The key points from the article for explaining this phenomenon:
> The exit values in VC have increased significantly over the last decade leading to escalating entry values. That makes sense. But the two things that have not changed materially over the last decade are the dilution from seed to exit and the power-law distribution of outcomes in an early stage portfolio.
And a little before that:
> If you believe your top-performing investment, out of 100 investments, will end up being worth $100 billion, then the numbers change a lot. You end up with a 13x fund instead of a 1.3x fund, before fees and carry.
So, VCs are still just doing the math like they always have. The rate of $1B companies being created today is 10x (? I don't know) higher than it was a decade ago, so the rate of $100B is probably going to be higher. A single $100B company in your portfolio of 100 companies makes it all work (really work). Still a lot has to go right from seed to $100B, but that's no different. There might be more money available in VC today. Feels like pop culture and society in general is much more interested in start-ups, VCs, etc. Maybe that's my bubble, though.
I though I most likely agree that a seed round at $100M is a bit ridiculous, I'm curious about a few things.
Are people really raising a "seed" at $100M with only $1M investment? I would assume these sorts of companies were in the space industry or something similar where they don't get anywhere without hundreds of millions and a seed would look more like $25M
What sorts of companies are raising at these sorts of valuations, and what stage are they really at? Fred suggests that a seed means they don't yet have PMF, but perhaps that isn't correct in the cases he's seeing.
I think, he meant a VC fund will be worth 100m. and then it will fund 100 startups, with 1 mil each. VC's will be looking at aggregates, to present to their LP's.
The article is talking about investments of $1M per company to get 1% ownership at a 100M valuation, and why the returns probably suck if you limit yourself to angel investment only.
The single biggest flaw with the analysis, is that it ignores that you must be a seed investor to be at the table to participate in subsequent series A,B,C funding rounds of the most successful businesses.
The following is from the article.
Assumptions:
Fund Size $100,000,000
Number Of Investments 100
Post-Money Value $100,000,000
Investment Amount $1,000,000
Ownership 1.00%
Average Dilution from Seed to Exit 66.67%
Top-Performing Investment Outcome $10,000,000,000
Power Law Number 0.75
Given those assumptions, a $100mm seed fund that makes all of its investments at $100mm post-money will barely return the fund. And that number is gross, before fees and carry.
Total Value At Exit $133,333,323
Fund Return 1.33
If an article about investment and fundraing requires bushy explanation what the author actually meant, it also requires correction. In my opinion, it would be effective to use personal loans houston https://zebrafinance.com/houston-tx for fundraising campaigns if you don't need too much money, of course. I am not speaking of those rich tycoons who takes grands here and grands there.
6 comments
[ 4.9 ms ] story [ 26.6 ms ] thread> The exit values in VC have increased significantly over the last decade leading to escalating entry values. That makes sense. But the two things that have not changed materially over the last decade are the dilution from seed to exit and the power-law distribution of outcomes in an early stage portfolio.
And a little before that:
> If you believe your top-performing investment, out of 100 investments, will end up being worth $100 billion, then the numbers change a lot. You end up with a 13x fund instead of a 1.3x fund, before fees and carry.
So, VCs are still just doing the math like they always have. The rate of $1B companies being created today is 10x (? I don't know) higher than it was a decade ago, so the rate of $100B is probably going to be higher. A single $100B company in your portfolio of 100 companies makes it all work (really work). Still a lot has to go right from seed to $100B, but that's no different. There might be more money available in VC today. Feels like pop culture and society in general is much more interested in start-ups, VCs, etc. Maybe that's my bubble, though.
and will probably never make a profit.
So I can see $100B companies getting dumped on the public and VCs making a ton of money.
Are people really raising a "seed" at $100M with only $1M investment? I would assume these sorts of companies were in the space industry or something similar where they don't get anywhere without hundreds of millions and a seed would look more like $25M
What sorts of companies are raising at these sorts of valuations, and what stage are they really at? Fred suggests that a seed means they don't yet have PMF, but perhaps that isn't correct in the cases he's seeing.
The single biggest flaw with the analysis, is that it ignores that you must be a seed investor to be at the table to participate in subsequent series A,B,C funding rounds of the most successful businesses.
The following is from the article.