This chart (taken from a recent post by First Republic’s Samir Kaji, data from leading venture investor Horseley Bridge) shows that to get the 3-5x return that most venture capitalists target 10% of their portfolio need to return 10x+. That explains why we are so focused on market size and other upside indicators when we invest. Getting a 10x result is hard and if 10% of our portfolio is to reach those dizzy heights then all of our investments must have that potential.
Of course, a 10x return on an individual investment doesn’t necessarily return the whole fund and many venture funds go a step further and stipulate that every deal must be a potential fund returner. That’s the way that we work at Forward Partners, so for us every investment in our second fund must have the potential to return £60m back to our investor. That means if we have a 10% stake the exit value should be £600m or if we have a 25% stake it should be £240m. If we have invested £6m to get to that point the return will be 10x, and if we have invested less, the multiple will be higher. What doesn’t work for us is investing £2m and with the potential of getting £20m back – that’s a 10x return, but it’s not a fund returner.
It would be interesting to see a version of this chart which replaced “Percentage of investments > 10x return” on the Y-axis with “Percentage of investments that returned the fund”.