Venture capital, in its standard form, is pretty well known. The story is as follows: invest in 10 startups, the majority go bust, two or three make a good return, and one is a huge success returning the fund and them some. Only, over the past decade, most venture funds haven’t made any money at all so there’s more emphasis on startups with traction and other measures that show risk has been removed from the equation.
There’s another segment of venture capital that isn’t talked about as much due to the few number of startups that reach the targeted size: growth stage capital. Growth stage is typically companies with at least $5 million – $10 million in revenues growing north of 30% per year. Once a technology company fits this category, growth stage venture capitalists will pay a nice premium, making a bet that the business will be able to grow substantially more and that worst case scenario they can get their money back (based on a 1x non-participating preferred preference with their stock).
The common refrain when asked for investment return expectations isn’t the 8-10x that early stage VCs talk about, rather the goal is to return 3-5x the money invested in 3-5 years. 3-5 years isn’t the 7-10 year horizon early stage VCs look at, but it’s still plenty of time to generate significant value above and beyond what’s already been created.
The next time you’re talking to a venture capitalist, ask about their expectations and desired return on investment.
What else? What are your thoughts on growth stage VCs looking to making 3-5x their money in 3-5 years?