The median, the mean and the fund multiple of one illustrative portfolio, and how much of the result rests on a single line.
Because venture returns follow a power law: a few companies return many times their cost and most return little or nothing, so the middle of the distribution sits below 1x even when the fund does well. In an illustrative portfolio of 25 equal seed cheques that returns 2.14x, the median company returns 0.3x, 16 of the 25 lose money, and one company at 30x provides 56.1 per cent of all proceeds. Without it, the fund returns 0.94x.
Worked in full in Venture Capital by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Three numbers describe the same portfolio and are routinely confused: the median position, the mean of the position multiples, and the fund multiple, which is total proceeds over total cost. In most asset classes they sit close together. In venture they do not, and the gap between them explains why portfolio construction, not deal-by-deal hit rate, decides the outcome.
| Outcome | Companies | Cost | Proceeds | Share of proceeds |
|---|---|---|---|---|
| Written off, 0x | 11 | 22.0 | 0.0 | 0.0% |
| Small sale, 0.3x | 5 | 10.0 | 3.0 | 2.8% |
| Money back, 1x | 4 | 8.0 | 8.0 | 7.5% |
| Good outcome, 3x | 2 | 4.0 | 12.0 | 11.2% |
| Strong outcome, 6x | 2 | 4.0 | 24.0 | 22.4% |
| Outlier, 30x | 1 | 2.0 | 60.0 | 56.1% |
| Portfolio | 25 | 50.0 | 107.0 | 100.0% |
Median: sort the 25 multiples; the 13th is 0.3x (11 zeros, then five at 0.3x).
Mean of the multiples: (11 × 0 + 5 × 0.3 + 4 × 1 + 2 × 3 + 2 × 6 + 30) ÷ 25 = 2.14x
Fund multiple: 107.0 ÷ 50.0 = 2.14x
In Excel, with multiples in B2:B26 and costs in C2:C26: =MEDIAN(B2:B26), =AVERAGE(B2:B26) and =SUMPRODUCT(B2:B26,C2:C26)/SUM(C2:C26).
With equal cheques, the mean of the multiples and the fund multiple are the same number, because the fund multiple is the cost-weighted mean. Once follow-on money enters, they part. The book's own fund of 28 positions shows all three apart: a median of 0.1600x (on one of the two conventions for an even sample), an unweighted mean of 1.0895x and a fund multiple of 2.6741x, because the reserves went disproportionately into the companies that were working.
The median is not a failure of the portfolio. It is what a power-law distribution looks like from the middle: 16 of 25 positions, 64 per cent, return less than cost, and 11, 44 per cent, return nothing at all. A manager whose median company returns 0.3x can still run a good fund; a manager whose median is 1x and has no outlier usually does not.
Remove the 30x company and keep its cost: proceeds fall to 47.0 on 50.0 invested, 0.94x. Remove the top three and proceeds are 23.0, 0.46x. The one company returned 60.0, 1.2x the whole fund on its own, from a 2.0 cheque. A company returns the fund on its own at 25.0x its cheque here.
| Best company multiple | Fund proceeds | Fund multiple | Best company's share |
|---|---|---|---|
| 1.5x | 50.0 | 1.0x | 6.0% |
| 10x | 67.0 | 1.34x | 29.9% |
| 20x | 87.0 | 1.74x | 46.0% |
| 30x | 107.0 | 2.14x | 56.1% |
| 51.5x | 150.0 | 3.0x | 68.7% |
| 60x | 167.0 | 3.34x | 71.9% |
The other 24 positions get the fund close to its money back; the 25th decides everything above that. To reach 3.0x gross, which is roughly what a fund needs for a strong net result once fees and carry are paid, the best company must return 51.5x. The fund's outcome is a bet on the size of one or two lines, and the median says nothing about it.
If outliers are rare, the number of positions decides whether a fund holds one. Picking five of these 25 companies at random, the chance of missing the 30x company is 80.0 per cent. That is the arithmetic behind seed funds of 25 or more positions, and behind the reserve question: money held back for follow-ons is only valuable if it reaches the outlier, at a price that still allows a high multiple.
The common mistake is to judge a venture manager, or a strategy, on its typical deal. A median of 0.3x looks like a poor manager; it is consistent with a 2.14x fund. The opposite error is to read the fund multiple as the typical outcome and underwrite each new company to it. Neither number alone answers the investor's real question, which is how much of the result depends on how few lines. Here, 56.1 per cent on one, and 78.5 per cent on three.
Ask for the concentration table. Proceeds ranked by company with the running total is the single most informative page in a venture report. It shows the median, the fund multiple and the dependence on the top line in one view.
The book's 28 positions, ranked with a tick box on each line, are in the free workbooks for this case. The exit a single company needs to return the fund is worked in what exit value a startup needs to return the fund, and the gross result a fund needs for a given net in what gross multiple a VC fund needs to return 3x net.
It varies by fund and vintage, and this is an illustrative portfolio, not market data. In the worked case 16 of 25 positions, 64 per cent, return less than cost and 11, or 44 per cent, return nothing. The fund still returns 2.14x, because one company at 30x and two at 6x provide 78.5 per cent of the proceeds.
Neither alone. The median, 0.3x in the worked case, describes the typical company. The fund multiple, 2.14x, is the cost-weighted mean of the positions and is what the investor receives before fees and carry. With equal cheques the unweighted mean and the fund multiple coincide; with follow-ons they do not.
In the worked case the other 24 positions return 47.0 million on 50.0 million of cost. The best company therefore needs only 1.5x for the fund to return its cost, but 51.5x on its 2.0 million cheque for the fund to reach 3.0x gross. A single company returning the whole fund needs 25.0x.
The power law, the median position and the three arithmetics that get confused are the subject of chapters 4 to 8 of 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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