Venture Capital puzzles, solved step by step

Puzzles: 100
Traced to a firm: 7
Topics: 12
Hard: 30

Showing 21–28 of 28 · filtered from 100Clear filters

079Estimate the annual market for refurbished smartphones in India. Build it from the number of phones replaced each year, the share of those that are resold, the share of resold phones that are refurbished, and the average refurbished selling price.Market sizing and estimationHardConsumer internet VCIndia VC
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Which input moves this market size the most per unit of doubt?
Show the worked solution
About Rs 24,000 crore a year on these assumptions, and supply, not demand, sets the ceiling. Take 60 crore phones in use on a 4-year cycle: 15 crore retire each year. If 40% are resold and half of those are refurbished, 3 crore units reach the refurbished channel at about Rs 8,000 each. Every input is an assumption to check against market data.
Why start from the phones people retire rather than the people who want one?
A second-hand bookshop can only sell the books people give up. However many students want cheap textbooks, the shop's shelves fill at the rate books are released. A refurbished market is a used-goods market, so its volume is capped by the flow of retired devices before anyone asks about demand. Size the flow first, then check demand only to see whether it is large enough to absorb that flow.
On the stated assumptions, 60 crore phones in use retire 15 crore a year; 6 crore are resold and 3 crore of those are refurbished, a Rs 24,000 crore market, and because demand of about 4.5 crore units exceeds the 3 crore supply, supply sets the size.
How do you build and defend each step?
Say every number is an assumption and give the reason for its size. Installed base over replacement cycle gives the retiring flow: 60 crore over 4 years is 15 crore phones a year. Of those, many stay in a drawer or pass to a parent, so assume 40% are sold or traded in, 6 crore. Some go straight to a buyer as they are; assume half pass through a grading, repair and warranty channel, 3 crore units. At an average Rs 8,000, that is Rs 24,000 crore.
Step Assumption Units, crore
Smartphones in use Round starting base 60
Retired each year 4-year replacement cycle 15
Resold or traded in 40% of retired 6
Refurbished 50% of resold 3
Market, Rs crore x Rs 8,000 24,000
Each row multiplies the one above by a stated assumption, so the Rs 24,000 crore estimate can be challenged one line at a time; none of these figures is market data.
How do you show that supply rather than demand caps it?
Run a quick demand check. If about 18 crore phones are bought each year, new and used, and a quarter of buyers would take a refurbished phone at a fair price, demand is about 4.5 crore units, more than the 3 crore supply. When demand exceeds supply, the market is the supply, so the replacement cycle is the lever to test. A 3-year cycle lifts the flow to 20 crore retired phones and the market to Rs 32,000 crore, a bigger swing than any plausible change in price. That also tells an investor where the business is won: in sourcing devices, not in finding buyers.
Where candidates lose it
Most candidates size demand: population, smartphone owners, share who would buy refurbished. That gives a huge number the market can never reach, because nobody can sell phones that have not been retired. The interviewer is waiting to see whether you notice which side binds.
The second loss is stating inputs as facts. Say that each number is a round assumption to be checked, and name the one you would check first: the replacement cycle.
What the interviewer asks next
How would you estimate the replacement cycle without any industry report?
What would change if exports of used phones took a quarter of the resold flow?
Would you rather back a refurbisher that sources through trade-ins or one that buys from individuals, and why?
082You will meet 20 founders, one at a time, in random order, and can back only one. You must decide yes or no at the end of each meeting and cannot go back to anyone you passed. What rule maximises the chance that you back the single best founder, and what is that chance?Probability and expected valueHardSeed and early-stage VCMulti-stage VC
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Roughly how often does the best possible rule land the single best of the 20?
Show the worked solution
Let the first 7 founders go, then back the first one who is better than all of them; you back the single best about 38% of the time. The first 7 set the bar. You win when the best founder comes after them and nobody earlier than the best beats the bar first. Across all cut-offs, 7 gives the highest chance, 38.4%, against 5% for picking at random.
Why let good founders pass at all?
