If you don’t understand venture math, your chances of getting investment are close to zero. Imagine this: you have a great product that is already generating excitement among customers. The business plan looks promising. All that’s left is to find the money to bring it to market. You start pitching the idea to angels and venture funds, but no one bites. What’s going on? The answer is simple: it’s all about venture math.
Let’s say your business plan promises $20 million in revenue in 7 years. You want to raise $2 million at a valuation of $10 million. You project that the company will bring in $5 million in profit annually. Isn’t that a great opportunity? For you, maybe. But for venture investors, most likely, no. Let’s figure out why.
When you approach venture funds or business angels with a pitch, they evaluate your project differently than you are used to thinking about business. They are not interested in just a “good company” with stable profits. They are looking for a rare opportunity — a startup that will become their “golden ticket”, returning their investment tens or hundreds of times. To understand their logic, it is important to understand the key principles of venture math. Here is what underlies their decisions.
Venture investments are not stocks on the stock exchange that can be sold at any time, or real estate that can be rented out. When an investor invests money in your startup, he will not get it back until there is an exit: either yDelftdigits is bought or it goes public with an IPO.
Example: If you raise $1 million in 2025, an investor can wait until 2032 to see any results. Until then, their money is just an entry in your cap table. This means your business must not only survive, but grow to a level that is attractive to buyers or the stock exchange.
Venture funds operate on a strict schedule. They raise capital from their investors (such as pension funds or wealthy individuals) at the beginning, make bets on startups in the first 3 years, and then have 7 years to “harvest” - exit all investments and return the money with a profit. By year 10, the fund is closed.
What this means for you: If you raised money at the seed stage, you have 5-7 years to grow into a company that someone will want to buy for hundreds of millions. Business angels are a little less constrained by deadlines, but they are not prepared to wait forever either – they also want to see a return in their lifetime.
Venture investors know: most of their bets will fail. The statistics are harsh: out of 10 startups at the seed stage, 5 will completely “burn out”, 2 will return part of the money (for example, through a sale for pennies), 2 will recoup the investment without profit, and only 1 will become a real hit. This single success must bring such a return to cover all losses and make the fund profitable.
Example: an investor invested $10 million in 10 startups at $1 million each. Nine of them are lost or barely recouped. For the fund to work, the remaining one must bring not just $10 million, but several times more - for example, $50-100 million at exit.
People and organizations investing millions in venture funds (called Limited Partners, or LPs) have thousands of options. They choose funds with the best reputation and the highest results. Beating the S&P index is the bare minimum, but real success is beating other funds. This requires a return of 20% per annum or more.
Example: a fund invested $100 million in a portfolio of startups. In 10 years, it must return at least $600 million to LPs (20% per annum, compounded) to be considered top-notch. Your startup must fit into this ambitious goal.
Large corporations like Google, Salesforce, or Pfizer buy startups not for a “cool idea,” but for real value: a strong brand, a growing customer base, or a technology that threatens their business. Typically, such deals start when a startup’s revenue reaches $50 million per year. For an IPO, the threshold is even higher — usually $100 million or more.
Example: Oracle bought Cerner for $28 billion in 2022, when it already had billions in revenue. Small startups with $5 million in revenue rarely get on the radar of giants, unless they are revolutionary in their niche.
The price at which you will be bought depends on the type of deal. In hot industries (AI, biotech, SaaS), big players can pay 5-10x your revenue, especially if you are a growing threat or if competition between buyers is starting. For example, Facebook bought Instagram (both companies are banned in Russia) for $1 billion with revenue of about $100 million - the multiple was huge due to strategic value. In less "hot" cases (for example, an acquisition to expand the product line or a deal with a private fund), they pay 4x EBITDA - this is much lower.
What this means: your business must not only grow, but grow in the right industry and with the right dynamics to count on a high multiple.
After reading the article, many things became clear in investment matters, and most importantly, now I can correct my mistakes in financial management. Thanks for the details and explanations.
I would still like to see more disclosure of some topics, but in general the article covers all the important issues related to financial activities. I will follow the release of new articles and study the topic of finance in detail.
The information in general turned out to be useful and informative. It is not surprising that many do not understand how to manage finances because they do not study such articles. Thanks to the author for the explanations in the field of finance.
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