(this post is a feed post from my comments on reddit)
r/startups
Ok so I spoke to a family office guy, in effect our LP; he looks for a 4x return within 10 years to make him park his cash with a VC. So if a VC has 1mil it needs to become 4mil; so the VC can choose how to split the 1mil- now the VC knows about power law, so he knows 1/10 will do well, the rest are not worth thinking about – so he takes the 1mil and splits it over 10 companies 100k each.
Now with each company he negotiates a 10% share meaning each company is worth 1mil.
10 years later 9 companies have died, the last company has to make 100k become 4mil at 10% of the total value of the company
Obviously this is over simplistic and the numbers are fake, just a thought experiment to illustrate the point, you still need to account for dilution and management fees as well.9
Most startup advice is not the best advice for building a company. It is the best advice for aligning founder interest with VC interest
byu/majani instartups