Or, as we like to call it at VC Lab, the “Secret Sauce”.
What is Secret Sauce for a venture capital fund?
The Secret Sauce of a fund describes why the managers are uniquely qualified to pursue the Thesis. The Secret Sauce provides a matter of fact statement of the competence of the managers with one or two pieces of supporting data. All of the data in the secret sauce must be from companies related to the Thesis, particularly the focus. Examples include:
– “…with a cumulative exit value of over $500 MM in the EdTech sector”
– “…helping three BioTech companies secure over $20 MM in sales each, including five deals with Fortune 500 accounts”
– “…providing startups exposure to our 25 member industry network, which has lead to 12 financings for $65 MM”
What are the top success metrics for a strong Secret Sauce?
There are six success metrics of Secret Sauce that are commonly used by general partners. The prioritized list by preference of limited partners is below.
Total exit value
Investment markups, IRR or MOIC
Total amount raised
Measurable sales increases
Number of companies helped, programs run or exposure
Years of experience
What are some examples of a good Secret Sauce?
The Secret Sauce will vary widely with different success metrics. Some examples include:
1. Total exit value
Exits convey your ability to pick winning companies and generate cash returns.
“…with a cumulative exit value of over $500 MM in the EdTech sector”
“…generating a $1.5 B exit in HealthTech”
2. Investment markups, IRR or MOIC
Markups demonstrate that you can pick good companies that have potential.
“…having achieved a unrealized IRR of 67% in similar companies”
“…with a 3.2x MOIC across 10 investments in the BioTech industry”
3. Total amount raised
Fundraising success demonstrates that you can help companies raise future rounds.
“…having assisted similar companies raise over $2 B in early stage capital”
“…helping FinTech startups to raise a total of $150 MM”
4. Measurable sales increases
Strong sales indicates that you can help companies grow revenue and build value.
“…helping three BioTech companies secure over $20 MM in sales each, including five deals with Fortune 500 accounts”
“…after experience negotiating 6 partnerships that created $300 MM in sales”
5. Number of companies helped, programs run or exposure
Measurable startups ecosystem experience demonstrates that you have knowledge, access, and related experience.
“…having successfully mentored over 25 promising startups, resulting in five unicorns and over $650 MM in capital raised”
“…providing startups exposure to our 25 member industry network, which has lead to 12 financings for $65 MM”
6. Years of experience
Years of experience demonstrates that you are an expert in the field when coupled with a measurable accomplishment related to startups or investing.
“…leveraging the collective 50 years of experience in the Cybersecurity sector, which included building the top startup in the space.”
“…capitalizing on our team’s 40 years of hands-on experience in the AI industry, including co-authoring the paper that started LLMs.”
Crafting a Secret Sauce
The Secret Sauce component is the most difficult to master for most managers. The best metric or metrics for your Secret Sauce depends on the unique circumstances and strengths of the team, which is why every Thesis is unique. Here is a process to get started.
First, identify two of the six success metrics where your team has the best track record with measurable performance in the fund focus area.
Next, work to collect data on the measurable performance, and, while collecting the data, use a reasonable estimate.
Then, write three versions of the Thesis for each of the two success metrics with an estimate or with real data.
Lastly, test these six versions with a couple close friends and associates familiar with venture capital to refine and select the best one.
A strong Thesis commonly takes weeks to refine with the Secret Sauce taking the most time. Here are five important criteria of a strong Thesis:
37 Words. Keep your Thesis to 37 words or less.
No Adjectives: Avoid using adjectives and superlatives.
Plain English: Don’t invent words or use confusing language.
One Metric: Try to have only one key piece of impressive data.
Related Data: Only use data for metrics that is related to the Thesis.
What are the next steps?
If you followed the exercises above, then you now have a good foundation to build a VC Firm. The next step is to join the VC Lab accelerator.
The total process to form your venture capital Thesis include:
Adeo Ressi is CEO of Decile Group, powering the next generation of venture capital firms worldwide with an integrated offering of training, tools, support, and funding. Decile Group is the parent of the VC Lab venture capital accelerator, which helped to launch nearly 50% of all new manager firms in 2022. Adeo is also Executive Chairman at the Founder Institute, a pre-seed accelerator with chapters in over 250 cities worldwide and over 5,000 portfolio companies.
Adeo has launched 14 venture capital funds and founded 11 startups, having nearly $2 billion in exits before 30. Adeo previously served on the Board of the X Prize foundation to pursue his interests in space exploration. He studied architecture and spent time living on a commune to explore his interests in designing better ways to live. Adeo is passionate about inspiring people to achieve their potential.
