Why some startups get 10x multiples (& others get 1x)

Hi! I’m glad you’re here. You’ve made it to issue #67 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.

Today’s deep dive: How your business model quietly determines valuation, dilution, and investor demand

^{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 for free across my socials.}

Read time: 5 minutes

How your business model quietly determines valuation, dilution, and investor demand

When founders pitch investors, they talk about vision, team, and market. But behind every venture investment is a quieter calculation: what kind of business is this and does its model actually work for venture capital?

Because the truth is: not all business models are created equal.

Some make it easy for investors to imagine a $1B exit. Others make that math almost impossible.

VCs invest in businesses that can achieve $100M ARR in 7-10 years

Rapid scale isn’t optional in venture, it’s the entire premise.

VCs write checks into companies that can go from $0 to $100M+ ARR in under a decade. That’s the benchmark for IPO readiness in software and the pacing is steep:

This is why so many venture-backed startups flame out, it’s not enough to grow. You have to grow exponentially.

And this is also why business model matters. Some models make that journey easier, with high margins and recurring revenue. Others make it a grind.

How VCs think about the math

VCs have one goal: return the fund.

A “fund returner” means one investment generates enough cash back to cover the entire fund, usually from just 1-2 portfolio companies.

Here’s how the math works:

• Fund size: $50M

• VC takes 10% ownership in the first round

• By exit, dilution means they still hold ~5%

• The company exits at $100M revenue x 10x multiple = $1B valuation

The VC’s 5% stake = $50M enough to return the fund.

The kicker? Exit multiple is heavily influenced by the business model. Software companies can fetch 10-15x ARR. Hardware might trade at 1-3x. That’s why VCs scrutinize the model from day one.

Why some business models are more “VC-optimal” than others

Look across the venture landscape and a pattern emerges:

• B2B SaaS dominates the right side of the “optimality” spectrum.

• Consumer sits in the middle.

• Marketplaces live on the left.

Why? Because ownership, potential revenue scale, and industry multiples all line up more cleanly in B2B.

A Look at the Top 10 Venture-Backed Exits in Each Category

I analyzed the top 10 venture-backed exits in B2B, consumer tech/products, and marketplaces to see how the data shook out across each category.

Here’s what the list looks like:

And here’s what the data shows:

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