Renting a flat in a tight market works the same way: the first few viewings teach you what a good flat looks like, and you commit to the next one that beats them. The early meetings are the price of learning where the bar sits, and the rule trades a small chance that the best founder is among them for a much better read on everyone after. Commit too early and you have no bar; wait too long and the best has probably already gone.
The chance of backing the best of 20 founders rises from 5% if you back the first one to a peak of 38.4% if you let 7 pass, then falls slowly, to 22.2% if you let 15 pass, staying near the 1/e limit of 36.8% across a wide middle range.
How do you work out the chance for a given cut-off?
Say you let r founders pass. Suppose the best founder is at position i, after the first r. You back that founder only if nobody between r and i beats the bar first, which happens exactly when the best of the first i minus 1 founders sits inside the first r, a chance of r over i minus 1. Each position is equally likely to hold the best, one in 20, so add up across positions.
The relationship
$P(r) = \frac{r}{n}\sum_{i=r+1}^{n}\frac{1}{i-1} \qquad P(7) = \frac{7}{20}\left(\tfrac{1}{7} + \tfrac{1}{8} + \dots + \tfrac{1}{19}\right) \approx 0.384$
n founders in total, 20
r founders you let pass to set the bar
1/(i-1) weight for the best founder sitting at position i
What it says in wordsAverage, over every position the best founder could hold, the chance that nobody earlier stole the pick.
The curve is flat near the top: letting 6 pass gives 37.9% and 8 gives 38.2%. The general rule is to let about n/e go, 37% of the field, and win about 37% of the time; for 20 founders that is 7.4, which rounds to 7.
Where does the model stop describing real deal flow?
It assumes you only value the single best, can only rank founders against each other, see them in random order and never get a second chance. A real investor is happy with a top three founder, has an absolute sense of quality from past deals, and can sometimes return to a founder a week later. Each of those argues for committing earlier. Say that limit after the number; it shows you know what the model is for.
Where candidates lose it
Most candidates either say 1 in 20, treating the choice as blind, or propose meeting everyone and then choosing, which the rules forbid. The interviewer is testing whether you see that watching without committing is itself a strategy.
The second loss is quoting 37% from memory without showing where it comes from. Give the r over i minus 1 argument in one sentence and the 7 for 20 falls out.
What the interviewer asks next
With 100 founders, how many do you let pass and what is your chance?
You are happy with either of the two best founders. Should you stop earlier or later?
A founder you passed is still available at the end half the time. How does the rule change?
083An investor puts in Rs 20 crore for 20% of a company, with a 1x participating preference capped at a total return of 3x. Map the investor's payout for exits from Rs 0 to Rs 400 crore. Where does the cap bite, and where does converting to common take over?Preferences, payouts and protectionsHardSeries A to C VCGrowth equity
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Between which exit values does the investor's payout stay flat?
Show the worked solution
The cap bites at an exit of Rs 220 crore and converting takes over above Rs 300 crore; in between, the investor's payout is stuck at Rs 60 crore. Below Rs 20 crore the investor takes everything. Above it, the investor takes Rs 20 crore plus 20% of the rest until the total reaches 3x, Rs 60 crore. Only when 20% of the whole exit exceeds Rs 60 crore does converting pay more.
What does a capped participating preference mean in plain words?
Picture a relative who lends to your shop on the terms: my money back first, then a fifth of whatever is left, but I will never take more than three times what I put in; if a fifth of the whole shop is ever worth more, I will take that instead. The investor first takes back Rs 20 crore, then shares 20% of the remainder, until the total reaches the cap of 3x, Rs 60 crore. Above the cap, the investor can give up the preference and convert to plain common shares. Here the cap covers the total return, preference included, which is the usual reading; say so before you calculate.
The investor takes the whole exit up to Rs 20 crore, then Rs 20 crore plus 20% of the rest until the total reaches the Rs 60 crore cap at a Rs 220 crore exit, stays at Rs 60 crore until Rs 300 crore, and then converts to take 20% of the exit, Rs 80 crore at Rs 400 crore.
Where exactly do the two kinks sit?
Set each piece equal to the cap. Participation reaches Rs 60 crore when 20 plus 20% of the exit less 20 equals 60, which is an exit of Rs 220 crore; converting beats Rs 60 crore when 20% of the exit exceeds it, above Rs 300 crore. At a Rs 100 crore exit the investor receives Rs 36 crore against Rs 20 crore as plain common; at Rs 400 crore it receives Rs 80 crore, exactly its 20%.
The relationship
$20 + 0.2\,(V - 20) = 60 \Rightarrow V = 220 \qquad 0.2\,V = 60 \Rightarrow V = 300$
V exit value, Rs crore
20 the 1x preference
0.2 the investor's as-converted share
