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FAQs | Funding

Investor Multipliers

Q: Are there any averages for the amount of return investors expect:

  • Here is some feedback from members of the Netpreneur Program's NET-INVEST investor group:

    Expected returns are adjusted by the risk. If the likelihood of returns is high, the rate of return will be lower. (Most entrepreneurs will think a deal is practically guaranteed, but investors know better, so the investors' perception of risk is much higher than the founders'.)

    VC's are generally going to look for 5 times their money in 3 years or 10 times on 5 years. They need such high rates to make up for the investment(s) that produce nothing. Another estimate is that a VC will be looking for a 50% return per year for a start-up investment.

    By determining the investor's desired IRR and knowing the number of years, you can figure out the multiple.

    Angels may not look for such high returns, since they may be less sophisticated and/or be getting returns in other ways, such as psychological. It depends -- some angels want higher returns on very early stage money. A ballpark estimate used by one NET-INVEST angel is to achieve a return per year in the range of 50% to 100%.

    An issue to watch out for is that angels don't foul up a subsequent round, such as by pricing the deal too high. Then everyone gets upset when the VC's do a "real" financing.

    No one should expect to cash out of an investment in less than 3-5 years.

    A good reference for this and other investment issues is the Venture Capital Handbook by David Gladstone.
    [Fran Witzel, Netpreneur Program]

 

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