$1B Funds Require Outcomes That Are Rarer Than You Think

Venture math has gone YOLO. Let me show you the data.

We just published a list of the 500 most valuable startup exits of the past 25 years, pulled from roughly 100,000 venture backed companies founded since 2000.

Three of those exits, three out of 100,000 starts, are worth more than a trillion dollars. About a dozen have cleared $100 billion. Fewer than a hundred, one tenth of one percent of the entire pool, have cleared $10 billion (based on yesterday’s values).

The two numbers that stuck out to me more than anything are that the median value of those 500 exits is $2.7B and that the top 5 combined are larger than the next 495.

Now let’s do the fund math.

A $100M fund owning 10% at exit returns the fund from a single $1 billion outcome. A fund our size only needs five of them, or one $5B exit, to 5X.

Something like 450 companies out of 100,000 have crossed the $1B line in 25 years. That’s 0.45%, long odds, but it gets crazier.

A $1B fund at the same 10% needs a $10 billion exit just to return itself from one position. Fewer than 100 companies have done that over the last 25 years.

Push to a $10B fund and you need a $100 billion outcome to get back to even off one name. About a dozen companies in a quarter century have managed it. Roughly 0.012%.

Every step up in fund size roughly divides your odds by five to ten.

And funds keep getting bigger despite this reality. Funds over $1 billion have taken nearly three quarters of all US venture dollars raised this year (per PitchBook and the NVCA), essentially chasing the handful of companies you can count on two hands.

Do the world’s best VCs really know which of these companies are going to be the top 3 of 100,000? If they do, give them all your money 😉

I would submit there’s a lot of circumstance, luck and randomness when we’re talking about companies at this level. Moreover, I’d rather not be forced to return capital ONLY if we invest in one of those few.

I get the pull too. Bigger = more shots on goal… and more fees.

Thus we’ve kept Founder Collective small for 16 years on purpose, not for lack of ambition, but because the math only holds at a small size.

I’m hunting for the top 500 (or even 5000!) out of 100,000. Still quite hard 😉