VC Return Expectations by Stage (2024)

VC Return Expectations by Stage (1)

It is incredibly important that startup founders know what their VCs are going for so that they can be aligned and make smart decisions.

Today, we’ll explore the question: what are your VC’s return expectations depending on the stage of investment? The TLDR; seed investors shoot for a 100x return; Series A investors need an investment to return 10x to 15x and later stage investors aim for 3x to 5x multiple of money. This translates into portfolio returns from 20% to 35% targeted IRRs.

Before we get into how these return expectations vary by stage, and how that impacts your startups’ valuation, let’s dig into an important part of how VCs construct their portfolios:

VC Returns - Understanding the Power Law

It is really important to think about venture capital in the sense that the power law is really at work in venture capital investing. They do big portfolios of startups and 20 to 100 investments in a given venture capital fund. So they know that two or three are going to power most of the returns of the entire portfolio because in the startup world the power law is, the big ones win big. Think about Uber, Facebook, Google. Those types of companies return their fund. The fund returns with 10X or 15X all because of, or mostly because of that one investment.

So that is the power law at work.

~~Now also remember, we are in a super hot market right now. I’m recording this in early 2021, and this is one of the hottest markets I’ve ever seen in my career. It’s reminding me of 1999; there’s IPOs every other day. There’s SPAC IPOs. There’s a lot of companies getting bought. ~~

~~It is a great time to have been a venture capitalist and been investing five to 10 years ago. That portfolio of startups that you invested in as a VC are maturing at the perfect time. ~~

~~Many of them are getting public and providing liquidity to both the VCs. Yet, more importantly, there are the limited partners, the funds, the endowments, the foundations, the high net worth people, the family offices that invested in the venture capital funds. ~~

~~The cool thing about that is those groups tend to recycle that capital back into the venture capital ecosystem and commit to new funds. However, there are rough times and years where there are few to no IPOs. So, good times, like the current, have to feed everyone in the industry so that we can all survive the bad times. Just know we’re in a special moment right here. ~~

Minor Update on VC Return Expectations in May 2022

In 2022 - it’s no longer a hot market for VC funding! But does this mean that VC return expectations have changed?

Overall, no. VCs still hope to get the same overall portfolio returns that they were previously targeting. However, it can be a LOT harder for them to hit these returns given the market downturn. What we will likely see as a result of the market downturn is that VCs with dry powder to invest will slow their investment pace in the middle of 2022.

And so sometimes the return expectations also change depending on if you’re in a good time or bad time. OK, now that we have some background information, let’s dive into the question at hand, **“what are your VC’s return expectations depending on the stage they invested in your startup? **

Venture Capital Return Expectations by Stage of Investment

Seed Investors

Seed investors typically have a lot of companies they invest in because it is so hard to pick the winner at the seed stage. They just have very, very low information. Oftentimes they’re investing in the people, the PowerPoint concept, and maybe an MVP, a minimum viable product or demo product, right?

So seed fund investors will do anywhere from 20 to 50 to 60 investments, depending on their fund size. They are targeting a 100X return pretty much for every company. They want every company to be 100X. However, the problem at seed is there’s a high failure rate relative to the other stages of venture capital.

Oftentimes it’s only two or three companies that are providing all the return and all the capital back to investors in the seed stage funds. Yet, when they are signing that check and sending you that wire, they are thinking about a 100X return. Can this be a 100X company? If they’re investing at a $5 million valuation or $10 million valuations, can this be a billion or multi-billion dollar company?

They also have to factor in all the dilution they and the company will take over the years as it goes through different funding rounds. So 100X rule of thumb for seed. They know they’re not going to get it on all the deals or even most of the deals. They know they’re going to get it on hopefully one, two, or three of the deals in their portfolio.

Series A Investors

Series A investors are writing bigger checks especially than they used to. They have a little bit more information. A lot of times, Series A investors are investing on more than a concept and can either see a million dollars or $2 million of revenue. They’re usually investing in an actual product at work.

Also worth noting, in life sciences, maybe there’s more clinical data or there’s an FDA approval or something like that but they are investing in bigger dollar amounts in startups than the seed stage fund. Whereas, the seed-stage fund might invest anywhere from $500K to $3 million in a specific company, Series A investors are investing five, 10, $15 million, even $20 million sometimes these days because again everything’s hot. They are looking for something like a 10 to 15X on their investments.

They know just like the seed investors that they’re not going to get it on all the deals but they are expecting to have a significantly lower loss rate than the seed funds. Because again, they just have more information.

Late-Stage Investors

Now late-stage investors typically target something like a 3 to 5X return. Although, the catch is that they’re very close to the M&A exit and IPO in the whole timeline. As a seed investor, it’s probably going to take five to 10 years series A. Maybe it’s three to eight years for your company to do an IPO or get bought. For institutional late-stage investors it’s one to three years. When they start getting a 3 to 5X return in that very short timeframe, their IRR and internal rate of return looks good.

Also, they have even more information than the series A, series B investors. So they should have an even lower loss rate.

Now the catch for them is that they’re investing much bigger dollar amounts. A late-stage round can be a hundred million, 200 million or even bigger. So when they take a loss, it is very, very painful for them; but they are investing out of bigger funds and they will still be diversified.

