How VC fund math works (simple)

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A VC's one job is to return the fund (and more) for their limited partners (LPs). A good standard is to 3x the fund, meaning if you have a $100M fund, you return $300M.

It's a VC's job, to not only pick the companies that can return their fund, but own enough of them that the math actually works to get those kind of returns.

Some VCs choose the volume model: more companies, less ownership. The hope is they can hit a few winners so the lower ownership doesn't matter as much.

Others do the highly concentrated model: fewer companies, ownership focused. The hope is they can hit one very big winner.

But here's the reality: you could pick 5 good winners in a fund, but if you didn't manage the investment well and you don't own a lot, you could not return the fund, or only 2x it.

Let me show you what I mean with two versions of the exact same fund: