Learn what makes a company a true VC fit, why power-law returns drive every decision, and the three non-negotiables investors look for before writing a cheque.
Part 1: Is VC Even Right for You?
Learn what makes a company a true VC fit, why power-law returns drive every decision, and the three non-negotiables investors look for before writing a cheque.
Outline
- The Venture Power Law
- Three Non- negotiables for VC fit
- Founder Requirements
- What VCs Don’t Typically Fund
Tools:
• VC Fit Checklist
• Founder Readiness Questions
1. The Venture Power Law
VCs are hunting for companies that can grow unreasonably fast, in large accelerating markets, and have a chance at becoming category leaders.
You already know startups are risky; the numbers sharpen that picture. Roughly 70% of VC-backed companies return less than the capital invested. Only 1–2% become billion-dollar category leaders.
Why does VC still make sense? Power-law returns. A single Canva-sized win can repay an entire fund, many times over. Covering scores of write-offs.
Portfolio theory in practice
- Typical seed fund: $100M, 30 investments.
- Target ownership per deal: 15% initially diluted down to 6%.
- Goal: Each investment could return $300M+ (3× fund) if everything clicks.
Portfolio rank | Exit valuation | Fund’s stake at exit | Cash back to fund |
1 | $3.0 B | 6 % | $180 M |
2 | $1.5 B | 6 % | $90 M |
3 | $750 M | 6 % | $45 M |
4 | $375 M | 6 % | $22.5 M |
5 | $188 M | 6 % | $11.3 M |
Remaining 25 startups | $23 M → $0.006 M | 6 % each | $12 M combined |
Even with two unicorns and a few other strong wins, the blended outcome just clears 3x overall.
That’s why partners insist on “return-the-fund” potential in every pitch.
The scorecard so far:
- Starting any tech company is tough.
- Building a unicorn is tougher (≈ 1–2 % odds).
- VCs therefore need every deal to have a chance at fund-returning scale.
2. Three Non -Negotiables for VC Fit
To give yourself a chance at this outcome – your business needs:
- Transformative product insight — not incremental change.
- Addressable market large enough to clear $1 B revenue.
- Velocity — a credible path to $100 M+ ARR inside ~8 years.
3. Founder Requirements
- Edge: unique insight into the problem.
- Pace: execute faster than incumbents can react.
- Learning curve: scale yourself from pre-seed to public-company CEO.
Remember: The foundations of the term venture capital stem from ad-venture capital — this is funding to back bold missions with a low probability but non-zero chance at huge outcomes.
Fix: Venture capital isn’t designed to build “just” good businesses — it’s designed to fund rare outliers that can reach billion-dollar outcomes. That means most startups, even strong and profitable ones, are not a fit for the VC model.
Investor Notes: Most startups don’t meet those conditions. And that’s okay. Venture capital is for a very specific kind of company. It’s not a marker of value, legitimacy, or ambition — many beautiful businesses will be built and achieve success in its absence.
4. What VCs Don’t Typically Fund
Local-only ambition | Few ANZ segments can produce $1 B+ outcomes. Global TAM is mandatory. |
Narrow or declining market | Venture math assumes a credible path to $1 B in revenue—accelerating markets only. See “The One Question Every VC Asks.” |
Fast-follower / clone | Category ownership accrues to the original disrupter; copycats rarely win power-law prizes. |
Unscalable unit economics | To grow from $0 → $100 M+ ARR in < 8 yrs you need margins that improve, not erode, at scale. |
Weak “why-now” | Funds recycle every decade. If the window to dominate isn’t opening soon, partners can’t justify the risk. |
Remember: ⚠️ Venture capital isn’t validation; it’s a tool for a specific job. If your company can thrive on profits or smaller capital, that may be the smarter route.
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