chapter 3

• Venture Capitalists (VCs) have different return expectations depending on the stage of investment:

  • Seed investors aim for a 100x return
  • Series A investors target a return of 10x to 15x
  • Late-stage investors aim for a 3x to 5x multiple of money
• Seed investors typically invest in many companies at the seed stage due to the high failure rate and low information available
• Series A investors are investing larger amounts, usually in companies with more than just a concept, looking for a 10 to 15x return on their investments
• Late-stage investors target a 3 to 5x return, often close to the merger and acquisition (M&A) exit and IPO
• Venture capitalists use two metrics to measure returns:

  • Cash-on-Cash Return (CoC): calculates the money received after an exit divided by the initial investment amount
  • Internal Rate of Return (IRR): industry standard metric considering annual return rates for each year of the fund's lifetime
• Cash-on-Cash Return (CoC) example: If an investor put $250,000 into a company and later received $120 million after an acquisition, the CoC return would be 48,000%
• Internal Rate of Return (IRR) considers:

  • Time-Value of Money Consideration
  • Comparative Analysis
  • Incorporation of Cash Flow Patterns
  • Accounting for Reinvestment Risk
  • Signal of Investment Quality