VC’s still expect 42% annualized return

I was chatting with a coworker the other day about whether the economy has changed the ROI expectations from VC’s. I decided to do some homework to educate myself. I found an article on Venture Beat that referenced a Pepperdine University study conducted in March / April 2009 on the ROI expectations of private capital providers in the recession.

I find great humor in this: the answer is 42%. Private equity groups expect a bit less, at 25%.

The report also stated that the most common exit is selling the company to a public company. The current expectations of VC’s for the ratio of sale price to total venture investments for companies that have started generating product revenue is 4-6x. This may be a bit optimistic since the actual data from their previous funds indicate that this ratio generally comes out at 3-4x.

Some other highlights:

  • Top 5 areas of investment include software, medical devices, biotech, clean tech and internet, in that order.
  • Massachusetts is home to 7.6% of portfolio companies.
  • Most of the investments are in companies with product revenue but still operating at a loss (Stage 4 in their terminology), followed by startups with a low burn rate and who have done very little product development to date (Stage 1).
  • Most VCs expect companies who have started generating product revenue (whether profitable or not) to achieve a revenue growth rate of 30-40% over a 5 year period.
  • The time to close from signing an LOI is usually 1-2 months although it could take 3-4 months or more.
  • Board members are assigned in 51% of the deals, and CEO’s are assigned in 27% of the deals.

There is a lot more data and color in the actual report itself. They are also doing another survey in Oct/Nov, so there will be an update of this data in a couple of months.  It’s a free download and a fascinating read – highly recommended. (Unless you are the CFO, or a VC,  in which case you already know all this).


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