60 the 3x cap on total return
What it says in wordsThe first kink is where participation hits the cap; the second is where plain ownership overtakes it.
Why does the flat band matter at the negotiating table?
Inside the band the investor gains nothing from a better price, while every extra rupee goes to the common holders. Between Rs 220 crore and Rs 300 crore the investor is indifferent to the price, so a quick, certain sale at the bottom of the band can suit it more than a long push for the top. A founder who knows where the band sits knows when interests diverge, and can plan the board conversation before a buyer appears.
Where candidates lose it
The common error is to find only one kink: candidates say the investor converts above Rs 300 crore and draw a smooth line up to it, missing that the cap already binds at Rs 220 crore. The flat zone is the answer to the question as asked.
The second is applying the cap to the participation alone, as if the investor could take Rs 20 crore plus another Rs 60 crore. Ask which convention the term sheet uses; the usual one caps the total.
What the interviewer asks next
With a 2x cap instead, where do the two kinks sit?
What does a 1x non-participating preference pay at a Rs 100 crore exit?
Why might a founder accept a cap rather than fight participation outright?
085A founder has two offers, each raising Rs 25 crore. Offer A is Rs 90 crore pre-money and requires a new option pool of 20% of the post-money, created inside the pre-money. Offer B is Rs 80 crore pre-money with a 10% pool on the same basis. Which leaves the founders more, and what is each offer's effective pre-money?Dilution and ownership riddlesHardSeries A to C VCIndia VC
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Which offer leaves the founders the larger share of the company?
Show the worked solution
Offer B leaves the founders 66.2% against 58.3% under Offer A, and its effective pre-money is Rs 69.5 crore against Rs 67.0 crore. A pool created inside the pre-money is paid for by the existing holders. Offer A's 20% pool is Rs 23 crore of a Rs 115 crore post-money, so the founders' shares are really valued at Rs 67 crore. Offer B's 10% pool costs only Rs 10.5 crore.
Why does a pool inside the pre-money lower the real price?
A flat sold for Rs 90 lakh, where the seller must also leave Rs 23 lakh of new furniture for the buyer, really sold for Rs 67 lakh. A pool created inside the pre-money is paid for entirely by the existing holders, so the effective pre-money is the headline pre-money minus the pool's value. Offer A: post-money is 90 + 25 = Rs 115 crore, the pool is 20% of that, Rs 23 crore, and the founders' shares are worth 90 - 23 = Rs 67 crore. Offer B: post-money Rs 105 crore, pool Rs 10.5 crore, effective pre-money Rs 69.5 crore.
Offer A's Rs 115 crore post-money splits into 21.7% investor, 20% pool and 58.3% founders, while Offer B's Rs 105 crore splits into 23.8% investor, 10% pool and 66.2% founders, so the lower headline leaves the founders more.
What share do the founders keep under each offer?
Take the investor's share and the pool off the whole. The founders keep one minus the investor's share minus the pool: 58.3% under Offer A and 66.2% under Offer B. The investor gets a smaller share under A, 21.7% against 23.8%, which is why the headline looks better; the extra 10 points of pool more than cancel it. This assumes the founders own everything before the round and there is no existing pool.
The relationship
$f = 1 - \frac{I}{\text{Pre} + I} - p \qquad f_A = 1 - \frac{25}{115} - 0.20 = 58.3\% \qquad f_B = 1 - \frac{25}{105} - 0.10 = 66.2\%$
f share the founders keep
I new money, Rs 25 crore
p pool as a share of post-money
What it says in wordsWhatever the investor and the new pool take comes out of the founders' share.
What would you push back on?
The pool size, not the headline. A pool should be sized to the hires planned before the next round, not to a round number. If the founder can show that 10% covers the hiring plan, Offer A's pool falls to Rs 11.5 crore, its effective pre-money rises to Rs 78.5 crore and the founders keep 68.3%, better than either offer as written.
Where candidates lose it
Comparing headline pre-money is the whole trap: Rs 90 crore beats Rs 80 crore, so candidates pick Offer A. The pool is a second price term hidden inside the first, and the interviewer set the numbers so that it flips the answer.
The second slip is computing the pool as a share of pre-money, 20% of 90, which gives Rs 18 crore rather than Rs 23 crore. Read which base the term sheet uses before you multiply.
What the interviewer asks next
How high must Offer A's headline pre-money go before its effective pre-money matches Offer B's?
Why do investors want the pool inside the pre-money rather than the post-money?
The company already has a 5% unallocated pool. How does that change the comparison?
