Why VC Needs Outliers
Explain why venture investors screen for fund-returning upside rather than only attractive single-company returns.
A venture fund is not looking for average goodness. It is looking for a small number of outcomes large enough to overcome a portfolio where many investments produce little or no cash back. Start with the fund, not the startup. If a $250 million fund invests $4 million for 10 percent ownership, a $100 million exit returns about $10 million before dilution and fees. That sounds good in isolation, but it returns only 4 percent of the fund. The company might be a wonderful business and still be a poor fit for that fund's required return profile. The practical lens…
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