Understanding VC Math

In my calls with founders, I’ve sensed a lot of frustration with the lack of VC interest in funding a follow-on round. While I don’t want to provide any excuses, I think it is important to understand the constraints VCs face when evaluating investment opportunities.

To start, when they raised their fund, they most likely promised their limited partners at least a 15% gross annual rate of return on their investment. Over the course of five years, that is a doubling of the initial investment.

Unfortunately, only 1 out of 5 (in the best case) of a VC’s investments achieves an exit within five years. That means that the ones that do exit have to cover for the rest of the portfolio, or achieve a minimum of a 10x return.

Therefore, when a VC is looking at a potential investment, the question at the forefront of their mind is “does this company have the potential to 10x within 5 years?” If you assume the revenue multiple stays the same, that means the company’s revenue has to grow a minimum of 59% per year for five years!

That is an incredible growth rate, met by very few private or public companies. Above a certain size, this becomes extremely difficult. For example, using the Q4 2025 median Series A pre-money value of $165 million and assuming 20% dilution, a company would have to grow to a $2.1 billion valuation within 5 years.

One can achieve personal and financial success without trying to strive for this growth rate. And there are plenty of sources of capital who can fund lower-growth strategies. Please do not look at VC funding as the only solution for your success.