Advanced Venture Math

Power-law returns, ownership and dilution modelling, follow-on scenarios, exit waterfalls with several preference classes, portfolio return modelling and fund-level arithmetic.

Ownership, dilution and the power law, modelled

Lessons

• One investment can decide the return of twenty — Venture portfolio returns follow a power law: most of the money comes from very few companies. Working through a portfolio's arithmetic shows why missing the best company matters more than avoiding the worst. (11 min)
• Ownership at exit is ownership today multiplied by every round's dilution — An early investor's final ownership is their entry stake reduced by each later round and option pool increase. Modelling the chain shows what exit value is needed for a target return. (11 min)
• A follow-on buys the same company at a higher price, so it needs its own maths — Exercising pro rata rights maintains ownership, but the new money earns a lower multiple than the original investment. Modelling follow-ons across scenarios shows when they add value. (11 min)
• With several preferred classes, each one decides whether to convert — When a company has several classes of preferred shares, exit proceeds are divided in order of seniority, and each class chooses between its preference and converting. Working through exits of different sizes shows how common shareholders are affected. (12 min)
• A multiple without time and cash tells you half the story — Portfolio and fund returns are described with TVPI, DPI and IRR. Each answers a different question: total value, cash actually returned, and return per year. Reading them together avoids common misinterpretations. (11 min)
• A fund must return far more than its investments cost to deliver its target to investors — Fees, carried interest and reserves mean a venture fund's portfolio must earn a much higher gross multiple than the net multiple its investors receive. Working backwards shows what a fund needs from its best companies. (12 min)

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