#181 My VC "Rule of 50", Ownership, Fund Model Impacts
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“Success is the sum of small efforts, repeated day-in and day-out.”
-Robert Collier
Picture of the Day: DKR Stadium in Austin, TX
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My own “Rule of 50” for VC A new take on the “Rule of 30” from @MKRocks
Diving Deeper on Ownership & VC Portfolio Construction Every VC Has a Fund Model - Can You Stick to It?
I love the “Rule of 30” concept that Michael Kim laid out in his original post on Twitter / LinkedIn because of the simplicity of it. Know your fund size ($500m in his example). Get 10% ownership. Multiply fund size x 30 to get exit value required for a 3x fund ($15b for a $500m fund).
Dilution and maintaining ownership is a challenge every VC fund deals with. Many can get 10%+ ownership at entry. What about maintaining that ownership and subsequent rounds? That requires pro rata rights and appropriate reserves within the fund vehicle. But in reality, it’s hard to maintain that 10% number (hence the 6% exit ownership in “Rule of 50.”
Additionally, there are a lot of managers I know and work with that are closer to the $100m fund size (plus/minus). There are a number of key things they and all fund managers need to be thinking about:
The Rule of 50 & The Fund Model Things Every VC Should be Thinking About
Fund size: the larger your fund gets, the harder it is to return the fund! The examples above provide a stark contrast. The first example from Michael Kim contemplates a $500m fund. You can see the context in his commentary - it’s pretty darn hard to return that fund! The $100m fund is much easier to return (but it’s still hard). Choose your fund size wisely (it’s your strategy and has meaningful return implications)
Entry ownership to exit ownership: getting ownership at entry doesn’t mean the same as ownership at exit! It’s hard to defend your ownership along the way - it requires pro rata rights and appropriate reserves. What ownership number do you need at entry to have that meaningful ownership at exit?
Average check size & RTF Math: We’ve written about VC Power Laws & RTF Math (w/ Template) many times but it keeps coming back up in conversations! Every venture fund manager I know wants to deliver superior performance. Before investing in any deal, a VC fund investor should ask: “How can this deal RTF? Or 2x, 3x RTF? What do I need to believe about the future for that to happen?” There’s always a story around things like an amazing founding team and an exciting market to capture. What about the math to RTF?
It’s possible to lose sight of RTF math as a VC fund investor moves quickly to close an investment. In response to this challenge, we’re sharing a simple RTF Calculator for VC fund investors to use when thinking about a new investment opportunity.
In the example below, a $50m fund making a $2m investment will require a $1b outcome to RTF (assuming a $20m valuation and 50% dilution). These assumptions can vary by fund strategy and sector focus so modify as you see fit!
That’s all for today folks! Thanks for your support and spreading the word!
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