Recently I was talking to an investor about my personal angel investing strategy and I mentioned that I don’t follow on most of the time. Why? Because I’m interested in getting a 10x or greater return, and as the valuations go up, the chance of getting a 10x+ return goes down. Of 1,000 startups that have raised venture capital, between .2 and 2% ever sell for $100 million or more. Now, that’s for ones that have raised venture money and the odds are even lower for the ones that haven’t.
Here are few thoughts on a potential investor’s desired returns:
- Some investors are playing for the 100x homerun return and double down on their winners, regardless of stage (most VCs outside the Valley play a different game)
- Larger venture partnerships often manage multiple funds with different return expectations (e.g. a venture fund for earlier stage deals and a growth fund for later stage deals)
- Generally, as the size of investment goes up, the size of the expected return goes down (e.g. 3x is a common return goal when investing at north of a $150 million valuation)
Entrepreneurs need to know the potential investor’s desired returns and make sure they align with their own goals.
What else? What are some more thoughts on needing to know the potential investor’s desired returns?
David Cummings on Startups 