starting a VC fund

hey guys, long time reader first (maybe second) time poster.

first off i just want to thank everyone on here. over the last yr this forum has been invaluable!

so...short summary: i graduated with an engineering (biomedical/chemical) and science (pharmacology) degree (dual-degree program) from college in 2010. worked at NASA for a yr. started a medical start-up company (which is currently developing a product with a couple hospitals). and currently working in PE (sourced a deal as well).

my buddy: US army vet, computer engineer, also worked at NASA.

we are thinking of starting our own VC fund (small 1-5MM) and will be focusing on healthcare, tech, IT investments - between the two of us - we have a strong background in biomed & software engineering.

so...the question part:
there really is only one person who has done this at our age - josh kushner. we have some leads for potential investors but by no means they are sure things.

could you guys suggest what to watch out for, what to focus on in particular, what YOU think is the most important part of this process....and the million dollar you think its possible?

NO trolling/NO stupid remarks - if you don't have something constructive to say, please hit the back button and monkey around on a different thread...


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Comments (60)

Sep 1, 2012 - 10:51pm

roofstreet, you certainly have some unique experience.I recently worked with an expansion stage VC firm and saw how the fundraising process went there, and also have a few personal contacts in the fund of funds business, who have given me some anecdotes from their ends. I have one friend of mine who started a $1MM seed fund and has made some great investments there.

Given the size of your first fund, I imagine you'll be targetting a decent amount of high net worth individuals, and maybe some institutions who you know well and would be willing to put $100K of risk capital in your hands. The main thing to remember here is that like any other VC or PE fund, you are effectively a money manager for those LPs. Their sole goal is to get an annual return on their cash beyond putting it in T-bills or leaving it sitting in a money market account. Investing in a first time VC fund is a high beta cash management strategy for them.

So in fundraising, you'll effectively be trying to communicate why it is worthwhile for them to allocate the high beta portion of their cash to you. What's your strategy? What type of deals will you go after, and what do you believe makes a good business? More importantly, what do you have that gives you access to these promising early stage deals? Do you interact frequently with entrepreneurs, or do you have some proven product expeirence, that when applied to a portfolio of investments, will generate worthwhile returns?

From your brief summary, it makes sense that you are focusing on healthcare and IT. One concern I would have if I was allocating my own capital is your experience. If your recent experience is heavy on NASA, the question I would have is how much has that allowed you to be involved in the entrepreneurial ecosystem?

Another thought I will offer you is that investing in med device startups for the size of your fund will be looked at with skepticism, given what is happening in the industry. With an increasingly stringent FDA, these companies require a lot of capital to product launch. Will your seed level investment still be significant enough to generate a return after all those follow on rounds?

So those are my thoughts from a process perspective. On whether or not I think this is possible, I have seen this done before by someone in his 20s, so yes it is possible, but obviously very difficult. Anyone who is active in this industry will look at a $1MM fund and assuming you're writing $50K check sizes, will wonder how feasible is it for you to multiply that capital, 3, 5, or 10x. As you know, startups require a lot of capital to get to exit, and even if you sell secondary in a private round, you still undergo significant dilution that needs to be made up by the value created in the company.

Again, these are the questions and potential reservations that an investor will have. If you have a unique edge and an ability to convince people that despite these concerns, you, a first time VC, will have the know how, relationships, and skillset to generate alpha, then by all means go for it. It has been done before, so there's no reason why you can't do it again.

Hope this is helpful

Sep 1, 2012 - 11:00pm

Okay... So.... my below comments come from the following context:

  • For where I am in my profession, I am young for my age - started my career as a lawyer (for 2 years) then lateraled to an Investment Bank as an Associate (for 2 years), and have now lateraled again as a VP within the corporate finance function of a large corporate. I am 28 year old (graduated law school 5 years ago). I say this not to "blow my own trumpet" but as evidence of (at least some) understanding of your position.

  • The Partner (in law) and Director (in Banking) that I worked for were incredibly generous with their time and support of my career progression (to the extent that I regard them both as part of my family, now having left them both to advance my career). They brought me "inside the tent" of their respective worlds such that I was granted a vantage point of my working environments not only from my own perspective but also from that of a person much higher up (where "soft skills", politics, foresight, and strategy are much much more important). Again, I say this not to sound arrogant, but to frame the broadness of my following comments.

