VCs and our quest to invest in “home runs”

By December 4, 2017Venture Capital

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”.

  • Great post as always @Nic. Just wonder whether it’s possible to take smaller bets, say 3X with 3 year exits rather than 10X with 5 to 10 year exits. This means betting on much more realistic targets but having to invest in lot more companies, i.e. lot more work on due diligence, syndication, etc. Love to hear your thoughts.

  • Hey Manoj – 3x doesn’t work because there are too many misses. If you have a standard 1/3 success rate you would only make your money back and experience says it isn’t easy to do much better than that.

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