The last dance for the venture capitalist and the entrepreneur is a successful exit.
How would we define a successful exit? For an individual venture, at a minimum, to be considered a successful exit, we'd look for one that delivers an annualized return of 20% or better and a minimum three times multiple on the capital invested. For an investor in a fund invested in multiple ventures, we'd consider an overall fund exit with an annualized return of 15% to be successful and one with an annualized return of 20% or greater to be highly successful.
Given the inherent riskiness of venture capital investment and the high percentage of ventures that fail, for the investor in an individual venture to consider the outcome as a highly successful exit, we'd set the bar even higher, and call for an annualized return of 30%+. We'd call an annualized return of 40%+ a home run.
Of course, the relationship between the annualized return (its IRR) and the return multiple depends on the amount of time from investment to exit. Some investments achieve a very strong IRR but a relatively low multiple if the exit occurs in fewer years. A larger multiple will likely take more years to materialize. Sometimes a seemingly strong multiple can even represent a modest IRR if the investment goes on for too long. (See Table 12.1.)
Table 12.1 Investment Duration and Multiple
|Annual IRR||Multiple @ 5 Years||Multiple ...|