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📰 Today's topic: Why VCs only care about massive wins… and why you should too

If you’re new to venture capital, you’d probably think that a 10x return on a deal is a great outcome. 

And that’s not exactly wrong. In fact, for the founder, a 10x exit is life-changing. 

But for you as a VC - it barely moves the needle.

Humbled by math

Let's say you write ten $5k checks. $50k total.

Nine of those companies go to zero - which is pretty close to what actually happens in early-stage investing. (And even if a company "succeeds," you may not see a cent. Investors in Giphy got nearly nothing when Facebook acquired it for $400M.)

So your one winner has to carry the whole portfolio.

If that winner gives you a "great" 10x return, you get $50k back. Congratulations - you broke even! And after waiting 7-10 years for that exit, you would've made more money just throwing that $50k into an index fund and forgetting about it.

Even a 20x winner only gets you $100k on your $50k investment. Sure, you made money, but barely better than just buying boring old S&P 500 stocks.

Here's what you really need

To make money in this game, your winners need to return about 100x. That means turning your $5k check into $500k from a single company.

Sounds insane? Wait until you hear about dilution. Every time that company raises more money, your slice of the pie gets smaller and smaller. 

A typical early-stage investor gets diluted down about 50% between their initial check and the final exit. A company that looks like a huge outcome often delivers a fraction of what you'd expect.

This is why VCs are absolutely obsessed with unicorns. It's not greed - it's cold, hard math. If you got into a company at a $3M post-money valuation, it needs to exit at $300M+ just to hit the 100x threshold after dilution.

That same check at a $15M valuation? You need a $1.5B exit. Entry point matters more than most angels realize.

Flipping your instincts

It's not really about failure rates; it doesn't actually matter that much. The magnitude of the wins does.

Eight out of ten of your companies can completely crash and burn, and you can still crush it - IF your winners are massive in your returns.

So in general, it’s wise not to sell early. If something in your portfolio is working, let it run. 

Taking a quick 2-3x in secondary feels smart, but it's the wrong move. You need those working companies to potentially get you to 100x.

Bottom line: Build a big enough portfolio

A handful of companies in your portfolio probably isn't enough. Lean toward more deals rather than fewer.

50 isn't unreasonable for a new angel. The power law only works in your favor if you have enough shots at it.

Pre-seed and seed investing ultimately comes down to finding your 100x. Everything else is noise.

– Brian from Angel Squad

🪽 Angel Investors Come from Everywhere

Spoiler alert: You don't need to be in Silicon Valley or have a trust fund to be a great angel investor.

Ali Zaidi | Bay Area, California

Meta + McKinsey Alum → Startup Operator

Product and growth leader with 20+ years driving 0→1 innovation and scaling products to millions of users across ads, and marketplace platforms. Transitioned from Meta to the startup world in 2022 by leading product growth and monetization for a Series A B2B marketplace, and is now building his own marketplace platform.

Why this matters: Ali's got the rare combo of big tech product scaling experience plus McKinsey strategic thinking, now applied in the startup trenches. He knows what it actually takes to go from prototype to millions of users – and which startups are just playing with toys vs. building real businesses.

Ali is in our angel investing community, Angel Squad. Small Bets subscribers can grab a 30 day guest pass to join them.

Overheard in SF…probably

“Calling us 'the Fyre Festival of SaaS' is unfair. We actually delivered a product. It just didn't work and everyone hated it.”