This was an interesting look at the venture capital industry and how the biggest VC firms may have become victims of their own success. The benchmark in VC – whether a fund was successful – is returning 3x your fund. So if you raise $100 million from investors, they would be expecting to see at least $300 million returned to them when the fund is wrapped up.
And as the biggest VC funds get bigger, their fund sizes have got bigger as well, and as a result the required outcome has got bigger as well. As the author, Evan Armstrong, writes:
“We have now reached a point in the startup ecosystem where for large VC funds, a startup achieving a billion-dollar outcome is meaningless. To hit a 3-5x return for a fund, a venture partnership is looking to partner with startups that can go public at north of $50B dollars.”
And unfortunately, there just aren’t too many of those companies around. Evan writes that there are only 48 publicly-listed tech companies valued at over $50 billion. Which becomes a challenge when there’s almost 1,000 VC funds trying to find the next one.
He uses the example of Figma to illustrate this point. Figma has just been acquired by Adobe for $20 billion. And one of Figma’s largest shareholders is Index Ventures, a VC fund that has been investing in Figma since the company’s seed round in 2013. Index owned ~$2.6bn of the company and made 30-90x their money on the Figma investment. Sounds good right?
But Index invested as part of a $3.1bn fund. So the Figma acquisition, one of the largest software acquisitions of all time, won’t be enough to return the fund, let alone get that 3x return. Index will need a couple more Figma’s in their portfolio to just hit the VC standard.
That is the challenge with the VC megarounds we are seeing today. And that is why this article believes VC is ripe for disruption.
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