What VCs Aren’t Telling You About Why They Require 10X to 100X Returns

Why do venture investors tell SaaS founders they invest for 10x to 100x returns when a VC fund would do great with a 3-5x lifetime return? It’s simple.

It’s the massive churn problem in venture investors’ portfolios. Most of their investments fail to pay back anything.

A SaaS startup would stall or go out of business if they lost 60-70% of their customers–and those customers never paid them in the first place.

But that’s how it works for the big venture funds we all hear about. Between 50% and 70% of a venture firm’s investments will not pay back anything to the investors.

These aren’t amateur and generous local angel investors we’re talking about.

This is how it works in professional VC world, with all that money, all the smart people, all the screening interviews, the few special funding decisions, all the lawyers, all the board meetings, and all that work they put in over years and years.

The 50% “failure rate” for institutional venture investors isn’t a problem to be fixed, it’s how this game works.

They make the best bets they can to win with the few companies that will get unicorn-blockbuster big.

Big tech VCs don’t win when all their founders win. Venture investors win when they invest in 50 companies and 2 or 3 of those get really, really big. That’s it. That’s their Power Law game and their portfolio approach.

So at least half of their investments are “churn”: they don’t pay back anything.

And when investors don’t make any return, founders don’t make any return either. Zilch-o.

If your early-stage VC fund goal is a 5x cash-on-cash (called DPI) return to your fund’s investors, and most of your investments don’t return anything, you need a few of those to return big. 10x at least and 100x if you are lucky.

As a venture investor, your 50x winners make up for so many 0x losing bets. This is how they get to 5x overall return goal in about 10 years.

An S&P 500 mutual fund has returned about 2x in the last seven years, so the additional risk of venture investing requires a much higher return.

Founders should be clear about a few things when taking VC investment:

  •  It’s an all-or-nothing bet, most of the time. Go big or go home.
  •  VCs win even when most of their investments don’t, but it’s a binary win-or-lose for each founder.
  •  If you aren’t looking like at least a 5x winner to your investor, you’re one of the losers in their portfolio.
  •  When you take big VC funding, you inherit the business model of your investors.
  •  If you’re not growing very fast (at least 100% for 5-7 years), you can’t possibly get the big returns.

It’s totally possible for serious SaaS founders to win with VC funding. It’s just far more rare than founders imagine. VCs know this.

This game is not clear and visible to most new startup founders–and to most advisors, mentors, and angel investors who help startup founders who recommend it.

The first rule of the game is to know what game you are playing. Investors know their game.

Is that really the game that you want to play?


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