  • I have not worked in PE or VC. However, my industry specialisation (which I won't disclose for anonymity's sake) is very greenfield/new venture focused and I consequently worked with a bunch of financial sponsors who were considering expanding their existing investment portfolio both in terms of individual investments and also complete fund strategies.

Okay... now to my 2 cents worth re your question, and let me say straight up that I absolutely think your establishment of a VC fund is possible. That said, if it was me, I would only be pursuing this if I was satisfied with my answer to the following questions:

  • Have your surrounded yourself with smart people (which, by the sounds of your brief background, you have a habit of doing)? Have a cadre of "go to people" for all the different pockets of expertise that you may not yet have yourself (or if you do, to test your own logic) - have legal, accounting, political, strategic, industry, technical and financial advisors that you trust implicitly. These can be both paid formal appointees and/or advisors who are more in the friend/mentor category. How you choose to remunerate their respective input will largely depend on what category each advisor falls into.

  • Are you comfortable walking away from your PE position this early (noting from your profile that you are a 1st year analyst)? When I think about how my knowledge base, and the way my "thinking" (re investment decisions) has matured over my career thus far, I definitely don't think that I had all the "pieces of the puzzle" put together until probably the my second year as an Associate. You may be in a very different place to where I was, but it is just a thought - it may be the difference between having to call on your support network (advisors as noted above and family and friends for emotional support) 70% of the time as opposed to 15% of the time (and as a result, may result in far less stress and fear for you, and less fatigue for your support network).

  • Have you considered approaching your existing employer re expanding the scope of their funds under management to include VC type investments (as a separate fund)? Obviously PE and VC are different and (depending on the specific industry) can require quite different mind sets.... but to my mind, a small VC fund as a back pocket project might be an interesting thought for a PE Fund's Partners (have definately seen this done by partners in a Big 4 Accounting firm).... if this were to work, this could give you (formal and direct) introductions to some additional capital sources (both the PE Fund's LPs and the Partners themselves) and would also give you a ready made support structure (not to mention a fall back job doing just PE if it all went to custard).

  • [Assuming you go it alone and not with your current PE Fund] Are your potential investors ones that want to work with you because they respect you for your intelligence, enthusiasm, and maturity (notwithstanding age)... and not just the potential financial returns. There is unfortunately still a percentage of the business community at the higher echelons who have an issue listening to those significantly younger than themselves and thus look down their nose at them to a certain extent, and want things done their way or the high way all time. You want nothing to do with these people, as they will only restrain your success. You want people that value you for who you are, and want to harness and encourage you (whilst being their to back you up if you need it).

  • [Again, assuming you got it alone] Have you considered non-conventional capital sources? I've never worked in VC, but it strikes me that industry specific corporates such as hospitals etc etc might be interested in (more formal) relationships with a industry specific VC fund... Hospitals etc need new ventures, intellectual property, designs etc to advance (and sustain) their own profitability. Now I'm sure that they don't want the riskiness of a pile of VC investments on their own books, but to have an associated VC fund that acts as a "feeder" for own operations, while keeping it off their own books might be interesting... In fact, you may well find that some of the investors in the hospitals etc (or indeed the pension fund established for its employees) are also interested in being an LP....

So that's my 2 cents.... Here's hoping it is helpful to your own thoughts.



Sep 2, 2012 - 1:10am
Can you and your partner put up seven figures of your own capital? That would be a good very very basic starting point

Also, I agree this helps a tremendous amount.
Sep 2, 2012 - 1:08am

I don't work in VC, but have started an Asset Management/hedge fund firm (where I still work). The first thing you need to know is getting the first capital commitment is the most difficult part. Don't assume that is easy...if at all possible, try to get some verbal commitments before quitting your current job. Everybody will ask how much you have raised so far. People are lemmings. Investors are lemmings squared.

I don't understand something about your plan. Why are you targeting a $5 million fund size? At 2%, you're looking at $100,000 in annual management fees. How can you even survive on that? You are going to have some fees associated with the fund (legal, accounting, etc.) and most investors will want you to cap those expenses, which you will have to eat. This is in addition to normal business operating expenses you need to pay for. Personally, I would be going for a much larger fund size and do whatever I had to do to get it. Figure out the size of fund you need to just survive month to month and target that size. Use outside sales firms if you need to. Then, if you are successful, you get the carry which is all upside and you are off to the races to launch additional funds where you could make big money. Keep in mind, I'm not suggesting that you need to get rich from the management fee, but $5 million feels absurdly low to me. Maybe you know something I don't.

Budget your expenses stringently. Figure out exactly what you need to spend on everything from rent, to legal (company formation and fund formation and ongoing), accounting, technology, travel, etc. You should be able to get very accurate estimates on everything except travel and entertainment, and even that should be in the same ball park as reality. You need to get someone you know who has done some of this before to review it to see if they agree with your assessments on cost. Once you have done that, you need to remember that all expenses are negotiable. Try to back end load contracts so that you can keep cash in the beginning when you need it most. Also, people are pretty willing to concede on price on almost everything these days (Bloomberg terminals excepted).

You need legit legal and audit teams for your fund, no excuses. If you don't you will scare off any investor with the slightest degree of sophistication.

Spend a lot of time on your operating agreement. Who in your firm gets to decide what and what goes to a vote? The more time you spend on it upfront, the less problems it will cause later. If you agree upfront and in writing, the harder it is to get upset and the stronger it makes the partnership. Don't pussyfoot around on this. Fight if you need to now. Usually, it's easy to divide responsibilities. How are you and your partner splitting economics and how will you do so with new employees? This needs to be answered now.

One thing I would strongly consider is to allow early investors in your fund (or potentially some others, like advisors) to participate in the upside of your firm or fund. You need help and connections. Nothing motivates people like participating in the upside. Let's say you offer something like this: every person that writes a check for $1 million participates in 1% of the profits of your firm for 10 years (or 1% of revenue for 5 years or 1% of revenue for this fund only). You should only offer this to people that commit a certain level or higher, to encourage people to write larger checks and for only the first X amount in the fund, to entice them to move sooner. There are literally millions of variations of this, you have to figure out what would be motivating for investors of your fund.

How are you going to source deals and how are you going to communicate whatever advantages you may have to potential investors? How is that differentiated from what everyone else is saying? As a new entrant, your story has to be twice as good the competition to get any traction.

If you have the ability to stack your advisory board with well known and/or well connected people, that will help tremendously in opening doors. People like this can add tons of value through little effort on their part by being able to introduce you to their connections and by enhancing the credibility of your operation. They need to be 100% convinced of your capabilities for maximum effectiveness. Don't choose to reward them based on effort, reward them based on results. (likely you wouldn't have a choice anyway since they usually know their value)

Keep in mind that I know absolutely nothing about you other than what you wrote above, in my opinion, I think it is highly unlikely that you get this to work. I hope I'm wrong. The difference between the initial team at my firm and yours is that we started with a group where each of the people (between 5-10 people) had more than 10 years of relevant experience each (except our Associate). I couldn't imagine how difficult it would be with the amount of experience you are talking about. Forgetting about technical skills and all of that, how do you have a big enough network now to pull this off? If you can answer this, you may have a shot. However, your odds of success probably increase if you wait a few years and build out your network, both on the investment side and the potential investor side.

I could probably write an entire book on this, but for now, that's my $0.02.

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Sep 3, 2012 - 9:26pm

I'd like to add one core, critical, and concise idea, in addition to some of the incredibly detailed (and accurate) posts here.

What do you bring to the table that is special?

More specifically:
1. Why would someone want to give you their money?
2. What value-add to you bring to an entrepreneur?

Why would an investor want to give their money to a 24-something year old who worked at NASA and then started (and apparently abandoned?) a medical startup and who worked for a limited time in PE, along with a NASA computer programmer? What is special about what you bring to the table? Are you a successful entrepreneur? Are you very well-connected? Are you a great visionary who can sell his/her dream?

Along the same vein, what value would you add to an entrepreneur? Believe it or not, VCs/angel investors bring more than just money to the table, they bring connections, legal/financial connections and expertise, and a support network between portfolio companies. And believe it or not, but some startups can afford to be picky, fielding more requests from investors than they can accept. When the entrepreneurs you're investing in (esp. medical startups) have more experience than you, they might be more hesitant to take your money, unless they are desperate (and sometimes they will be).

