Can you actually get the ownership you are targeting

The question

Is the ownership this fund targets actually available at the stage it enters. Ownership is the mechanism that turns a company's outcome into a fund's outcome, and it is the number most often carried across from a firm that had no business lending it.

Where the 20 percent convention came from

Rob Go set out the reasoning in 2012, and it is worth reading in the original because the conclusion is not the one the convention became. His starting point is that it is a poor use of a partner's time to make an investment that, even in a very good scenario, cannot move the fund. From there the arithmetic is simple: a $500 million exit at 20 percent ownership returns $100 million, which makes a real dent in a $400 million fund.

But the same piece dismantles the fixed number in the next breath. A $40 million fund owning 5 percent of that same $500 million exit returns more than half its fund. A $400 million fund owning the same 5 percent returns $25 million, which Go calls pretty modest. His actual conclusion is that the right threshold scales with fund size, and that 20 percent was never a law. It was one fund's answer, at one size, with a particular number of partners.

The identity underneath

The Fund CFO reduces the whole question to one relationship: required exit equals fund size divided by ownership. Everything else is commentary on that.

Worked through a $50 million fund, the consequences are stark. Spread across 25 companies, ending near 5 percent ownership, the fund needs roughly a $1 billion outcome to return itself. Concentrated into 10 to 12 companies at 10 percent or more, roughly $500 million does it. The title of the piece is the point: you do not need a unicorn, you need enough ownership that you do not.

This is why ownership target and portfolio count cannot be chosen independently, and why moving one without the other is the most common construction error there is.

The dilution gap

Here is the part that most often goes wrong, and it is not a disagreement between practitioners so much as a gap between what managers assume and what happens.

SheetVenture describes the standard construction: because future rounds dilute, and lifetime dilution typically runs 35 to 40 percent, investors ask for 15 to 25 percent at entry in order to hold 10 to 15 percent at the finish. Entry ownership is set deliberately above the target so there is something left after the dilution.

The Blue Future Partners survey of emerging managers, published through OpenVC, found something different in what managers actually expect. Their expected ownership at entry and at exit are both in the low teens, roughly unchanged, with an assumed 18.5 percent dilution across the entire life of an investment. The author is direct that this is not realistic, and that stakes get diluted substantially regardless of reserves held to defend them.

Run back through the identity above, that is the difference between needing a $400 million outcome and needing a $700 million one. The error is invisible at construction and decisive at exit.

The case that none of this matters

The strongest counter-position belongs to David Tisch, who has argued on 20VC that ownership in venture does not matter, and that ownership requirements are investors projecting their own problems onto founders. The reasoning is that returns come from genuine outliers, and an outlier returns a fund from a modest position; insisting on a percentage mostly costs a firm access to the founders who have other options.

BoxGroup's own construction makes the position concrete rather than rhetorical: 80 to 100 companies per fund, and more than 500 seed investments across the firm's history. That is a strategy where per-position ownership genuinely is not the lever, and it has worked.

Harry Stebbings pushes back in a later episode, and the two argue it directly rather than trading assertions. The substance of the disagreement is whether the Tisch position generalizes. It is a coherent answer for a firm operating at that portfolio scale, with that access, writing that many cheques. Read the identity again and the tension is obvious: at 5 percent, a fund needs an outcome large enough that only a handful exist in any vintage. Betting the fund on reaching one is a real strategy and it requires being right about access rather than about ownership.

Chris Neumann adds a practical observation that partly reconciles them: multistage funds tend to enforce an ownership target only at the stage they treat as primary, and are flexible elsewhere. Much of the apparent disagreement is firms describing different stages of their own book.

Why entry ownership matters more now

One development has shifted the weight of this argument, and it is not about ownership at all. Charles Hudson has written that the reset in seed to Series A graduation rates is real and permanent. Good firms once saw 50 to 75 percent of their seed investments graduate to a Series A; that world is gone, and he expects a generation of companies that use the seed round to reach control of their own destiny without raising again.

The implication for this subscore is ours rather than his, and worth stating as such. If fewer companies raise again, then fewer follow-on opportunities exist to defend a position, and dilution is less survivable through participation. The ownership a fund holds at entry becomes a larger share of the ownership it will ever hold. Entry ownership was always the cheapest ownership; the reset makes it more often the only ownership.

What this subscore reads

The target ownership against the target stage, and nothing else. Earlier rounds are priced lower, so a given cheque buys more; later rounds are priced higher, so it buys less. A target that sits far from what the declared stage supports is a target that will be missed, and the subscore says so before the fund finds out one round at a time.

The Firm Design Congruence engine reads an adjacent pair, ownership against lead practice, in its own stage and ownership check. The two are deliberately separate: one asks whether the ownership is available at that stage, the other whether the firm's role in rounds is one that secures it.

Sources

• Why Do VCs Have Ownership Targets? And Why 20%?Rob Go, NextView, July 2012The origin of the 20 percent convention, and the argument that the right threshold scales with fund size rather than being fixed.
• #338: You Don't Need a Unicorn! Your Fund Model Tells You Why.The Fund CFOReduces the question to one identity, required exit equals fund size divided by ownership, and works it through two portfolio shapes.
• How VCs Decide Ownership Percentage TargetsSheetVentureEntry targets set to survive dilution, with realistic lifetime dilution at 35 to 40 percent.
• Why Do VCs Care About Ownership?Chris NeumannOn multistage funds enforcing an ownership target only at the stage they consider primary.
• 20VC: David Tisch on Why Ownership in Venture Does Not MatterThe Twenty Minute VCThe case that ownership requirements are investors projecting their own constraints onto founders.
• 20VC: A Debate on Portfolio Construction: Does Ownership Matter, with David TischThe Twenty Minute VCThe follow-up where the disagreement is argued directly rather than asserted.
• An LP take on VC portfolio constructionRodrigo Ferreira, Blue Future Partners, published on OpenVCWhat managers assume about dilution, and why the author considers the assumption unrealistic.
• The Big Reset in Seed to Series A Graduation Rates is Real and PermanentCharles Hudson, Precursor VenturesGraduation rates that good firms once saw at 50 to 75 percent, and why the reset is not temporary.