As a startup founder, you really need to understand how venture capital works | TechCrunch
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Abstraction: VC fund mechanics and return expectations every founder must understand
Key points:
- VC funds are structured around limited partners (LPs) — pension funds, endowments, corporations — who expect high-risk/high-reward returns above inflation
- Fund math requires a "fund-returner": a single exit worth the entire fund size (often $1B+) because most portfolio companies fail
- Standard VC economics: 2% annual management fee plus 20% carry on profits above the return of invested capital
- Pro-rata rights allow VCs to maintain ownership percentage in follow-on rounds; a typical fund reserves ~50% of capital for follow-ons
- A 3x–4x return is great for founders but nearly meaningless to a VC portfolio model where losses must also be covered
- A $1M investment at 10% ownership requires a ~$600M exit just to return that single investment's share of the fund
Connections: Techcrunch · Venture Capital · Startup Funding
Source: https://techcrunch.com/2022/08/17/how-venture-capital-works/