Evaluating a VC investment. The critical components of a VC exit model

Hi! I’m glad you’re here. You’ve made it to issue #5 of VC Demystified🪄.

My name’s Nicole - I’m a Principal at an early stage venture fund, and I know firsthand that VC can often be a black box. Breaking into the industry may feel daunting and resources can seem scarce and inaccessible. I wanted to put together a newsletter to give others the playbook I wish I had when I first started.

I hope everyone is enjoying this long weekend. There’s nearly 2,200 of you now! Welcome to all the new subscribers and hello again to those who have been here longer. I’m grateful for all of you!

Today’s deep dive: How to evaluate a startups exit potential using a VC exit model

My personal mission is to open as many doors as possible for other people and this newsletter is just one avenue to do that. As always, I will continue to post VC insights daily across my socials for those of you who prefer those channels.

How to evaluate a startups exit potential using a VC exit model

If a founder decides to go the venture route, it’s important to understand that every VCs #1 job is to return capital back to their Limited Partners (LPs), the individuals and entities that contributed capital to their fund.

So in evaluating a new investment, VCs always consider what the upside outcome looks like for the company if things go well (i.e. the exit potential).

They evaluate this using a VC exit model. I’ve previously shared a VC exit model template on socials - you can find it here. Whether you are a founder or a VC, this model is critical for you to understand to see what a path to success looks like and how fundraising and dilution can drastically change your upside potential.

There are 3 parts to this VC exit model:
1️⃣ Assumptions
2️⃣ VC Funding Rounds Analysis
3️⃣ Exit Scenario & Return Analysis

I’m going to take you through each section so you can use this template for yourself. For VCs, you can use this to evaluate any new deal that crosses your desk and for founders, you can us this to understand the impact of dilution on your startup before your next fundraising round.

Let’s get into it!

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