For example, the person you cite, Jared Kushner, appears to have been very well-connected, especially through his father/brother, and had co-founded a successful startup (currently 300MM+ valuation) while in college.

Sep 2, 2012 - 7:50am

For the record guys he's asking for advice not on starting the fund, i.e. the money, but on advice of Dos and Don'ts. None of your answers contain this, alas, I am now bored by your rather disingenuous replies.

Sep 2, 2012 - 12:05pm
For the record guys he's asking for advice not on starting the fund, i.e. the money, but on advice of Dos and Don'ts. None of your answers contain this, alas, I am now bored by your rather disingenuous replies.

Are you serious? I've read some of the best posts on WSO here, contaning pretty doable info. 'Disingenuous'? stop being so cynical bro, you are better than that.

The Auto Show
Sep 2, 2012 - 4:39pm Curating the best advice and making it actionable.

Sep 3, 2012 - 2:47pm

first off, thanks everyone for posting - some very insightful and thoughtful comments on here. special thank you's to:


I do agree it's a tough proposition and you guys have certainly highlighted some important things to watch out for. My start-up is currently developing the product in medical imaging (which doesnt require day-to-day oversight from me). We are targeting fall 2013 as a possible launch date, fundraising starting in Jan 2013, prep from now to jan.

"...the art of good business, is being a good middle man, putting people togeather. It's all about honor and respect."
  • 1
Sep 25, 2012 - 7:07pm

Guys have you thought of doing consulting work for some Angel Funds first? You would get exposure to deal-flow, help those guys figure out the technical merits of an investment (aka is it feasible) and get exposure to potential investors. With the amount you are looking to raise you will be doing angel investing anyways to spread the risk thin enough.

Sep 25, 2012 - 7:08pm

creating your own VC fund (Originally Posted: 12/23/2010)

Hey all -- I'm just coming up with crazy ideas during the holiday season. But I was contemplating about creating a VC fund on the side -- very, very early seed money for entreperneurs. I have a little extra money and I'm thinking about teaming up with some one else, but I really wanted to know how much of an investment for very, very early companies need for seed money? I know it varies but does anyone have a ballpark range?

Sep 25, 2012 - 7:09pm

Depends on the cost-intensiveness of the business/ what they need to start, how many investors they have, and your exit terms. Also, how early stage the business is. The earlier, the less expensive your position obviously. 100K to a garage outfit is a lot of fn money, so think in terms of ~25-75. If they end up getting 500k in seed, you own ~10% of the equity, if they get to second round of funding, that is a nice position, and you'll have the option of being diluted or selling your equity.

Sep 25, 2012 - 7:10pm

Start saving money now. You need $200K of your own capital to just start a hedge fund. I would think the same thing for a VC firm

If you want to take small equity stakes in your friends' start-ups, that's obviously a very different situation, but bear in mind a few things:

-Most financial companies require you to disclose all outside affiliations (including start-ups), and make them subject to their approval while you are working for them. You don't want to drive managers crazy approving and disapproving these investments.
-Most early companies fail. They're sorta like options- they usually wind up worthless but sometimes wind up being worth a lot.
-It's very easy to get screwed on dilution when companies are burning cash like it's going out of style.

Sep 25, 2012 - 7:17pm

Starting a VC Fund (Originally Posted: 10/27/2011)

I just finished my undergrad. I have long term goal of becoming a billionaire, so i want to start a VC Fund after 10 years of working .......

In simple terms what is a "VC Fund" ?

How to start a VC Fund ?

what kind of job in Finance(ex: ibanking/PE/VC/Equity Research/Trading) soon after MBA from a top school helps to give knowledge on how to start a VC fund ??

out of VC/PE/Hedge funds, which one can yeild more profits ??

Sep 25, 2012 - 7:18pm

Firstly, you need to lower your expectations. It's good to dream big, but dreaming of becoming a billionaire is pushing it. Most VC founders do not make it to the billionaire club, unless your fund is a megafund (odds are one in a zillion).

It is best to start from bottom up i.e. join a VC megafund like Sequoia and learn about the operations of the fund. Since you've graduated, what are your available job opportunities? IB would be a good training ground before you embark on your MBA as you will get to learn about valuation techniques etc.

