If you think you want “big VC funding” someday, then you’ve got to have one of the few businesses that will grow crazy fast and exit at over a billion $.
This is just how the math works for the big Silicon Valley-style venture funds we all hear about.
Silicon Valley startup investor and startup luminary Jason Calacanis explained it succinctly on one of my favorite podcasts: This Week in Startups.
Here’s what he said when explaining what “venture scale” means to VC investors:
- “Venture scale means getting to a BILLION in revenue.”
- “A VC fund needs to believe that every one one of their investments has the potential to return TWICE THEIR FUND SIZE. So a small $100M fund needs to see a possible return on its investment of $200M. So the exit needs to be $1B. A bigger fund needs a much bigger exit – $2B or $10B.”
- “If a software business is for a smaller market (TAM), like vertical SaaS software for dentists, then big VC funds won’t invest because they can’t invest big checks of $10M or more and get a 40X+ return.”
- “A seed or angel investment might work out if it is invested early at a reasonable valuation and it exits for $50M-$100M with no additional outside investment.”
- “Venture capital is the funding source for a VERY SMALL number of businesses in the world. It should be obvious to everybody, but it’s not.”
So bigger VC funds require the potential to create a billion $ exit at least.
This is what they really mean by “Your TAM isn’t big enough.” It’s not big enough for their math to work in their fund.
OK. Fair enough. That’s the big VC game.
But what about all successful practical software companies that grow to $3M revenue or $10M ARR and sell for $20M or $50M or $100M without big funding?
These are truly successful “FOUNDER-SCALE” exits for the founders, their teams, and their practical investors.
These are life-changing wins for founders.
There are 20X more of these founder-scale exits than big VC-scale exits. At least.
Not every software investor is a big VC fund with unicorn expectations.
But software startup founders should know what they are really asking for when they jump in and say “I’m going to raise big VC funding!”
VC funding isn’t bad or wrong, it’s just not for most software founders.
“Non-investible” to VCs is NOT THE SAME as a “non-valuable business” to founders!
Founder-scale math works great for founders but it just doesn’t work for VC investors.
Nobody is talking about how practical founders are winning big with “founder-scale” software businesses every day.