Venture capital firms invest other people's money in young companies, and their fund structure makes them look for rare, very large outcomes rather than steady good ones.
10 min read
I think fund size is the single most predictive fact about a venture investor's behaviour, and it is usually available in a sentence. Once you know what exit returns the fund, most of their advice, pressure and decisions become predictable, which is useful whether you are working with them or deciding whether to.
A venture capital firm raises a fund from outside investors and invests it in young, high-growth companies, usually in exchange for preferred shares and some governance rights.
The fund's economics shape what it looks for. Consider a 100,000,000 fund that aims to return three times its capital, 300,000,000, over about ten years.
If the fund typically owns 10% of a company at exit, a single company must sell for 1,000,000,000 just to return the fund once:
Fund size 100,000,000 Ownership at exit 10% Exit needed to return fund 100,000,000 / 10% = 1,000,000,000
Because most venture investments return little or nothing, the fund needs a few companies capable of outcomes that size. A company likely to sell for 40,000,000 may be a genuinely good business and still be a poor fit for that fund.
Venture firms differ by stage (pre-seed, seed, Series A, growth), sector focus and size, and larger funds generally need even larger outcomes.
Because it explains behaviour that otherwise looks strange: pushing companies to grow fast, declining profitable but modest businesses, and caring more about the upside than the typical case.
For founders and co-investors, knowing a fund's size and target ownership tells you what outcome it needs and therefore how it is likely to behave.
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Two funds considering the same company, which could plausibly sell for 150,000,000.
Fund size Ownership at exit Proceeds from 150m exit Share of fund returned 20,000,000 10% 15,000,000 75% 500,000,000 10% 15,000,000 3%
For the small fund, this outcome nearly returns the fund. For the large fund it barely registers, so the large fund may pass or push the company toward a riskier, larger outcome.
Assuming all venture investors want the same thing. Fund size and target ownership determine which outcomes matter to them.
Look up or ask how large the fund is.
Divide fund size by typical ownership at exit.
Judge whether the fund's needs and the company's likely path are aligned.
When dealing with venture investors as a co-investor, founder or potential fund LP.
Do not assume every venture investor behaves identically; strategy, stage and individual partners vary widely.
Venture investors widely discuss evaluating each investment by whether it could 'return the fund', a heuristic reflecting the power-law distribution of venture returns and commonly described in investor writing and interviews.
When a venture investor asks whether a company could be very large, they are usually asking whether it could return their fund.
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