A basic understanding of how venture capitalists make money can help you as you prepare to raise venture funding for your startup. In my short career as a venture capitalist I have yet to realize a return from any of my investments (although I also have no donuts yet either, which is good… knock on wood…) You will want to position your startup as a company that can be one of the 10% to 30% that return real capital for the venture firm. Here are a couple of good posts that may help you understand how your VC intends to make money:
1) Venture firm economics by Fred Wilson. Fred has a couple of recent posts on how VCs actually make and deploy their money. Links to: basic venture fund economics and return calculations.
2) How and why VCs think big. I’ve seen a number of great business plans where I have recommended to the founder that they do not raise venture funding for one reason: they’ve potentially got a great small business that venture capitalists will ruin. VCs need to make big companies to cover all the “holes in the ground,” i.e. to make up for the capital that is lost when portfolio companies go out of business. Altos Ventures talks about how venture capital is a hit driven business and how and why VCs look for big wins.
