The VC Power Law

Too many founders are applying to VC Funds not knowing their expectations and then wondering why they are rejected.

The problem is that they don’t understand the VC power law.

It’s a different ball game than pitching to Angels. Angels are happy with the potential for a 10x return, for VCs, they have to see the potential for 100x or more.

Let’s assume we have a fund of £50m and they are targeting a 3x return.

“But hang on, didn’t you just say they wanted 100x?”

Here’s the difference. In this example, the fund has to make 3x. In order to achieve that your business must make 150x. Here’s why:

By the time the VC sets aside £10m cash to cover fees and £20m to commit to follow on rounds for the portfolio, they’ll be able to invest in around 20 companies at £1m each.

Of those 20 companies, they expect 2 to make a 5–10x return.

“Nice, that’s the 3x achieved then”

Nope. That merely covers 3–10% of the expected return.

They expect 5 to break even. And 12 to fail.