VC Economics & Exit Strategies: Case Studies from Seed to IPO - E689
episode
BRAVE Southeast Asia Tech: Singapore, Indonesia, Vietnam, Philippines, Thailand & Malaysia Startups, Founders & Venture Capital VC (English)
9 min
1 speaker
8 chapters
transcribed 17 days ago
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Transcript generated automatically by AI and may contain errors.
What is the VC’s dual role of adding value versus judging a portfolio?
VC economics is quite straightforward. The VCs have to think about it is do I add value versus do I manage my portfolio? Do I help them or do I judge them?
Every VC fund is always gonna do that. Even after they've invested in you, they're always going to be doing that assessment and reassessment every three months. So, obviously, from an adding value perspective, they'll be trying to help you avoid failure and try to increase the outcomes for you. But from a judging perspective, they are going to figure out how to assess you and figure out whether you're on track or off track and how much time and attention to give to you. From a VC fund perspective, is that they have to prioritize home runs and then they can make a decision which is either gonna support. Your company, they can dedicate it to somebody else, or whether they will ghost you and not really help you.
Imagine a VC fund that has done and made an investment in 20 startups. So there are five VC funds. Imagine you're a bassemer, a sequoyer, you've invested in five funds that are investing in 20 companies each. But now you have effectively a hundred companies across all your funds. Out of all of them, as of today, you believe that 50% of them they're effectively on track to be a loss. They're not going to return you. Your principle, they're going to return the investment that you made. And then you believe that about 25% of them will maybe return you the face value of the money that you put in. Then you believe that maybe 18% will give you a small win, maybe give you like a 3x return. And then 5% of them will give you a large win by giving you a 15x return.
And then two of them will give you a very large win of giving you a 50x return.
Why does the Power Law mean only 5% of startups drive most VC returns?
That's the shape of your portfolio from the VC's perspective, where they assess that portfolio. Overall, the theoretical ROI would be about 2.4x based on the original checks they've written to all 100 companies. And what they have to do is say, hey, who do I support? Now the interesting thing from their perspective, of course, is that the companies that are on track for the largest wins that are going to be a unicorn, they're popular, they're doing well, they're getting lots of help, all the cylinders are firing. They seem to not require that much help. Whereas the companies that are struggling the most, those are the ones that often Ask for the most amount of help. So the VCs have to part to prioritize and figure out what they want to support.
And normally they would focus their support on helping convert large wins into unicorns, converting small wins into large wins, and maybe spending some face time with the people that they're trying to save the face value to see where they can be converted into a small win. But they have to prioritize their support because there's only a limited amount of value that these VCs can have in terms of man hours, in terms of board support, in terms of
How does the “Help Paradox” affect which founders receive VC support?
Portfolio support. If you look at Instacart for the IPO, this is an interesting example of their progression from seat stage in 2012 to their IPO during the pandemic. And what this chart shows is each stage to VC round. And it shows each round from C to Series A to Series F to Series I to the IPO. It shows the year of each of these rounds and it shows effectively the effective price per share of the equity at each show those rounds. Started out with a seat round with about $75 per share and when he hit the IPO at about $9,300 per share. Then it shows the investors who came in at each stage, and then he shows basically the calculated what is the rate of return from an internal rate of return basis based on the sale of the IPO price.
And they compare it against the SP 500 for your index funds. What's interesting to see in this situation here is that if you look at the first round, the people who invested KOSla, Canada. And white company invested in 2012 at about $75 per share. They eventually got to sell at about $9,300, which is effectively 55% annual rate of return on that investment, which was fantastic.
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Chapters
8 chapters
1
What is the VC’s dual role of adding value versus judging a portfolio?
0:00–1:28
2
Why does the Power Law mean only 5% of startups drive most VC returns?
1:28–2:22
3
How does the “Help Paradox” affect which founders receive VC support?
2:22–3:44
4
What can we learn from Instacart’s valuation shifts from seed to IPO?
3:44–4:44
5
What are the three primary exit outcomes for struggling startups?
4:44–6:05
6
How did the $1 billion offers shape the futures of Instagram and Snapchat founders?
6:05–6:59
7
What are the key considerations when a startup goes public or raises a new VC fund?
6:59–8:07
8
How do MOIC and DPI metrics reveal the brutal math behind VC returns?
8:07–9:28
Speakers
1 identifiedMore from BRAVE Southeast Asia Tech: Singapore, Indonesia, Vietnam, Philippines, Thailand & Malaysia Startups, Founders & Venture Capital VC (English)
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