The fund, not the partner, is the customer
A typical $200M VC fund has to return $600M–$1B over 10 years just to be considered “good.” With a 25–30% loss rate across the portfolio and a long tail of 1–3x outcomes, the math only works if at least one or two portfolio companies return the whole fund on their own. That’s why partners are not looking for “nice 3x businesses.” They are looking for fund returners — companies that can single-handedly return $200M+ to LPs. A company that sells for $50M is a success for the founders. For a $200M fund, it barely moves the needle.
Where your 20% actually goes
LP money in, fund out. Inside the fund:
- ~2% per year as management fee for 10 years = ~20% of committed capital just to operate the firm, pay salaries, and keep the lights on.
- 20% carry on profits above the LP’s initial capital back, sometimes with a preferred return hurdle of 8% per year.
- The rest deployed across 25–40 companies, with reserves — typically 40–50% of the fund — set aside for follow-on investments in the winners.
When a partner takes 20% of your company, they’re not pricing your business. They’re pricing the ownership stake their fund needs at exit, working backwards from the outcome required to hit their target return. If the fund needs a $200M return from your company and they own 15% at Series A, your exit has to be north of $1.3B just to be “good” for them.
Why a profitable company can still be “uninvestable” for VC
A SaaS company doing $5M ARR growing at 40% a year is a genuinely great business. For a $200M VC fund? It probably can’t scale to a $1B+ outcome inside the fund’s 10-year window. The expected value of that investment — probability-weighted across all scenarios — doesn’t justify the partner’s time, the board seat, or the capital deployment. Same company, two completely different verdicts, both rational.
The selection filter you’re not seeing
Before a partner even builds a financial model, they’ve already filtered for two things: is the market large enough that a 10% share produces $1B+ in revenue, and is this team capable of capturing it? If either answer is no, no model gets built. This is why “the market is $50B” without credible evidence of how you get to $500M in revenue lands flat — it doesn’t pass the first filter.
What this means for you
Before you pitch, ask: “If this company is wildly successful, how big can it realistically get in 7–8 years, and what ownership does the fund need today to make that work?” If the answer doesn’t produce a fund-returner outcome for them, you’re wasting both sides’ time. Either pick different investors — smaller funds, family offices, revenue-based financing — or pick a different financing path entirely.
Frequently Asked Questions
Q: What return does a $200M VC fund need to be considered top-quartile? A: A $200M fund needs to return at least $600M–$1B (3–5x MOIC) to be considered “good” by institutional LP standards. Top-quartile funds return $800M–$1.2B or more, driven almost entirely by one or two fund-returning investments — companies that individually return $200M+ to the fund.
Q: Why would a VC pass on a company growing 40% year over year? A: A 40% annual growth rate in a market with a $500M total addressable size may never produce a $1B+ exit outcome, which is the threshold most large venture funds need to justify the investment relative to the partner’s time and board commitment. The business is excellent; it simply doesn’t fit the fund’s return math.
Q: How much equity does a VC fund need to own to make a return on a typical investment? A: A $200M fund targeting a $200M return from a single company needs roughly 15–20% ownership at exit. Accounting for dilution across multiple follow-on rounds, the fund typically needs to enter at 20–25% ownership at the first check — which is why ownership percentage is negotiated more aggressively than valuation in many term sheets.
Q: What is “carry” in a venture fund and how does it get paid? A: Carried interest (carry) is the GP’s 20% share of fund profits above the LP’s initial capital returned — and in most fund structures, above an 8% preferred annual return hurdle. On a $200M fund returning $600M in profits, the GP partnership shares $120M in carry, typically split among 2–5 named partners on a negotiated schedule vesting over the fund’s life.
Q: What alternatives to VC should a founder consider if their business doesn’t fit fund math? A: Founders with strong unit economics but a sub-$1B total addressable market should consider revenue-based financing (repaid as a percentage of monthly revenue), family office investment at lower return expectations, strategic investment from a large customer or supplier, or bootstrapping to a profitable sale at 3–5x revenue — often producing a better personal financial outcome than a VC path that never reaches a fundable exit.
CTA: Model your growth scenarios in CrackTheDeck — see whether your plan actually produces the exit math a venture fund needs, or whether you should be looking at a different capital structure.