 out of 10,000 startups, only less than 10 end up generating a majority of the returns. And so there's this incredible discrepancy between how many companies are founder and how many actually end up returning the money to their investors in a way that's meaningful. And those few that do then sort of fund everyone else because that enables the VC's to make more bets. And so as a rule of thumb, let's say you're a founder and you're going to pitch an early stage VC. Here's how that VC's business model works. Right? So let's say I, in 2018, I start, yes, VC, this early stage fund together with my partner. And so for the sake of our argument, let's say that our fund is going to be $50 million. So we're going to raise $50 million, right? So maybe we invest in it ourselves, but almost certainly we're also going to invite other LPs, right? People who invest in our fund. So I take out my phone, I write some iMessages or whatever, and I say, hey, starting a new fund, you want to invest? So what's my LP, my limited partner, the investor that invests in my fund going to think, well, he's going to say, or she's going to say, well, I would like to see returns, right? I'm not going to just donate money to your charity. I can do that through my charity. So I'm going to expect something to come back. What do they want back? Well, standard in VC world tends to be a 3x return as the bare minimum baseline. And you're talking about a fund that has a limited lifespan, which is typically 10 years. So you're actually thinking 3 or 3x sounds like a lot. But if you distributed over 10 years, and that's an ill liquid investment, the VC or the LP is probably not going to necessarily be able to just sell their stake in the fund like in the stock market anytime they want. So you do the IRR, the internal rate of return on that, and it's not anything crazy. You can probably actually make more money on the stock market if you invest well, some public markets. So this is just as a background. So let's say minimum 3x return, but good early stage funds, especially smaller funds will have dramatically higher 5x, 10x funds. I think we're all pizza and fun. That's over 100x. So it's possible to make that. But if the VC wants to keep their job, that's what they're signing up for. So now $50 million. So they're going to return 150, right? 3x that 50. Now, the other thing to understand is that, well, not all of that 50 million is actually going to get invested into startups. First of all, over 10 years, there's going to be fees. There's a management fee typically 2%. So that's going to be roughly one fifth of that fund. So $50 million, you take $10 million immediately, and you just allocate that to fees and legal fees, all that. Now you've got $40 million left. Well, VCs, as anyone who understands VC knows, are actually making two kinds of investments always. One is the initial checks. That's the first time you guys pitch and I decide to invest in your company. It's a new investment I'm making. I'm adding your company to my portfolio. But then over time, you're going to raise more rounds as you grow, hopefully, and I need to defend my ownership. And so I will make follow-on checks later. So I'm going to take that $40 million and I'm going to split it into two, right? Let's say an early stage fund that might be 50-50. Other funds, bigger funds, typically actually allocate much less to initial checks and a bigger chunk to their follow-on checks. But I'm going to say for simplicity sake, 50-50. So we're going to 40 million, 20 million into initial checks, 20 million we're just going to stow away, ready to deploy later as dry powder as our companies grow. Now, $20 million are left of my 50 now that I'm actually going to start cutting checks into new companies. And so obviously, I'm not going to invest it all in one company because it's a portfolio I need to distribute in order to diversify and manage the risk, right? So how many companies do I actually invest in? Probably at minimum 20. For an early stage VC, that's bare minimum. There's, you know, VCs that'll do 50 companies per fund, 30 to 40 is pretty normal, but let's say $20 million, 20 companies. So on average, $1 million per each company, right? So now I start writing my checks. I create my portfolio. And by the way, VCs have this investing period, right? So in our fund, it's three years. So from the initial closing of my fund, I've got three years and I need to deploy all that, all that 20 million into companies. So I've got basically three years to build my 20 company portfolio. And then after that, there's still seven years of the fund left. And that's when I make my follow on investments, but I'm not adding new companies into the portfolio. So the presumption for the VC is after that investing period is over, they're going to go and raise a new fund. So VC stack funds. So you're going to have VC like, I don't know, older VC like Raylock or something, and they might have 16, 17, there might be on their fund 18, because they've done so many funds, right? And so, and some of these funds remain active. And that's frankly how VCs make salaries is every time you raise a new fund, there's new management fee. And so you end up stacking your management fees. Of course, they go down. So after the active investment period is over, the fee goes typically goes down. But VCs with a lot of funds end up actually pulling in quite a bit of fee just from having so many funds. It's another interesting thing. If you think about from a VC's perspective, you know, you're want, you have this driver to basically raise more funds, raise more money, because you get more fees, so you can pay yourself a bigger salary or hire more people or whatever, right? But then on the other hand, the more money you raise, the higher your returns are going to have to be in order for you to maintain that same multiplier. Remember that 3x minimum, right? And so, if you have a $10 million fund, 3x is only $30 million. But if you have $10, $20 million funds or whatever, you know, you're going to have to or $10 million funds. Now you have $100 million hours. And obviously, that becomes harder to return at the same kind of multiplier. So you're constantly looking at this from a VC's perspective, the situation where there's a pressure to have more assets under management, AUM. And then at the same time, also in the long term, though, if you think most of the VC's own reward should come from the carry, right? So that's what they make once they have a great exit. And again, if you think about European VC's versus US VC's, US VC's tend to be hyper carry oriented, right? So VC like us will pay ourselves minimum salaries and try to maximize carry, drive all our incentives to just carry, carry, carry, right? And then on the other hand, if you have like many European VC's have difficulty actually ever reaching carry, there's funds that are never had any carry and still keep going because there's, you know, the European Investment Fund and governments that, you know, are happy to be LPs and funds that don't perform quite as well. And so that's another thing to just watch as a founder is like, what's has your VC actually ever had carry? And, you know, these things actually matter. And also as an investor, obviously, if you invest in venture capital fund, you probably want to align with the, you know, it's probably better that you have the same incentives in terms of both getting the money from the carry and not just from the management fee. Sure. Yeah. And it's, you know, of course, you know, you want to be fair, just as VCs should be fair to founders and founders should be fair to employees where, you know, you want a fund manager to not be over constrained, like they should be able to travel, you know, network, throw dinners for their founders, et cetera, which are all part of management fee presumably. So you're not going to want to like squeeze that too tight, but at the same time you want them to be as incentivized as possible aligned with your incentive to actually generate a lot of carry. Okay. Well, so here we are. We're back at the situation where I'm cutting my $21 million checks, right? And so, and now this is the critical part for a founder is if you're pitching, figure out what the fund size is for the VC that you're pitching, because that's, you know, it's like Mike Maples, I think famously, you know, kind of like a foundational early stage VC in Silicon Valley, founder of Floodgate, together with Ann Miraco, his partner, I think Mike once said, your fund size is your strategy when you're thinking about like from a VC perspective, because a small fund versus a large fund means that you're going to look at the world a completely different way. So look at the fund size of the VC and then figure out how much of a return expectation will that VC actually have if you assume that every time that they go in front of their LPs, which happens typically once a year at the annual general meeting of the venture capital firm, they have to basically defend to their LPs and prospective new LPs who they probably want to invest in the next fund that they are going to start soon. They're going to say, well, every time we've made an investment, we have carefully considered and decided that this indeed this company has the potential to return our entire fund because, you know, the assumption with the power law, right, is that nine out of 10 and actually more than that, it's like more like 19 out of 20. And this is even if the VC is very, very good, they might have just one company in there that returns the entire fund and not just 1x, 3x minimum, right? And so every time they make an investment out of a 50 million dollar fund, what they're thinking is, is this going to be the one that returns the entire fund, 3x? So basically a $1 million check turns into $150 million in return each and every time they invest in a new company.