1. There is no 3x venture growth investment
Some growth funds underwrite an investment to be at least a 3x returner. This doesn’t make sense.
Most startups, even at a growth stage, are still baby companies. They’re still proving out their product, whether their market is real, and what defensibility looks like. These are not established businesses where managers fully understand the levers of their business yet. So how can we have precision on whether the business will generate the requisite revenue to be at least a 3x return or not? In reality, we can’t – and it doesn’t matter. These baby businesses either will work or will not.1
This is the logic behind the “is this a generational company” question that all VCs ask and intuitively understand, but is much harder to actually execute on. A failure mode is spending excessive time underwriting to a 3x downside. A 3x downside protection model could work if you could enter/exit easily (see publics) or if the business had proven durability (see PE). In venture and in growth, with baby businesses, these are just not true — the market, tech, product are changing too quickly (and this is what allows the opportunity to arise in the first place!)
It’s either going to work or not. Figuring out the details to get to a 3x is a psyop. Instead get to conviction to a 10x or not at all.
2. Not playing shitty PE
One of Bain Cap’s PE funds crushed it because they bought Canada Goose, before it became the status symbol of millennials a few years ago. They knew the business levers, underwrote, and then executed at a price where they’d never lose money. They had high precision on its current business to underwrite it to a 2-3x. It just so happened that it surprised them on the upside by becoming a cultural phenomenon and it ended up being a 10x (almost ~25x at peak)
Some growth investors think they’re investing in a Canada-Goose-like-business (aka controllable downside), but in reality, they’re not and the investment goes to 0 more frequently and significantly. And there definitely isn’t enough precision to underwrite to a 3x in the same way.
If one keeps false-Canada-Goose-chasing long enough, it becomes clear why the math breaks down. When compared to PE, median venture growth investments are underwater more often (30-40% of Series B cos shutdown) AND more acutely (0x vs 1x loss).
Their edge, and what they should lean into more — and the best absolutely do and this piece is repetitive to them — is to underwrite it to a 10x via card flips (aka meaningful business or market changes). The data, h/t David Clark, supports this too — 81% of 3x TVPI growth funds had a fund returner, and growth funds had MORE fund returner + 10x cos than early stage funds (6.9% to 6.5%).
An investor once commented to me that he felt like venture was just shitty PE. And my retort was like yes, of course this feels like shitty PE to you, because these are not PE businesses. The magic, beauty, and challenge of what we do is believing in what could be.