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.