#160 VC Fund Math: "Maximum Convexity" Leads to 10x+ Funds
#160 VC Fund Math: "Maximum Convexity" Leads to 10x+ Funds
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VC Fund Math: "Maximum Convexity" = 10x+ Funds
What game are you playing in VC? Are you going for 10x+ funds or 3x+ funds? Established VC funds with large AUM can lower their return targets to 3x+. A $1b fund generating a 3x = $3b of returns, $2b of profits. That’s at least $400m of carry for the team at 20%. Not bad.
I would argue (and believe most LPs would agree) that most early-stage emerging managers need to be shooting for 10x+ funds. But how do you do that? Today, we share insights from Roger Ehrenberg (Eberg Capital, formerly IA Ventures). Roger shares the following (linked here):
“As I've written on numerous occasions, markets, portfolios and, in fact, many systems in life take the shape of barbells.”
“It's tough to be in the middle - are you artisanal, built for scale or stuck in between? Are you risk taking, risk averse or a combination of the two?”
“My personal approach to venture investing has been to use the powers of illiquidity, convexity and the willingness and ability to withstand extreme pain and delayed gratification for maximum compound returns.”
Going Deeper on “Maximum Convexity” & VC Returns
Recently, Monica Black (Resolute Ventures) shared a deeper summary of Roger Ehrenberg (via podcast). She shares the following quote from Roger:
“Our goal was never to stamp out 3x funds, it was to create maximum convexity in the portfolio.”
From her post (linked here): Roger Ehrenberg and the team at IA Ventures accomplished their goal, delivering 10x+ net DPI on Fund I and investing in real winners like Digital Ocean in Fund II. Here’s how they approached portfolio construction.
First — they have kept fund sizes consistently under $200M. Fund I was $50M, Fund II was $105M, and Funds III and IV were $160M. They could have raised way more, especially after Fund I’s success, but remained focused on executing their strategy.
Second — each partner focuses on a small number of investments per year (2-3) over a 3-4 year period. Roger gave a caveat to this — “when there’s real blood in the water, we speed up to take advantage of low valuations.”
Third — they are ownership sensitive upfront and deploy reserves asymmetrically into “best of fund” and “best of firm” companies.
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