Thread by @ejdav

The recent @twentyminutevc podcast by @HarryStebbings interviewing @semil got me thinking about portfolio construction in venture capital, so I thought it might be helpful to illustrate a fictional European seed stage VC portfolio and the outcomes needed for it to succeed...
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Let's assume our little European seed stage fund has raised $75M. For simplicity, we'll ignore fee drag/recycling. Most VCs are targeting a 3x net return to LPs, i.e. you give me $1 and I will give you back $3. (After fees, the fund would need to return ~4x gross, i.e. $300M)
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The fund needs to decide how to split up the $75M it has to invest. Suffice to say that this is a really complicated subject, about which much excellent material has been written (e.g. check out blog posts by @fredwilson, @benedictevans, @ganeumann and others)...
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Let's assume that the fund's strategy is to invest in at least 25 companies at seed stage and to reserve enough capital to "double down" on the winners, i.e. targeting healthy diversification, without being spread so thinly that it prevents the VC from adding any value.
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Let's also assume that avg. amounts raised in Europe are as follows (valuations assume a 20% dilution in each round). The data here is largely taken from @dealroomco analysis, including their recent "Series A Landscape in Europe" report, summarised in @mishmashkautsan's blog.
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We'll assume that our fund has a 1:1 reserve ratio, i.e. for every $1 invested at seed stage, it holds back $1 for follow-on investments. So it invests $37.5M in 25 seed investments, i.e tickets of $1.5M in rounds of $2.5M at $10M pre-money, targeting 12% post-money stakes.
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How will our fund decide to allocate its reserves? Well, if it's a top quartile European fund, it will follow at Series A in 40% of its seed investments (vs. industry avg. of 19%) according to this @atomico, @localglobevc and @dealroomco analysis: blog.dealroom.co/wp-content/upl…
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We'll extend that and assume that the fund also follows at Series B in 40% of its Series A investments, and that 30% of the fund is deployed in follow-ons at Series A and 20% is deployed in follow-ons at Series B....
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This means that the fund will follow on in:

- 10 Series A deals writing $2.25M tickets in $7.7M rounds at $30.8M pre-money, growing its stake from 12% to 15%

- 4 Series B deals writing $3.75M tickets in $18M rounds at $72.0M pre-money, growing its stake from 15% to 17%

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So by the time it is fully deployed, our fictional fund will have invested a total of $7.5M each "winner" and holds a 17% stake post-Series B. What does a "home run" now look like? If the fund takes ~50% dilution in Series C to exit, it will hold an 8.5% stake pre-exit...
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To "return the fund", one of these companies would need to exit for $887M. To deliver a 27.6x multiple of invested capital (per @benedictevans post), it would need to exit for $2.4Bn. To "4x the fund", it would need to exit for $3.5Bn.
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I'm not saying in this post that the illustrative portfolio construction is the "optimal" one. Instead, I wanted to illustrate with examples the outcomes a seed stage VC with a fairly typical portfolio construction will be expecting every single one of its seed investments...
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If you want to know more about this topic from people much smarter than me, check out these phenomenal posts by @fredwilson, @benedictevans and @ganeumann, respectively:

(1) avc.com/2012/07/the-po…

(2) ben-evans.com/benedictevans/…

(3) reactionwheel.net/2017/12/power-…
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Such a great response! Feels like this subject really resonates. If you’re interested, I’ve expanded this tweetstorm a bit in a blog post, which you can find here:

link.medium.com/7pAKy55uc0