Beyond the Unicorn: What VCs Actually Need From Startups
Decode the expectations of venture capitalists and position your startup for fundraising success
Check out the tools for understanding what VCs actually expects from startups at the end of the newsletter 👇
Raising venture capital isn’t just about pitching big numbers or promising exponential growth—it’s about knowing exactly what venture capitalists want and aligning your vision with their expectations.
Ever wondered why some startups secure funding despite modest projections while others with ambitious goals fail? The answer lies in understanding the VC playbook—how they evaluate returns, manage portfolios, and balance risk with reward.
In this issue, we break down what returns VCs actually expect, share examples of how to calculate potential returns, and recommend tools to align your projections with investor expectations.
When fundraising, you’ve likely heard the phrase: “VCs need to see $100M ARR in 3–5 years.” But is that really the golden rule?
The reality is more nuanced. While some startups can aim for unicorn-level exits, others succeed by targeting achievable outcomes tailored to the VC’s fund size and return model. In this issue, we break down what returns VCs actually expect, share examples of how to calculate potential returns, and recommend tools to align your projections with investor expectations.
The Myth of $100M ARR
The "$100M ARR in 3-5 years" mantra gained traction because it simplifies VC decision-making:
A $100M ARR, with a 10x revenue multiple, translates to a $1B valuation or exit.
This aligns with the VC goal of funding unicorns (or decacorns in 2024).
Reality Check:
Not all startups can—or need to—reach $1B valuations. According to global exit data:
The majority of startup acquisitions are valued at $10M-$50M.
Unicorn exits make up just 1% of all exits globally.
In 2021, there were only 79 unicorn IPOs, with an average valuation of $1.05B.
What does this mean for you? Focus on crafting a realistic growth trajectory. Startups can secure VC funding even with smaller exit potentials if they align with the investor’s fund size and return expectations.
What VCs Look For
To understand what VCs need from your startup, you need to understand their math.
1. Fund Economics
VCs aim to generate at least 3x returns on their fund.
For a $100M fund, this means $300M in returns.
A portfolio might include 30 startups, with a mix of:
1 major exit at $1B+
3 mid-tier exits at $300M+
Several smaller exits in the $50M-$100M range.
A typical allocation of portfolio performance for every $1,000 invested is outlined below:
2. Scalability
VCs prioritize startups that can scale quickly in large addressable markets. Highlight how your business can grow exponentially with a clear strategy to capture market share.
3. ROI Alignment
VCs want to see how your startup contributes to their overall returns. For instance:
A startup with a projected $50M exit might be perfect for a $10M fund.
Demonstrate how your projections align with their fund size using VC return models.
4. Strong Founding Team
Your ability to execute is just as important as your business idea. Showcase your team’s expertise, adaptability, and commitment to the vision.
5. Competitive Edge
VCs are drawn to startups with unique advantages—whether it’s proprietary tech, market insights, or operational efficiency. Make it clear why your business stands out.
If you're building a business, apply to the Xartup Fellowship Program and join a thriving community of 2,500+ founders tackling one of the toughest times in the Indian startup ecosystem.
The Xartup Fellowship has been an incredible journey for its fellows:
2,500+ Alumni
300+ Startups
$5M+ in Funding Raised by Alumni
Be part of this transformative network driving success in the startup world.
Actionable Insights for Founders
Run Projections Through a VC Return Model
Test your projections to ensure they align with a VC’s portfolio needs. For example:A $250K investment in a startup exiting at $32M ARR with a 10x multiple can yield $9.1M for the VC—an excellent return for a smaller fund.
Target the Right Investors
Research VCs whose fund sizes align with your startup’s exit potential using tools like VCCEdge.Strategize Your Cold Outreach
Mention in your outreach how your projections align with the VC’s expected returns. Highlighting that you can return 50-100% of their fund piques interest and opens doors.
Conclusion
Raising venture capital isn’t about selling an impossible dream—it’s about building trust with investors by showing how your startup aligns with their goals. Understand their fund dynamics, present data-backed projections, and position your business as a viable, high-return investment opportunity.
By adopting this mindset, you’ll not only increase your chances of securing funding but also build long-lasting relationships with investors who genuinely believe in your vision.
Tools for Founders
VC Research Platforms:
Return Modeling Frameworks:
Use VC return models to calculate alignment with fund goals.
Case Studies and Examples:
Learn from startups that successfully aligned with VC expectations.
Cold Outreach Templates:
Craft compelling messages highlighting your potential ROI for VCs.
Books for Deeper Insights:
Venture Deals by Brad Feld for understanding VC dynamics.
If you're building a business, apply to the Xartup Fellowship Program and join a thriving community of 2,500+ founders tackling one of the toughest times in the Indian startup ecosystem.
The Xartup Fellowship has been an incredible journey for its fellows:
2,500+ Alumni
300+ Startups
$5M+ in Funding Raised by Alumni
Be part of this transformative network driving success in the startup world.