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Comment by 001sky | Hacker News Reader

They just weren't a great VC- backable biz.

Can someone explain why a fund cannot be structured to make wins at the $100m level as opposed to the $1b level? Its bizarre that free money creates funds so big they need insane 1,000x deals to return a net 15-20% portfolio premium over bonds trading at (yield-equivalnt) peanuts.

The problem in going for $1B's (as an investment thesis) is that these companies are outliers so extreme you are beyond lucky to predict them, and even if they show up on your radar, and you can get some edge, they are so small in number that they cannot sustain N=Large number of VCs. Its just not a strategy 200 funds (20? maybe) can pursue rationally at the same time. Or am I missing something?

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Those funds exist. They're smaller funds. Everpix was going to the "best" (biggest) VC funds and asking for a relatively large amount of money for a Series A. VCs typically aim for 10x return (let's keep the hyperbole out of this discussion, please) so Everpix indicated they expect a return of at least (1.5M + 5M) x 10 = 65M. Add in later rounds of funding and the ~1B goal is not unrealistic.

It takes a roughly constant amount of time to do a deal, so funds have a minimum deal size below which they aren't interested.

VCs typically aim for 10x return (let's keep the hyperbole out of this discussion, please)

Thats why I said $100m should work. You suggest $65m. That's the same order of magnitude. It was reported that the VCs were turning them down because $1B was "never gonna happen"[1]. That's why the math piqued my interest. If its just reporting hyperbole...that would be one explanation.

[1] Which implies they were looking for that extra ~order of magnitude

You're assuming their business plan included only the one round of funding. I'm assuming they were planning extra rounds or the VCs believed they would need extra rounds.

If they went up to, say, a Series B at 10M and a Series C at 20M, which are reasonably conservative multiples, they are at ~36.5M, so looking for a ~400M exit. It's not hard to need that ~1B exit if your business plan is "everyone in the world using my product," and it appears this is what Everpix were aiming for.

I hear what you are saying. But i still feel like there is some mixture of thought that should let these guys take a shot at a 50 to 100m exit, without (on the one hand) tripping over 35k aws bill; and on the other blowing through 50-100m of invested capital. because clearly, if the team is pitching those are the only options, its gonna make people nervous. but now it seems the mirror is pointing back at the guys and not at the VCs...

You are forgetting dilution.

It's pretty common for A-round investors to be diluted by 50%. http://www.bothsidesofthetable.com/2011/10/14/understanding-... shows it pretty well.

Good point. That raises the exit amount the investors seek quite substantially.

Peter Thiel gives a great rundown on the whole biz. http://blakemasters.com/post/21869934240/peter-thiels-cs183-...

Because of power law distribution, "... the 100th employee at Google did much better than the average venture-backed CEO did in the last decade."

So even being late on a $1b+ company is better then being first on a $100m company but orders of magnitude. And it's not worth the opportunity cost of going after $100m companies.

There are, on average, four $1b companies created each year, so being even a small part of one of those may not be as crazy as it seems. http://techcrunch.com/2013/11/02/welcome-to-the-unicorn-club...

Most VC funding is about winning the lottery. But where an actual lottery is a zero-sum game (less than, actually), in the VC lottery many investors can be winners, all it takes is being sufficiently diversified into enough different startups with strong potential.

Not everyone is going to win the facebook lottery (Accel Partners, for example, achieved a ~40,000% RoI), but there are lots of lotteries in play. And the VCs that win those lotteries then end up with the most money. So the most money in play in VC-land tends to be from people who have played the lottery game and like it, so they want to continue to play the lottery game.

> Can someone explain why a fund cannot be structured to make wins at the $100m level as opposed to the $1b level?

There are plenty, they are called "Angel Investors" and they look for 5x - 10x return (or less, or more, depending on what kind of person they are).

It's a numbers game. Let's say that 99% of your investments flop. That means the 1% of successful investments have to make up for all of the losses from the others (and earn a return). To earn a total return of Y%, you need that 1% of investment to earn (100+Y)x returns. If you want to do this annualized over a 5 or 10 year investment, the required return jumps dramatically (and you start talking about 1000x deals)

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