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Insider's View of IRRs - What VCs and Angels Expect for their Investment Return

What should your projections target in terms of investment performance for VCs and angel investors?

Here are some clues.  During the last twenty years, the Venture Capital Index returned roughly 25% to venture capital fund investors.  But this industry performance significantly understates the investment goals of most VCs.  VCs don’t write checks to startup companies that might deliver a mere 25% investment return–they look for companies that have the potential to deliver far more.  Here’s why.

Within every venture capital fund portfolio are massive investment winners and massive investment losers.  In order to achieve a blended portfolio financial return of over 25%, one or two portfolio company investments have to deliver grand slam home run returns in order to make up for the larger number of money losing VC investments that strike out. 

This is why VCs always seek to invest in seed-stage and early-stage companies that have home run potential and can likely deliver investment returns well over 40%.  Another way VCs talk about the financial returns is by the multiple of invested capital.  Larger funds are happy to earn 10 times or more on their invested capital.

Individual angel investors usually don’t have specific rate of return performance objectives to guide their investing activities, though members of angel investment clubs tend to have higher expectations for investment performance.  While angel investing is difficult to track, different studies report similar results to VC investing: a few investments that return at least 10 times invested capital help offset the majority of angel investments that lose money.  Here’s a good guideline to know as you develop your company’s financial projections.  Average angel investment performance is approximately 2.5 to 3 times invested capital in about 4 years with ballpark returns of 25%. 

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