Do read up more about the different areas in finance. To be honest, I'm quite shocked that you're a graduate and yet have no clue about HF/PE/VC industries when you are looking to break in. It's quite obvious that your internships aren't IB/VC-related, so I'd recommend getting a job at a F-500 and lateral into IB.

Sep 25, 2012 - 7:23pm

@ all those Sarcastic replies : I believe in this : "Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma – which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary." - Steve Jobs'

Sep 25, 2012 - 7:25pm

Starting your own VC firm (Originally Posted: 02/18/2015)

Just curious about some opinions here on what you would all do. Let's say you have the capital and VC interests you, but you have no experience in the field. Plus you don't have the undergraduate grades to get into a good MBA program, nor do you want go back to school.

My main question is the advice you would all give someone who has the funding to start their own VC firm, but doesn't have the experience?

Sep 25, 2012 - 7:26pm

Terrible idea. If you have no experience and no track record, how are you going to get access to and win the best deals? Good entrepreneurs and companies with strong traction get to pick their investors. Why would anyone pick you?

Sep 25, 2012 - 7:31pm

You could join an angel group, yeah?

Make Idaho a Semi-Target Again 2016 Not an alumnus of Idaho
Sep 25, 2012 - 7:32pm

There is virtually unlimited capital in the VC space chasing a relatively small amount of good deals. The VC firms compete with each other for the privilege to invest in these companies, not the other way around. If you think you will land good deals without experience, you are wrong.

Sep 25, 2012 - 7:33pm

If you're interested in VC and you know you want to lead a VC fund in the future, the best thing you could do today is get a job with a startup. Go to the job section on Angel List and apply for some of those positions. Otherwise, you offer no value to a VC firm. Even top MBAs offer little value. You need to have the operational experience.

Sep 25, 2012 - 7:34pm

One of the great things about VC is that brand matters, it's not just money. So, sourcing would be hard.

If you could get over that hurdle, you'd still run into A LOT that is hard. There are lots of different structures, incentive systems, term sheet idiosyncrasies, etc. From my experience, mentorship is really important to success.

Sep 25, 2012 - 7:35pm

Why don't more people start VC funds? (Originally Posted: 11/02/2009)

Sequoia made 41x on youtube in one year and $3 billion from $12million from Google within 5 years. Why aren't more people following suit?

Sep 25, 2012 - 7:41pm

totally agree with drexelalum.. hey buddy, how many serguy brins do you know? how many googles are there on earth? sry to say that dude, but that was a silly ques

"What we can, we must; and because we can, we must"
Sep 25, 2012 - 7:38pm

Google didn't just knock on any VC's door and asked for money. They knocked on Sequoia's door because they have an amazing track record and a strong network to help their portfolio companies out.

VC is generally a much more active investment class. If you can't bring any value as an investor such as experience successfully running a company, you'll be left sifting through the poor quality deals.

Sep 25, 2012 - 7:39pm
Google didn't just knock on any VC's door and asked for money. They knocked on Sequoia's door because they have an amazing track record and a strong network to help their portfolio companies out.

VC is generally a much more active investment class. If you can't bring any value as an investor such as experience successfully running a company, you'll be left sifting through the poor quality deals.

Funny story from Bessemer Venture Partners' anti-portfolio page:


Cowan's college friend rented her garage to Sergey and Larry for their first year. In 1999 and 2000 she tried to introduce Cowan to "these two really smart Stanford students writing a search engine". Students? A new search engine? In the most important moment ever for Bessemer's anti-portfolio, Cowan asked her, "How can I get out of this house without going anywhere near your garage?"

Sep 25, 2012 - 7:42pm

Rhetorical questions from college/high school students don't really help answer my question in my shape or form. I would appreciate it if less kids will absolutely no full time experience tell me that I am the one that I have no idea what a VC fund entails.

Getting back to the topic at hand, any seasoned investor should be able to pick out successful business plans from the duds. 90% of all business fail , but there are also thousands of proposals submitted to each of these VC funds a day. All you have to do is find the best one with the best return to risk ratio A WEEK, and even if only 1/4 of them succeed, the returns should be astronomical.