088Of 100 seed companies, 40% raise a Series A, half of those raise a Series B, half of those raise a Series C, and 40% of the Series C companies reach a Rs 8,000 crore exit. What is the chance that one seed bet gets there, and how many independent seed bets give a 90% chance of at least one such exit?Power law and portfolio mathsHardSeed and early-stage VCIndia VC
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How many seed bets give a 90% chance of at least one large exit?
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One seed bet has a 4% chance, and it takes 57 independent bets to have a 90% chance of at least one such exit. Multiply the stage rates: 0.4 x 0.5 x 0.5 x 0.4 = 0.04. For a portfolio, find the chance that every bet misses: 0.96 to the power n. It first falls below 10% at n = 57, where the chance of at least one exit is 90.2%. Correlated bets would need more.
How do the stage rates turn into one chance?
A cricket team must win the quarter final, the semi final and the final; its chance of the trophy is the product of the three, not the average. Each financing stage is a gate the company must pass, so the chance of reaching the end is the product of the conversion rates. 40% to Series A, then half, then half, then 40% to the large exit: 0.4 x 0.5 x 0.5 x 0.4 is 0.04. Out of 100 seed companies, 4 get there.
Of 100 seed companies, 40 raise a Series A, 20 a Series B, 10 a Series C and 4 reach a Rs 8,000 crore exit, so one bet has a 4% chance; the chance of at least one such exit rises to 64% with 25 bets and passes 90% only at 57 bets.
Why can you not just add the chances across bets?
Adding 4% twenty five times gives 100%, which would mean 25 bets make a hit certain. For at least one success, work with the opposite: the chance that every bet misses, which multiplies. Each bet misses with probability 0.96, so n independent bets all miss with probability 0.96 to the power n. Twenty five bets all miss 36% of the time, so the chance of at least one hit is only 64%. To push the miss chance under 10%, take logs: n is at least ln 0.1 over ln 0.96, which is 56.4, so 57 bets. At 56 bets the chance is still 89.8%.
The relationship
$1 - (1-p)^n \ge 0.9 \;\Rightarrow\; n \ge \frac{\ln 0.1}{\ln 0.96} = \frac{-2.303}{-0.0408} \approx 56.4$
p chance one seed bet reaches the large exit, 4%
n number of independent seed bets
(1-p)^n chance that every bet misses
What it says in wordsKeep adding bets until the chance that all of them miss falls below one in ten.
What does this tell you about how seed funds are built?
It explains why seed portfolios hold dozens of companies rather than a handful. With a 4% hit rate, a portfolio of 25 companies misses entirely about a third of the time, however good the picks look one by one. Then say the limit: the bets are not independent. Companies from the same year share a funding climate and an exit window, so a weak market lowers every stage rate at once. Correlation makes the true number of bets needed higher than 57, and the 4% itself is an assumption to test against a fund's own record.
Where candidates lose it
The common slip is to add: 90% divided by 4% gives about 23 bets, or 25 bets for one expected winner, which candidates then read as a near certainty. One expected winner still leaves a 36% chance of none, because winners arrive unevenly.
The second loss is treating the bets as independent without saying so. The interviewer will usually push on it, and the right answer is that correlation within a vintage raises the number, not lowers it.
What the interviewer asks next
How many bets give a 50% chance of at least one large exit?
If the Series A rate drops from 40% to 30%, how many bets are needed for 90%?
Why does correlation between companies in the same vintage raise the number of bets needed?
092A fund invests Rs 100 and gets Rs 200 back five years later. Instead of calling its investors' money on day one, it pays for the investment with a bank credit line and calls the investors' money one year later to repay it. The exit date is unchanged. Ignoring the interest, what is the investors' IRR in each case?Fund economics riddlesHardFund of funds and LPsGrowth equity
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What does the credit line do to the investors' IRR and multiple?
Show the worked solution
14.9% without the credit line and 18.9% with it, and the multiple is 2.0x either way. IRR measures time as well as money. Without the line, Rs 100 doubles over five years: 2 to the power one fifth, less 1. With it, the investors' Rs 100 is out for four years, and 2 to the power one quarter, less 1, is 18.9%. Nobody made an extra rupee; with 8% interest, investors actually make less.
Why does paying later raise the IRR?
Lend a friend Rs 100 and get Rs 200 back: whether that is a good deal depends on whether it took five years or four. IRR is the yearly rate that turns the money paid in into the money paid out, so shortening the time the money is out raises the IRR even when the rupees are identical. Without a credit line, the investors' Rs 100 grows to Rs 200 over five years, 14.9% a year. With one, the investors pay at year 1 and still receive Rs 200 at year 5: four years, 18.9% a year.