So just know that the late-stage round you’re raising right now, everyone’s doing the back of the envelope math and wondering, can this company do a 3X to 5X in the next 18 months and get public?

If that company can, it is a fantastic investment for late-stage investors and they will be all over you and you’ll have a lot of term sheets.

VC Returns are Based on the Portfolio’s Performance

Remember, VCs are judged by their investors on the overall fund portfolio performance. That means that any individual company in the VC’s portfolio can fail, yet the fund can be a high-performing fund if enough other startups produce returns.

So I hope this helps you know what your venture capitalists are expecting out of your company and the return horizons. If you are looking to, or are in the process of raising venture capital, and have any questions or need help, please feel free to reach out. You may also like our list of the top VC pitch decks. Our clients have raised over $10 billion in venture and seed financing, and our team knows how to navigate the VC diligence process.

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VC Return Expectations by Stage (2024)


VC Return Expectations by Stage? ›

The TLDR; seed investors shoot for a 100x return; Series A investors need an investment to return 10x to 15x and later stage investors aim for 3x to 5x multiple of money. This translates into portfolio returns from 20% to 35% targeted IRRs.

What rate of return do VC expect? ›

The National Bureau of Economic Research has stated that a 25 percent return on a venture capital investment is the average. Most venture capitalists or venture capital returns will expect to at least receive this 25 percent return on investment.

What is a good IRR for VC? ›

What's a Good IRR in Venture? According to research by Industry Ventures on historical venture returns, GPs should target an IRR of at least 30% when investing at the seed stage. Industry Ventures suggests targeting an IRR of 20% for later stages, given that those investments are generally less risky.

What is the average time between VC rounds? ›

For the speediest quartile, the median is under 18 months. But as venture funding contracts, the lag time between rounds is getting longer. Startups across sectors are taking steps to cut costs and extend runways.

What are the stages of the VC deal flow? ›

VC deal flow process

It consists of 6 major steps: deal sourcing, deal screening, partner review, due diligence, investment committee, and deployment of capital.

What is the success rate of a VC portfolio? ›

The Odds of Succeeding for a Startup Funded by a Top VC

Since there are 4,000 companies looking for funding, that translates to odds of 5.0%. Of the 200 that are funded by top VCs, 15 of those startups will generate nearly all of the economic return.

Does venture capital outperform the S&P 500? ›

Specifically, the study found that the median net internal rate of return (IRR) for VC funds was 13.5%, compared to 9.9% for the S&P 500, 8.1% for the MSCI World Index, and 7.8% for the FTSE All-World Index, all over a 10-year period.

What is the 2 20 rule in VC? ›

At its most basic, the two and twenty is basically the standard fee structure for venture capital firms to charge their investors. The 2% is the annual fee that the fund charges investors to manage the fund. And the 20% is the percentage of the upside that the fund managers take.

What percentage of VC investments fail? ›

25-30% of VC-backed startups still fail

As a general rule of thumb for startups, out of every 10, about three or four fail completely. The other three or four return their original VC investments, and only one or two will produce substantial returns.

What is considered late stage VC? ›

Late stage venture capital are investments that occur after a venture-backed company has developed its product, proved that there is a market opportunity, has meaningful revenues and is close to having a potential exit (liquidity event) such as the sale of the company or an initial public offering.

What is the typical VC fund life cycle? ›

Based on the sector, theme, or even risk-to-reward ratio, various funds have different lifespans and stages. According to Pitchbook, a VC's average lifespan is around 13.1 years, with funds taking longer to return capital.

What stage is early stage VC? ›

Early-stage companies typically have a prototype or a service model that's been tested and have developed a business plan to grow the business. The company may even be generating early-stage revenue. It's not common to be profitable at this stage but some businesses may be breaking even.

What are the 3 stages of VC business funding? ›

5 Key Stages Of VC Funding Explained
  • Stage 1: Pre-Seed Funding – Where It All Begins.
  • Stage 2: Seed Funding – Planting the Seeds of Success.
  • Stage 3: Series A – Getting Serious with Scale.
  • Stage 4: Series B – Hitting the Growth Spurt.
  • Stage 5: Series C and Beyond – The Sky's the Limit.
Mar 15, 2023

How long is a VC fund cycle? ›

Most venture funds have a 10 year time horizon to invest all of their capital and then return the profits to the fund's investors. There are exceptions to this 10 year life cycle, but that is fairly standard.

How long between seed funding and Series A? ›

Series A. Again, not all startups who raise a seed round go on to raise a Series A, but after raising a seed round, the average time until a startup raises a Series A is 22 months. Series A fundraising usually comes from Venture Capital with some Angel investors being common as well.

What is the average time for a VC investment? ›

Fund Tenure/term:

Venture capital funds typically have long tenures, beginning the first closing and running for 8-10 years. Fund managers usually seek pre-determined extension periods (2-3 years for example) to allow them for a smooth exit from all investments.

What is a typical VC vesting schedule? ›

Common Vesting Schedules

In most cases, they offer a forty-eight month vesting period with a one-year cliff. In effect, this means you will earn 1/48 of the rights to the shares you were granted. Each month this adds up until you have earned the full rights to the percentage of equity you were originally granted.

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