Why VCs Are Looking for Billion-Dollar Startups

About this episode

As a founder, you've probably heard it countless times: your startup needs to become a unicorn – worth more than a billion euros. But why is that actually the case? The answer lies in how venture capital funds operate and the expectations of their investors.

How Venture Capital Funds Work

To successfully raise money from VCs, you need to understand how their business model is structured. Venture capital funds raise capital from so-called Limited Partners – these are institutional investors like pension funds, insurance companies, or high-net-worth individuals. These Limited Partners have clear return expectations.

Christian Hecker from Trade Republic puts it bluntly: "Be convinced that you're building a billion-dollar company!" This statement might sound exaggerated at first, but it reflects the mathematical reality of VC investments.

The Mathematics Behind VC Investments

Jenny Dreier from EQT Ventures explains the fundamentals: "On average, one company pays back the entire fund!" This seemingly simple statement has far-reaching consequences for you as a founder.

A typical VC fund invests in 20-30 startups. Of these:

• –70-80% will fail or generate minimal returns
• –10-20% will achieve moderate success
• –1-3% will become true "home runs"

These few success stories must compensate for all the fund's losses while simultaneously generating the expected returns for Limited Partners. That's why VCs look for startups with the potential to return 100 to 1000 times the invested capital.

What VCs Look for in Startups

VCs evaluate your startup based on specific criteria:

Market Size and Scalability: Your addressable market must be large enough to justify a billion-dollar valuation. VCs refer to this as the "Total Addressable Market" (TAM).

Growth Potential: Your business model must enable exponential growth, not just linear growth.

Defensibility: You need sustainable competitive advantages – whether through technology, network effects, or other barriers to competition.

Team: VCs invest in teams that have already proven they can solve complex problems.

The Reality for Founders

This fund structure has direct implications for your fundraising strategy. VCs cannot opt for "nice" deals that might return 5-10x. They need the prospect of 100x returns or more.

However, this doesn't mean your startup needs to be perfect from day one. VCs invest in potential – but this potential must be credible and large enough.

What You Should Know as a Founder

Understand the Limited Partners of your target VCs. Different funds have different return expectations and time horizons. A corporate VC has different goals than a traditional VC fund.

Be honest about your market potential. If your addressable market is too small, you might be a better fit for business angels or strategic investors.

Prepare for the question: "Why can this become a billion-dollar company?" This question comes up in every VC pitch, and your answer determines success or failure.

Conclusion

The search for unicorn startups isn't VC greed, but a mathematical necessity of their business model. As a founder, you must understand this logic and align your pitch accordingly. Only then can you successfully raise VC capital for your startup.