5 ms·

"(investors aim at an ownership percentage and are willing to pay what will get them there)" What is the reason for this?

PanosJee 8y ago
Calculations that help them understand their possible returns on a company & fund level
jasode 8y ago
I think that paragraph is somewhat confusing for the intended audience. Anyways, VCs at series A want to buy enough equity percentage (e.g. 15% to 25% ownership) to make their exit numbers work. Investing a smaller amount to only get 5% of a company is not a "meaningful percentage" or "meaningful stake". (In contrast, YC does buy a smaller 7% equity but their $150k isn't considered "Series A".) To me, talking about investment scenarios in terms of "valuation" always seemed to make things more difficult to understand. The following math is equivalent but I think the explicit percentages layout is easier to grasp in a few seconds: Mark Z is considering 2 offers of investments for his young Facebook startup in 2005: Don Graham offers $6 million at a $60 million post money valuation. Accel Partners offers $12.7 million at a $80 million post money valuation -- or -- Don Graham offers $6 million for 10% of the company Accel Partners offers $12.7 million for 15.7% of the company
- dustingetz 8y ago
  Yes that is what they say ("make exit numbers work") but the math is elastic here so, that explanation does not check out, or at least something is missing.
brandnewlow 8y ago
When investors raise their funds, they pitch a specific model to their LPs. Example: "We're going to invest in a basket of startups whose aggregate value will be $X billion in 5 years and we will own Y% of those companies at that time." If they can't hit that Y number, they are not doing what they said they'd do.
jm20 8y ago
Most lead investors at the series A level look to take a board seat, and spend a lot more time per-company than at the seed round. There's a finite amount of time in an investor's day, and somewhere around 20% ownership of a company is, for whatever reason, considered the magic number where it's worth it to spend that much time with them (through assistance, board meetings, etc).
martinshen 8y ago
I believe investors aim at ownership percentages at Series A mainly for pro-rata. Lead Series A investors usually get pro-rata rights. Generally, the wisdom in startup investment is to double down on your winners and you typically can only do so if you have pro-rata rights. In other words, if the startup does super well, that VC will likely invest 10x more in real dollar terms to upkeep their pro-rata. Take 2 pretend funds: CoolVC has a 20% target ownership and CheapVC has a 10% target ownership. They do their pro rata every round. Rocketship Corp. will have the following rounds (super simplified): Series A @ $25M post-money Series B @ $100M post-money (15% dilution) Series C @ $600M post-money (10% dilution) Series D @ $3B post-money (5% dilution) Series E @ $5B post-money (5% dilution) Exit @ $9B CoolVC would have exited with $1.8B + spent $100M (profit $1.7B) CheapVC would have exited with $900M + spent $50M (profit $850M) In other words, for an additional $2.5M in the Series A, CoolVC bought an option that would ultimately make $850M more in real dollars than CheapVC. In the VC world where 1 needle in the haystack makes or breaks your fund, it's an inexpensive option. At Series A, there should still be at least 50X potential upside. Why do most VC funds target 15-20% ownership? Probably that's probably the most they should get to balance founder ownership through further dilutive rounds. If you look at my above example, remember that founders will probably own less than 36% of the company (they also will get diluted by employee incentive plans).
- gtzi 8y ago
  That's a fantastic explainer, thank you. In general, VC is by nature a game of ownership.

PanosJee 8y ago

Calculations that help them understand their possible returns on a company & fund level

jasode 8y ago

I think that paragraph is somewhat confusing for the intended audience. Anyways, VCs at series A want to buy enough equity percentage (e.g. 15% to 25% ownership) to make their exit numbers work. Investing a smaller amount to only get 5% of a company is not a "meaningful percentage" or "meaningful stake". (In contrast, YC does buy a smaller 7% equity but their $150k isn't considered "Series A".) To me, talking about investment scenarios in terms of "valuation" always seemed to make things more difficult to understand. The following math is equivalent but I think the explicit percentages layout is easier to grasp in a few seconds: Mark Z is considering 2 offers of investments for his young Facebook startup in 2005: Don Graham offers $6 million at a $60 million post money valuation. Accel Partners offers $12.7 million at a $80 million post money valuation -- or -- Don Graham offers $6 million for 10% of the company Accel Partners offers $12.7 million for 15.7% of the company

dustingetz 8y ago
Yes that is what they say ("make exit numbers work") but the math is elastic here so, that explanation does not check out, or at least something is missing.

brandnewlow 8y ago

When investors raise their funds, they pitch a specific model to their LPs. Example: "We're going to invest in a basket of startups whose aggregate value will be $X billion in 5 years and we will own Y% of those companies at that time." If they can't hit that Y number, they are not doing what they said they'd do.

jm20 8y ago

Most lead investors at the series A level look to take a board seat, and spend a lot more time per-company than at the seed round. There's a finite amount of time in an investor's day, and somewhere around 20% ownership of a company is, for whatever reason, considered the magic number where it's worth it to spend that much time with them (through assistance, board meetings, etc).

martinshen 8y ago

I believe investors aim at ownership percentages at Series A mainly for pro-rata. Lead Series A investors usually get pro-rata rights. Generally, the wisdom in startup investment is to double down on your winners and you typically can only do so if you have pro-rata rights. In other words, if the startup does super well, that VC will likely invest 10x more in real dollar terms to upkeep their pro-rata. Take 2 pretend funds: CoolVC has a 20% target ownership and CheapVC has a 10% target ownership. They do their pro rata every round. Rocketship Corp. will have the following rounds (super simplified): Series A @ $25M post-money Series B @ $100M post-money (15% dilution) Series C @ $600M post-money (10% dilution) Series D @ $3B post-money (5% dilution) Series E @ $5B post-money (5% dilution) Exit @ $9B CoolVC would have exited with $1.8B + spent $100M (profit $1.7B) CheapVC would have exited with $900M + spent $50M (profit $850M) In other words, for an additional $2.5M in the Series A, CoolVC bought an option that would ultimately make $850M more in real dollars than CheapVC. In the VC world where 1 needle in the haystack makes or breaks your fund, it's an inexpensive option. At Series A, there should still be at least 50X potential upside. Why do most VC funds target 15-20% ownership? Probably that's probably the most they should get to balance founder ownership through further dilutive rounds. If you look at my above example, remember that founders will probably own less than 36% of the company (they also will get diluted by employee incentive plans).

gtzi 8y ago
That's a fantastic explainer, thank you. In general, VC is by nature a game of ownership.