From the net target to proceeds, from proceeds to a count of billion-dollar exits, and why fund size multiplies the count while only ownership divides it.
Divide the proceeds the fund must generate, less what the rest of the portfolio returns, by what one unicorn exit pays the fund. With 20 per cent carry, a 3x net target needs proceeds of 3.5 times commitments; if everything else returns 0.6x and the fund owns 7 per cent of a 1 billion exit, a 150 million fund needs 6.21 unicorn exits, so 7, and a 1 billion fund needs 41.43.
Worked in full in Venture Capital by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Every venture manager raising a larger fund is asked whether the strategy scales. The honest answer is a count: how many outcomes of a given size the larger fund now needs. The arithmetic takes three lines and turns a debate about ambition into a number an investor can test against the fund's own history, its ownership and the size of exits in its sector.
| Input | Value |
|---|---|
| Target net multiple to investors, on commitments | 3.0x |
| Carried interest, whole of fund, on profit over commitments | 20% |
| Proceeds from every non-unicorn position, as a multiple of commitments | 0.60x |
| Exit equity value of a unicorn, $m | 1,000 |
| Fund ownership at exit, after dilution and follow-ons | 7% |
Management fees are inside the commitments: the fund invests less than it raised, and the proceeds have to cover the whole commitment. At a 1 billion exit every preferred share converts, so proceeds follow ownership. None of the inputs is a market statistic.
Proceeds needed D = (target × F − carry × F) / (1 − carry)
Proceeds per unicorn = ownership at exit × exit value
Unicorns needed = (D − rest × F) / (ownership × exit value)
In Excel, with F in B1: =((3*B1-0.2*B1)/0.8-0.6*B1)/(0.07*1000)
Step 1, from net to proceeds. Investors receive proceeds less carry, and carry is 20 per cent of proceeds above commitments. For 3.0x net, D = (3.0 − 0.2) / 0.8 = 3.50 times commitments. On a 150 million fund that is 525.0: the GP takes 75.0 of carry and investors receive 450.0. The derivation, and why the common shortcut understates it, is in what gross multiple a VC fund needs to return 3x net.
Step 2, what the rest delivers. The non-unicorn positions, the modest exits, the acqui-hires and the write-offs, return 0.60 times commitments in aggregate: 90.0. The unicorns must deliver the other 435.0, which is 82.9 per cent of all proceeds.
Step 3, the count. 7 per cent of 1,000 is 70 per unicorn. 435.0 / 70 = 6.21, so 7 unicorn exits.
| Fund size | Proceeds needed | From the rest | From unicorns | Unicorns needed |
|---|---|---|---|---|
| 50 | 175.0 | 30.0 | 145.0 | 2.07 |
| 150 | 525.0 | 90.0 | 435.0 | 6.21 |
| 400 | 1,400.0 | 240.0 | 1,160.0 | 16.57 |
| 1,000 | 3,500.0 | 600.0 | 2,900.0 | 41.43 |
The count scales one for one with the fund. The size of exits does not. A 1 billion fund at the same ownership needs 42 billion-dollar exits, or 8.29 exits at 5 billion each, which pay it 350 apiece. A 150 million fund that makes 34 initial investments, as in the portfolio construction model, needs one company in every 5.47 to become a billion-dollar exit.
| Fund size | 2.0x net | 3.0x net | 5.0x net |
|---|---|---|---|
| 50 | 1.18 | 2.07 | 3.86 |
| 150 | 3.54 | 6.21 | 11.57 |
| 400 | 9.43 | 16.57 | 30.86 |
| 1,000 | 23.57 | 41.43 | 77.14 |
| Ownership at exit | 150m fund, 1bn exits | 150m fund, 5bn exits | 1,000m fund, 1bn exits | 1,000m fund, 5bn exits |
|---|---|---|---|---|
| 5% | 8.70 | 1.74 | 58.00 | 11.60 |
| 7% | 6.21 | 1.24 | 41.43 | 8.29 |
| 10% | 4.35 | 0.87 | 29.00 | 5.80 |
Ownership at exit is the lever the manager controls. Going from 5 to 10 per cent halves the count, and that is what follow-on reserves are for: they buy back the ownership later rounds dilute away. The tail of the portfolio barely matters by comparison: if the rest returns 0.3x instead of 0.6x, the 150 million fund needs 6.86 unicorns, and at 1.0x it needs 5.36.
Counting paper unicorns. A company valued at 1 billion in a private round is not a 1 billion exit: the round price values a preferred share with protection, the company may raise again at a lower price, and the fund's stake will be diluted further before any sale. The count above needs realised exits at 1 billion of equity value with the fund still holding 7 per cent. The second mistake is the naive version of the sum, fund size divided by proceeds per unicorn: 150 / 70 = 2.14. That returns the commitments once, before carry, not three times to investors. To check the ownership side for one company, see what exit value returns a venture fund.
The book measures the power law on one fund's twenty-eight positions and shows how few of them carry the return; the free workbooks for the book let you untick the winners one at a time and watch the fund multiple fall.
On the same assumptions, 3x net needs proceeds of 350 million; the rest of the portfolio supplies 60 million and each 1 billion exit at 7 per cent ownership pays 70 million, so 290 / 70, about 4.14 unicorns. At 10 per cent ownership it falls to 2.90.
Because the number of large exits needed rises in proportion to fund size while the number available does not. At 7 per cent ownership a 150 million fund needs 6.21 billion-dollar exits for 3x net and a 1 billion fund needs 41.43, or 8.29 exits of 5 billion each.
Yes, because proceeds are paid on the stake held at exit. Each 1 billion exit pays 50 million at 5 per cent and 100 million at 10 per cent, so a 150 million fund needs 8.70 or 4.35 unicorns for 3x net. Follow-on reserves exist to defend that exit stake.
This article is one calculation from Venture Capital. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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