The same Rs 100 in and Rs 200 out gives investors an IRR of 14.9% when they pay at year 0 and 18.9% when a credit line lets them pay at year 1, while the multiple stays 2.0x and the interest on the line, if counted, takes the multiple down to 1.85x.
The relationship
$\text{IRR} = M^{1/n} - 1 \qquad 2^{1/5} - 1 = 14.9\% \qquad 2^{1/4} - 1 = 18.9\%$
M money multiple to the investors, 2.0
n years the investors' money is out, 5 or 4
What it says in wordsWith one payment in and one out, IRR is the multiple spread evenly over the years the money was at work.
What happens once you count the interest?
The bank is not free. At 8% for one year, the fund calls Rs 108 at year 1 to repay Rs 100 plus interest. The investors now pay more for the same Rs 200, so the multiple falls to 1.85x, yet the IRR is still 16.7%, higher than the 14.9% without the line. Less money, better-looking IRR. That gap is why investors in a fund ask for the multiple and the IRR side by side, and increasingly ask for the IRR with the credit line stripped out.
Why would a fund use a credit line at all?
There are honest reasons: it lets the fund close a deal quickly without waiting ten business days for a capital call, and it smooths many small calls into a few large ones, which investors find easier to manage. The concern is the IRR effect. A fund that ranks high on IRR partly because of the line may have made less money for its investors than one that ranks lower. Say both reasons, then say which number you would compare funds on: the multiple, and the IRR measured from the date the investment was made.
Where candidates lose it
The first slip is saying nothing changes because the deal is the same. The interviewer is testing whether you know that IRR depends on when the investors' money moves, not just how much.
The second is thinking the higher IRR means the investors are better off. Once interest is counted they get 1.85x instead of 2.0x: the IRR rose while the money made fell, and saying that clearly is the point of the question.
What the interviewer asks next
If the credit line is drawn for two years instead of one, what is the IRR, ignoring interest?
At what interest rate does the credit line stop raising the IRR?
Why might an investor in a fund still welcome a credit line?
095An investor paid Rs 100 a share for 10 lakh preferred shares. The company has 1 crore shares fully diluted. It now raises a down round, issuing 20 lakh new shares at Rs 40. How many shares does the investor convert into under full ratchet anti-dilution, and under broad-based weighted average anti-dilution?Preferences, payouts and protectionsHardSeries A to C VCMulti-stage VC
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Under broad-based weighted average, what is the investor's new conversion price?
Show the worked solution
25 lakh shares under full ratchet and about 11.1 lakh under broad-based weighted average. Full ratchet resets the conversion price to the new Rs 40, so the Rs 10 crore converts into 10 crore / 40 = 25 lakh shares. Weighted average resets it to 100 x (100 + 8) / (100 + 20) = Rs 90, so the investor gets 10 crore / 90 = 11.1 lakh. Either way, the extra shares dilute the other holders.
What does anti-dilution protection actually change?
A shop that promises to refund the difference if the price drops within a month is protecting its customer against a later, cheaper sale. Anti-dilution keeps the investor's rupees the same and lowers the price at which they convert into common shares, so the investor ends up with more shares. The investor put in Rs 10 crore at Rs 100. If the conversion price falls to P, it converts into 10 crore / P shares. The whole question is how far P falls, and the two formulas answer differently.
After a down round at Rs 40, the investor keeps 10 lakh shares with no protection, gets 11.1 lakh under broad-based weighted average at a Rs 90 conversion price and 25 lakh under full ratchet at Rs 40, and the other holders' share falls from 75.0% to 66.7% in the full ratchet case.
How does each formula set the new price?
Full ratchet is blunt: the conversion price becomes the new round's price, Rs 40, however few shares were sold there. Broad-based weighted average moves the price only in proportion to how much cheap stock was issued relative to the whole company. The Rs 8 crore raised would have bought 8 lakh shares at the old Rs 100; it actually bought 20 lakh. Against a fully diluted base of 1 crore shares, the price moves by 108 over 120, to Rs 90.
The relationship
$P_2 = P_1 \times \frac{A + B}{A + C} = 100 \times \frac{100 + 8}{100 + 20} = 90$
P_1, P_2 conversion price before and after, Rs
A shares fully diluted before the round, 100 lakh
B shares the new money would buy at P_1, 8 lakh
C shares actually issued, 20 lakh
What it says in wordsLower the conversion price by the ratio of shares the money should have bought to shares it did buy, measured across the whole company.
