The venture myth of 1/3, 1/3, 1/3

The venture myth of 1/3, 1/3, 1/3

VCs like to say their deals go about 1/3 bust, 1/3 sideways, 1/3 successful. So the winners have to pay for the rest. Let's say you want to return a net 20% annually to your limited partners. You need to earn about 25% (since you are going to take about 20% cut) plus you have to cover your management fees of about 1% of the fund value per year. So call it a gross return target of 30%.

You need to make your initial $1 worth $3.71 at the end of 5 years if you want that 30% gross. And if 1/3 of your deals are GOOB, and 1/3 are merely sideways (worth their original $0.33 of your fund), then you need to turn the last $0.33 invested into about $3.38. So you need to get 10x on that initial money on about 1/3.

The chart above, though, is the actual outcome distribution of venture deals from a deal database that a guy from Chicago GSB considered. Only 9% go out of business. 45% stay private -- "sideways". And 46% are IPO, acquired or filed to IPO. That's 50% more exits than the old 1/3 mythology suggests. Some caveats though, since not all exits are positive returns etc etc.

Another thing to conclude is that if your company gets venture financing, there's a 91% chance it will be around in 5 years either alive, acquired, or public.