About benchmarks and the “Spherical Unicorn in a vacuum”
I was looking at the data from Carta on the dynamics of round valuations and their size.
Despite the fact that the market is cooling in H2'22 from its peak, it’s still unclear if valuations are reasonable for everyone. So I decided to do an exercise on the yield of different participants in the “standard successful” growth with the simplest model with the following assumptions:
- Benchmarks are taken by the “SaaS” row
- All get liquidity at $1 billion valuation. I believe that building a unicorn is still a huge achievement. Even though Crunchbase has already counted over 1400 of them, the chance of building one for venture-backed companies is still well below 1%. So lets take $1bn exit as a successful one
- Took estimates from round to round at H2'22 data
- Sized rounds by weighted average data from the distribution of cash raised by Round name
- Made the assumption that a round happens once every 2 years.
Here is the simple model to copy and play with:
It turns out that in a standard successful case on the market benchmarks the maximum that VC investors can count on is far from the “thousands of X’s”, but only 20 times the return on investment in a good case in 12 years!
In such a case, if the classical 80/20 rule works (2 successful cases according to the model above, and 8 conditionally written off), then such a standard successful companies can make a good economy to the seed fund (4x ROIC), positive economy (1x+ DPI) for early stage fund and a plan-loss to others (although later stage firms obviously have different risk/opportunity and bottom protection).
So market averages are certainly interesting. But in order to outperform the market and give the VC-investor motivation to invest, you need to show where the OPPORTUNITY/RISK is better than in benchmarks. That’s why I don’t really like to focus on market data, but try to figure out “how do we earn our 10x on investments in a REALISTIC scenario and what are the chances of a GREAT result that will make both investors and founders happy?” on the each specific case.
Of course these are all spherical assumptions and food for thought :) In reality, there are a lot more nuances, portfolio composition and conditions in the rounds.
p.s. the post was not written by the almighty #ChatGPT, perhaps that’s why it can be incomprehensible or even silly.
