At one point, they asked him about his growth rate. He replied that he was intending to grow the business 5–10% per year for the foreseeable future.
One of the VC investors shared the honest feedback that such growth was insufficient to attract his interest. I thought this investor had shared a valuable insight for the CEO about where his company wasn’t matching up with the profile he was looking for.
The CEO became defensive and took this feedback as an indication that the investor thought he had built a bad company. He totally missed that the investor’s comments were’s about the quality of his company at all. His company might be great, but it wasn’t going to grow fast enough to generate sufficient returns for a venture investor.
In #23 on my list of 101 things founders ought to know about venture capital, I’ll explain why that is.
Returns? Go big or go home
VCs must typically generate 100% internal rate of return (IRR) or more on each winning deal to make the economics of a VC fund work. Why?
They need to generate a minimum of 20–25% return to LPs across the fund’s portfolio despite losses. Otherwise, LPs would be better off investing in the much less risky S&P 500 (which returns around 10% for long-term investing).
Consider the task for giants like A16Z who raised $1.5B or Greylock Partners who raised $1B (both in 2016). These funds need to generate 20% plus compounded returns on over 1 billion dollars investing in startup companies. That’s around $300 million a year!
Data shows that in reality most VCs struggle to generate returns which beat the S&P 500. But those that do may generate 1,000’s of percent returns.
The content of this post originally appeared as part of 101 Venture Capital Pro Tips. You can read the original as well as 99 additional tips for founders looking to understand the world of new venture financing there.
@chadjardine is the Head of Marketing for @goreact, an edtech startup that makes game film for the classroom. He also teaches courses in venture financing @uutah