

“Life has no limitations, except the ones you make.” -Les Brown

“Making 10X in Venture is complicated…”

A recent X post from Martin Tobias on VC fund math inspired us while also reminded us that VC is hard! You have to worry about things like dilution, protecting your ownership, etc. to hit a 10x return on just one investment. Then to have a great fund, you really need a 100x fund driver. That’s hard to get!

We’ve written about this topic extensively (more below). In the meantime, we’ll pass the mic to Martin to share more on his 15.6x mark-up that was really a 5.5x after accounting for dilution (spreadsheet linked in thread):

“Making 10X in Venture is more complicated than most people think. I recently invested in a $16M post, and the company just raised a $250M post. Up 15.6X? No, only up 5.5X. Here is the math. For early investors to make 10X, the valuation has to be over 40X higher than our entry price. It is much harder for VCs to get outlier returns than most understand.”

(note: this assumes not following on to protect ownership - see spreadsheet thread).

VC Power Laws and Return The Fund Math

We’ve written about VC Power Laws & RTF Math (w/ Template) many times but it keeps coming back up! We revisit this today - read on!

How Can This Deal RTF? The Investing Math (Yes or No)

Every venture fund manager I know wants to deliver superior performance. Before investing in any deal, a VC fund investor should ask: “How can this deal RTF? Or 2x, 3x RTF? What do I need to believe about the future for that to happen?” There’s always a story around things like an amazing founding team and an exciting market to capture. What about the math to RTF?

It’s possible to lose sight of RTF math as a VC fund investor moves quickly to close an investment. In response to this challenge, we’re sharing a simple RTF Calculator for VC fund investors to use when thinking about a new investment opportunity.

In the example below, a $50m fund making a $2m investment will require a $1b outcome to RTF (assuming a $20m valuation and 50% dilution). These assumptions can vary by fund strategy and sector focus so modify as you see fit!