Understand how VCs make money to Elevate Your Pitch Deck

March 2025

I review 100s of pitch decks every year and mentor 100s of start-ups; over 90% of them don’t tell the story of how they’re a venture-scalable business that VCs can get an ROI for. For the longest time, I was in the same boat! Here’s what this means, why there’s a need for an ROI, and how to tailor your pitch to talk about this.

TL;DR: Joey Pham's takeaways from this blog post. 

Background: Why Funds Exist

High-net-worth individuals and other investors, called LPs (or Limited Partners), give money to a VC fund to diversify their investments, e.g., as an alternative to the S&P and other investment opportunities. These LPs expect a 2.5x+ return on investment; in return, fund managers charge management and fees on profits (also called carried interest), typically as a 2 and 20 fee breakdown structure.

Background: Fund’s 2 and 20 Fee Structure

As a simple example, suppose a VC fund has $10M to invest in start-ups. LPs pay 2% of that amount annually in management fees, which go towards salaries, health insurance, and other fund administrative costs.

Suppose there are any start-up exits (such as from IPOs, M&A, or sales on the secondary markets) within the fund’s lifecycle, LPs typically first get back the money they’ve invested (or ~$10M). In that case, any profits are split 80/20 – LPs get 80% of the profits and the fund receives 20%.

All of this is outlined in the legal document called LPA between each LP and the fund.

What is a Venture-Scalable Business?

For example, if an investor gives you $1M for 10% of your company and your exit is $10M, they break even. Actually, the LPs lost money when adjusted for inflation! If LPs had made money if they had just invested in the S&P, they’d be more hesitant to give the fund money to invest in their next fund. Then there’s less funding for start-ups! So we know VCs need to imagine (and see) a bigger exit, but how much bigger?

We also hear that at least 90% of start-ups fail. If a fund invests $10M into (for simplicity) 20 start-ups, then about 1-2 will succeed and ~18 will fail. This means that for LPs to see any profits, the fund needs to get back more than $10M from their 10% ownership stake for LPs (and the fund) to see any profit!

Takeaway: Tell your Venture-Scalable Start-up Story

VCs evaluate each start-up as an opportunity to return the fund, from your TAM/SOM/SAM to your traction to your growth milestones, with an eye towards how you’re de-risking each step along that path and thinking about the business growth with those exit targets in mind.

Omri Drory, PhD, GP at NFX, shares a formula for you to consider: 

(# Sell) x (Cost) x (Gross Margin) = $100M+/year

Now you know that your pitch deck should focus on how your product — and its milestones along the way — will become the next unicorn, with a $1B+ exit, so investors get multiples of their money back, get LPs to invest in their next fund, and back your next start-up! Good luck!

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