Thread by @lukemostert

Venture Capital ‘Backable’? 💡

I’ve reviewed over 3000 African startup pitch decks in the last 4 years. The most important question I ask myself each time is.. ⬇

‘Is this startup VC ‘backable’?’ A thread 🧵

VCs talk about ‘grand slams’, ‘moon shots’, or ‘fund returners’. These terms aren’t trivial jargon but a necessity for VC funds to succeed:

For example, in 2012, @ycombinator calculated that 75% of its Fund’s proceeds came from just 2 of the 280 startups it invested in – 0.7% 🎯

It’s this exact phenomenon that @scmallaby coined as the “The Power Law” in his book:

Opposite to a normal distribution curve, The Power Law distribution sees 10% or less of the inputs (startups) bringing about 90%+ of the outputs ($ returns), as seen the diagram above 📈

But what does this really mean for startup founders pitching to VCs?

At a minimum, it means funds would like each startup they invest in to have the potential to return their fund. Here’s how this plays out at a Pre-Seed Fund like @anafricanfuture:

Let’s assume a VC Fund is $10M in totality, then every investment must have the potential to return at least 1x the total fund size, thus $10M.

And let's assume on each deal the fund invests $200k in the Pre-Seed round at a $5M post-money valuation.

This means the 200k needs to multiply in value 50x to return the Fund (200k * 50 = $10M). But one also needs to factor in dilution.. 👇

Three additional fundraising rounds (Seed, Series A, Series B) will each add dilution of ∼ 20% to existing shareholders:

So instead the investment’s exit valuation must reach a multiple of 50 * (1.2)^3 = 86x in order to accomplish the ‘fund returner’ goal.

In monetary terms, this means:

$5M post-money * 86x multiple = $430M exit value

If we extrapolate, a software business is typically valued at 10x its annual revenue, hence the startup would need to reach $43M in revenue per year.

There should thus be a path to $43M annual revenue within a VC funds (usually 10 year) lifespan ⬇️

For instance, if the startup sells software subscriptions to businesses for $1000 per annum, is there a clear path to 43k customers?

More granularly, at what intervals (growth rate) does the no. of users have to increase each year in order to achieve this?

Is this rate of growth possible? And how probable is it? Here is where 3 other core considerations (outside of the above ‘Data’) come into play, namely:

• The Founders (Talent)
• The Product (Design)
• Scalability (Distribution)

All of which are outlined aptly in most pitch decks; however, ultimately, if a founder can’t demonstrate that their startup is – first and foremost – capable of generating a VC level return, then they will likely struggle to maintain investors' attention for the rest..

If you found value in this thread 🧵 please retweet the the first tweet for visibility ⬇️

https://twitter.com/lukemostert/status/1574337715784523784?s=20&t=0UTULz-ulBAm24SSdaDTlg