Managing Startups: Best Blog Posts

Chapter 44. Why Do VCs Have Ownership Targets? And Why 20%?

Rob Go

Ownership is a relatively puzzling concept in venture capital. It seems like almost all institutional investors have an ownership target, and many stick to that number pretty religiously. But why, and where does that come from? I remember when I first started learning about the VC business, I found the number to be completely arbitrary.

A related pet peeve of mine is that some funds often dismiss other, usually smaller funds with a statement like, “Well, they have no ownership in any of their deals.” I think that is a false statement because in my view, ownership does not mean anything without thinking about fund size.

Ownership targets are primarily set based on some internal calculation of how an investment can generate “meaningful” returns to a pool of capital. The theory is that it is a poor use of time and effort to make an investment that, in even a very good scenario, is unlikely to yield a return that makes a difference to one’s fund. This means that the right ownership threshold is largely dependent on fund size and/or dollars under management per investment partner. A secondary consideration is investment pace and time allocation among investments, but I’ll talk about that some other time.

The traditional VC model is optimized around 20–30% ownership. Usually, this is for a fund that has $50m/investment partner who makes ~2 new investments per year. Let’s assume we are talking about a fund ...