Lessons for Startups: One reason you’re not being funded
This post is part of the Lessons for Startup Series: Bringing awesome curated topics for startups from around the web!
Firstly, let me get the ‘what this post is not’ bit out the way. It’s an example, not a playbook. Also, I’m generalising quite a bit and have deliberately removed some parts of the equation (more on that later). And I will not be covering anything on non-institutional investors (eg business angels and corporate/strategic investors). They usually view this differently based on their structural setup. So first rule — knowing which kind of investor you’re pitching to as an entrepreneur is crucial.
The math is as straightforward as this question: what is a VC looking for in terms of return potential when they assess a startup investment? And the place to start finding the answer is in the background of this kind of investor structure. Institutional investors have raised money from external fund investors (LPs) — meaning we’ve promised to deliver some level of return to these fund investors and that’s why we invest in startups. This also means the number of portfolio companies is important. In order to spread the risk, VCs will usually invest in around 20–30 companies from a single fund in order to get a solid risk/return balance.
In this example, I’ve chosen not to consider management fees, the ownership in the portfolio companies, the number of follow-on rounds that a VC can make into a portfolio company or liquidation preference stacks which are all important parts but would make the example way too complicated……
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