Required Cash-on-Cash Multiples in Venture
There are two rules of thumb when it comes to evaluating investment performance in venture.
VCs underwrite a startup investment for a 10x target return multiple
LPs underwrite a VC fund for a 3-to-5x target return multiple
Something to keep in mind, though VCs normally think in multiples when evaluating a startup’s potential for returning the fund, they usually rely on a >30% return expectation when they talk about their underwriting standards.
But what is missed from above is that, if you rely on multiples your performance over time will decrease. A 10x outcome in year 4 is an outstanding 78% IRR, that number is 26% if you attain that outcome in year 10. Still a phenomenal performance but perhaps one that could have been achieved elsewhere at a much lower risk.
Most early-stage funds that have outperformed historically are usually within the 3-to-5x range for their net returns. That is a 32-to-50% IRR in year 4 but a 12-to-17% in year 10 when most funds are at the end of their life.
Time is always against you.