Who pays for the extra shares?
Everyone without the protection, mostly the founders and employees. With no protection the investor holds 8.3% after the round; under weighted average 9.2%; under full ratchet 18.5%. Full ratchet hands the investor 15 extra lakh shares against about 1.1 lakh under weighted average, and the other holders' 90 lakh shares fall from 75.0% to 66.7% of the company. That is why broad-based weighted average is the common market term and full ratchet a sign that a company had little negotiating power. New investors in the down round also dislike a ratchet, because it dilutes them too, and often ask for it to be waived as a condition of investing.
Where candidates lose it
The common slip is to apply the new price under both formulas, or to treat weighted average as a simple average of Rs 100 and Rs 40. Weighted average weighs the cheap shares against the whole share base, which is why it barely moves when the down round is small.
The second loss is stopping at share counts. The interviewer wants to hear who pays: every extra share the investor gets comes out of the founders' and employees' percentage, and that is the real negotiation behind the clause.
What the interviewer asks next
Under narrow-based weighted average, counting only the 1 crore shares minus the option pool, would the price fall more or less?
How many shares does the investor get if the down round is at Rs 80 instead?
Why might the new down-round investor insist that existing investors waive their anti-dilution?
098Strategy A makes 20 equal bets and strategy B makes 5 equal bets with the same total money. Every bet, independently, has a 10% chance of returning 20x and otherwise returns nothing, so both strategies expect to return 2x. What is the chance that each strategy returns less than the money invested?Power law and portfolio mathsHardSeed and early-stage VCFund of funds and LPs
Try it first
What is the chance the 5-bet strategy loses money?
Show the worked solution
About 12% for 20 bets and 59% for 5 bets. In both strategies a single hit returns at least the whole fund: 20x on 5% is 1x, and 20x on 20% is 4x. So a strategy loses money only when every bet misses. Twenty bets all miss with chance 0.9 to the twentieth, 12.2%; five bets all miss with chance 0.9 to the fifth, 59.0%. Expected value is 2x either way.
When does each strategy lose money?
Buying one lottery ticket in each of twenty draws and buying four tickets in each of five draws can cost the same and win the same on average, yet the second leaves you empty-handed far more often. Find the outcome that loses money first: here one hit already pays back the whole fund in both strategies, so losing means getting no hits at all. With 20 bets each worth 5% of the fund, a hit returns 20 x 5% = 1x the fund, exactly the money back. With 5 bets of 20%, a hit returns 4x. Either way, zero hits is the only losing outcome.
Both strategies expect 2x, but 20 bets spread the outcomes across 0x to about 6x with only a 12.2% chance of 0x, while 5 bets put the outcomes at 0x, 4x, 8x and 12x with a 59.0% chance of returning nothing.
The relationship
$P(\text{loss}) = (1-p)^n \qquad 0.9^{20} = 12.2\% \qquad 0.9^{5} = 59.0\%$
p chance each bet returns 20x, 10%
n number of equal bets, 20 or 5
What it says in wordsA strategy loses only when every bet misses, and the chance of that falls fast as bets are added.
If the expected value is the same, why does it matter?
Because a fund's investors live through one draw, not the average of many. Concentration leaves the expected multiple at 2x but stretches the outcomes: B loses money 59% of the time, yet also returns 4x or more 41% of the time, against 13% for A. A returns at least 3x 32% of the time and rarely does spectacularly. Neither is better in the abstract; the choice depends on how much the fund's investors can bear a blank.
What does the model leave out?
It assumes the bets are independent and identical. In practice a concentrated fund argues that it can pick better and support each company more, raising p; a diversified one argues that nobody can pick reliably at seed. Correlation also matters: if all twenty companies depend on the same funding climate, the 12% understates how often A has a blank decade. Say the result, then say which assumption you would test first.
Where candidates lose it
The trap is stopping at expected value: both strategies return 2x on average, so candidates call them equivalent. The question asks about the chance of loss, which depends on the spread, not the mean.
The second slip is computing the loss chance for A as something like one minus 20 times 10%, which goes negative. Use the chance that every bet misses, which multiplies.
What the interviewer asks next
How many bets does strategy A need for the chance of losing money to fall below 5%?
If the 5-bet strategy can raise p to 15% through better selection, what is its chance of losing money?
Why might an investor in many funds prefer each fund to be concentrated?