Sep 25, 2012 - 7:43pm

Not sure where you're getting your 90% number from but that sounds like an OK number to start from. This of course takes into account all types of business (mom and dad starting a local grocery store, some guy opening up a mcdonalds franchise) and is NOT limited to the type of companies that VC's make money off of. VC's make money off extremely high growth companies and I would venture to guess that the success rate of those startups is MUCH lower than 90%.

Secondly, if you were the only VC out there with money to invest then yes it would probably be much easier, but as someone has already said there really aren't THAT many good startups with the right team behind them to choose from. The ones with the highest chance of success at the outset go to funds that can offer them something (operational experience, strong network). Each of these VCs do not get anything close to thousands of proposals a day.

Lastly, if it was as easy as picking out good business plans then yes, it would be relatively easy to start a VC fund. Execution is everything and business plans change all the time with changing business environments. Funds that have strong industry contacts and experience starting and growing companies have much more to offer new startups than money

The fact that historical returns from VC funds have been a mixed bag at all but a few of the very best firms should already tell you how wrong your thesis is

Sep 25, 2012 - 7:45pm

In addition to fk's points,

Money is locked up in VC firms for 7-10 years, longer than PE firms and significantly longer than most HFs, that's one deterrent.

Most VC firms are run by seasoned executive/entrepreneurs because operational experience counts for far more in the VC world than does transactional experience. Successful executives/entrepreneurs like Perkins, Khosla, Andreessen and others, that want to start VC firms are in short supply. This alone is a barrier to entry because you can't just walk up to investors, tell them you're a banker with X years of experience, and expect them to hand you cash for a VC fund, just doesn't happen much.

Lastly, VC fund returns have been less than stellar for all but the top firms. There was a list floating around of VC firms that have been unable to raise follow-up funds, I'll try to find it and post it.

Sep 25, 2012 - 7:46pm

...just like any form of investing, venture capital is difficult. For every guy who got an early stake in Google their are many who ended up with Saying "why dont i start a VC fund b/c one guy made 100x his money by seeding google?" is no different then saying "why don't i start a hedge fund because John Paulsen made a billion dollars last year?" or saying "why dont i start playing baseball since Alex Rodriguez has made $25MM/year for the last 8 years?". If you think you would be good at finding diamonds in the rough and have the means to raise the money then go ahead and start a VC fund, but it certainly isnt some kind of free lunch and "the next google" isnt going to be easy to find. If you do find it please call me as I'm sick of waking up at 5am every day.

Sep 25, 2012 - 7:49pm

It is a legitimate question. In almost every other type of investing, the market is beyond over-saturated. VC is the only type of fund where companies consistently get turned down (the figure that I have is only 1 out of every 100 gets accepted), whereas for almost every other type of pe, the rate is never this high and it is the funds who are doing the sourcing, not the companies. It is simply supply and demand.

Sep 25, 2012 - 7:51pm
It is a legitimate question. In almost every other type of investing, the market is beyond over-saturated. VC is the only type of fund where companies consistently get turned down (the figure that I have is only 1 out of every 100 gets accepted), whereas for almost every other type of pe, the rate is never this high and it is the funds who are doing the sourcing, not the companies. It is simply supply and demand.

Just because you turn down a lot of deals doesn't mean the market isn't saturated. There's plenty of VC funds with over >$1 billion in AUM and all of them are competing in an asset class that only requires $5-$10 mm to do a Series A.

The companies that get rejected are done so, for the most part, with good reason. Only few of the companies Bessemer rejects will show up on their anti-portfolio.

Sep 25, 2012 - 7:50pm

it's clear that the original poster needs to do a bit more research on the VC industry. VC is a lot more than just giving people money for equity, it also involves a lot of helping the company out. if you don't have people at your VC firm who have connections and experience to help out the entrepreneur, you're not bringing much to the table (and probably throwing your money away). when a VC funds 10 companies, they expect 1 success, a handful of companies that do okay (make back their investment), and the rest to flop. and that's out of the literally thousands or tens of thousands of business plans that they get their hands on.

so in order to start a VC firm, you need:
- money (lots of it, since most of your investments turn out to be a complete loss)
- money for a long time (8~10 years)
- industry expertise to help your investments get off the ground
- industry connections to get customers or whatever else the company needs
- a clear exit plan (be it IPO or sale to a larger company). VCs want their money back at some point.

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