Why VCs Want to Raise Billion Dollar Funds

You’ve probably noticed many of the leading VC funds now have raised much, much larger funds.  Some of it is to compete better.  Some of it is for fees (20% of the fund goes to fees and expenses).

But it’s not just that. It’s energy vs. output. It’s just in many cases much easier to make a lot more money in VC by writing bigger checks — even if the nominal returns are lower. As long as the Limited Partners will give you that capital to invest.

In fact, the larger a check a VC writes, the lower the returns it needs from that check.

This sounds wrong, but on balance, it’s correct.

E.g.,

• Invest $1B in OpenAI, it 3x’s to $3B, VCs take home $400m+ of it themselves (20% of gains)
• Invest $1m in a start-up and it 10x’s to $10m, VCs take home $1.8m of it themselves (20% of gains)

Both investments honestly are about the same amount of work. But the first investment “only” needs to triple, and the VCs make 200x more. 200x more.

This is a vast oversimplification many will poke holes in. There are a number of great examples of VCs making tons from owning a huge stake in a decacorn early.

But also, it explains why many top VC funds raise as many billions as humanly possible.

We have a HUGE announcement that we can't keep secret any longer. 

This year we're partnering with Mayfield AI to bring you the AI Demo Stage and Pitch Competition to SaaStr Annual 2025.

You could win $500K - $5M in funding from Mayfield AI Garage!! 

That's right. This is epic opportunity to showcase your AI Startup.

The winner(s) will receive funding from the Mayfield AI Garage, who are at the forefront of investing in cutting-edge tools at the intersection of SaaS and AI. 

This edition of the SaaStr Daily is sponsored in part by Prismatic

Building integrations isn’t the challenge—scaling them is. Here’s how product leaders are staying ahead.

Well, first, let’s be clear — it’s tough if your core goal is to get acquired for a big price in most cases. There really aren’t that many good acquisitions done a year. So if that’s really your goal — vs. building an Amazing Company — I’m worried you’ll fail.

You can see here from our great deep-dive with Brian Halligan, co-founder and chair of HubSpot, that even there they never got a strong M&A offer … ever.

Having said that, let’s rework the question. The best way to maximize the odds a decent ROI acquisition is feasible is to (x) raise the least amount of capital necessary to still (y) build a category winner, or at least, a potential category winner.

Apollo.io, an all-in-one go-to-market platform, underwent a significant transformation in its business model that led to remarkable growth. This analysis examines their journey from a struggling sales-led organization to a successful product-led growth company, resulting in over 880,000 paying customers and substantial revenue growth.

CEO Tim Zheng came to SaaStr Annual to share the deep dive on the journey from SLG to PLG here.

Up Next: Wednesday, February 12 @ 10AM

Topic: Ask-Me-Anything (AMA)

Speaker:  SaaStr CEO and Founder Jason Lemkin

Workshop Wednesdays is our weekly series where we’ll be bringing some of the best SaaStr speakers to you LIVE, every Wednesday. 

Each workshop will be hosted in a live, interactive 30-minute format at 10am Pacific each and every Wednesday. This workshop will be 100% LIVE, not pre-recorded, and will be hosted in an, interactive 30-minute format, including Q&A.

Investors rarely get to choose. Founders and the CEO make the decision to exit. VCs have surprisingly little “power” here … unless the start-up is running out of money. Then, the founders are dependent on more funding from the VCs. But otherwise, really all VCs have is a vote.

Beyond that though .. what makes VCs want to exit a start-up?

It’s when they don’t see a brighter future.

VCs naturally want to double down, push harder, go longer. A $2B exit is so much better than a $1B one, and the chance of a $1B exit later is much more exciting than a $100m exit today.

So if you’re growing, and doing well, VCs generally speaking won’t want you to sell.

But … but … if it looks like you won’t get to the next level, VCs will be fine selling. And if you are tight on cash, they likely will start to encourage you to sell.

Because they won’t want to write another check.

There’s no perfect answer here, but at least until you are at $10m+ ARR, my strongest recommendation is align around cash.

Later, you will align around bookings (including multi-year bookings), and change the comps plan to align around bookings.

But the sucker bet is to align around bookings anywhere < $10m-$20m in ARR, really, at any time when cash still matters.

So until $10-$20m in ARR, when cash still matters:

On one end of the spectrum:

• A multi-year deal with (x) an annual out and (y) only the first year prepaid is barely better than a standard one-year deal. It is better, but barely. It’s better because opt-out is better than opt-in. But barely.
• In many cases — a multi-year deal may actually be worse than a standard one-year deal if the incentives make an AE (x) over-discount and/or (y) risk deals and/or push too hard, too early in your company’s life, for multiyear deals. So you may not even want to incent these “barely more than one-year” deals if you don’t like the AE behavior that comes out of it.
• The key is multi-year deals need to be organic. They need to also be what the customer wants. Push too hard, too early and things break.

A few ways I’ve observed that the best sales leaders retain the best:

• They promote the best. You can’t promote everyone, but you can almost always promote your best.
• They make them better. They help make sure their biggest deals close. Even more than usual.
• They have fun together. Movies, golf, lunch, whatever.
• They pay them well — and as well as they can. They push to make sure their top performers are paid high market at least.
• They make them feel secure. That they have a real role and stake, and are important. They make sure they know there is no chance they will get fired or treated unfairly.
• They talk through big changes coming to their patch, territory, etc. — early. The #1 think high performing reps hate is change.  They can react very strongly to when their job gets even just 15%-20% harder.  Because they have it dialed in.  You can’t stop change.  But you can engage them as part of it. Rather than learn about it in an email.
• They help them achieve their goals. Great sales leaders ask their top performers what they want to achieve this year. And they help them achieve it.  Michelle Benfer, ex-SVP of Sales at HubSpot and Bill, does a great deep dive on how to do this well here.

The explosion of AI adoption has created massive new privacy risks for SaaS companies. Here’s what we learned from talking with Skyflow’s Chief Product Officer about protecting your company (and your customers) from AI data breaches.

AI and data privacy. Not the fluffy marketing version – the real, nitty-gritty details that determine whether your SaaS company thrives or dies in the AI era. Here’s what Skyflow’s Chief Product Officer shared with us, and frankly, it’s keeping a lot of founders up at night.

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