While reading through the endless questions and answers on Quora, I found one which I believe every entrepreneur must have asked themselves at least once.
The question was, “What is a VC's expected return in startup investments?”
Along with many great responses, my favorite came from Ilgiz Akhmetshin. He stated:
“Expected return always comes with expected risk. VCs usually have funds with different risk profiles:
• Seed stage (nine out of ten startups don’t survive)
• Early stage (A, B - two out of three startups don’t survive)
• Late stage
Higher risk investments require higher returns. For example, an early stage investor would expect at least 20% IRR (this means that at the liquidation event the return on the investment would be equal to the return of an non-risky investment with the 20% interest rate during the same time period).
This leads us to the simple arithmetic. If I expect 2 out of 3 startups to fail, then the third one must have at least 60% IRR (to compensate for the loss of others and still make my desired 20%). Therefore, if the average startup story last for 5 years, then my expected return is 10x in 5 years.”