Step	Assumption	Units, crore
Smartphones in use	Round starting base	60
Retired each year	4-year replacement cycle	15
Resold or traded in	40% of retired	6
Refurbished	50% of resold	3
Market, Rs crore	x Rs 8,000	24,000

n	founders in total, 20
r	founders you let pass to set the bar
1/(i-1)	weight for the best founder sitting at position i

V	exit value, Rs crore
20	the 1x preference
0.2	the investor's as-converted share
60	the 3x cap on total return

f	share the founders keep
I	new money, Rs 25 crore
p	pool as a share of post-money

Try it first

Why start from the phones people retire rather than the people who want one?

How do you build and defend each step?

How do you show that supply rather than demand caps it?

Where candidates lose it

What the interviewer asks next

Try it first

Why let good founders pass at all?

How do you work out the chance for a given cut-off?

Where does the model stop describing real deal flow?

Where candidates lose it

What the interviewer asks next

Try it first

What does a capped participating preference mean in plain words?

Where exactly do the two kinks sit?

Why does the flat band matter at the negotiating table?

Where candidates lose it

What the interviewer asks next

Try it first

Why does a pool inside the pre-money lower the real price?

What share do the founders keep under each offer?

What would you push back on?

Where candidates lose it

What the interviewer asks next

Try it first

How do the stage rates turn into one chance?

Why can you not just add the chances across bets?

What does this tell you about how seed funds are built?

Where candidates lose it

What the interviewer asks next

Try it first

Why does paying later raise the IRR?

What happens once you count the interest?

Why would a fund use a credit line at all?

Where candidates lose it

What the interviewer asks next

Try it first

What does anti-dilution protection actually change?

How does each formula set the new price?

Who pays for the extra shares?

Where candidates lose it

What the interviewer asks next

Try it first

When does each strategy lose money?

If the expected value is the same, why does it matter?

What does the model leave out?

Where candidates lose it

What the interviewer asks next