Thread by @Samirkaji

For new managers, don’t be cavalier when speaking about “expected performance” I see too many managers throw out 3-5X like it’s nothing. 3X+ net is top decile in nearly every vintage year in history (in most cases, it’s upper, upper top decile). possible but hard.

Thread start/

1/ Per Correlation ventures data, 65% of portfolio companies in a given fund typically return 0-1X, and the top 2-3 companies usually return more than the rest of portfolio combined.

2/ Important to calculate “RTF”, which is the exit value a portfolio company needs to achieve to return the fund. It’s HIGHLY unlikely to generate a 3x on an early stage fund w/o at least 1 company returning a minimum of the fund (exception may be for portfolio theory funds)

3/ let’s take RTF for a $35MM, which gets 6.7% initial ownership at seed ($500K initial check at $7.5MM post), keeps pro-rata in A round, and then gets diluted 20% per round from rounds B,C,D. Factor in stock option pools, and ownership at exit is ~3%.

4/ RTF for the fund is $1.2B, meaning that even with small funds, massive outliers are needed. A 3x Net represents 3.5x gross, or $122.5MM in gross distributions for a $35MM fund. If average ownership/exit is 3%, this means $4.1B in enterprise value to achieve this

5/ If you have one RTF, it still leaves $2.9B in necessary exit value from rest of portfolio (or put another way $87.5MM back to the fund) to get to this 3x

6/ Assuming 65% of the portfolio returns a 1X (20 companies) and for sake of simplicity, this is $20MM, you are left with $67.5MM needed from remaining 14 companies (or $2.2B in enterprise value).

7/ Average exit in the US still <$100MM, so this will mean 2-3 companies will also need $500MM exits to reasonably get to 3x net. This assumes no preferences, additional dilutive rounds, etc.

8/ Point of this thread is to go through this math prior to launching; it’ll help guide portfolio construction particularly with initial/follow on check sizes & ownership targets.