[Ask Your VC] ROI Benchmarks on Investment
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Are there any commonly accepted benchmarks for the ROI expected on investments and exit period for their investments?
Very broadly speaking, investors expect 3-4x of invested capital within three years and more than that for any longer period as pretty much the minimum for a given investment. Early-stage investors are prepared for several of their investments to fail so their return criteria may be considerably higher. This also means that the required return on the entire fund is going to be lower than the required return from any one investment.
Note again that these are very broad-brush statements that do not apply to all investors.
Exit period depends on the type of investor and the stage of your company. If you are a 10-year- old company raising money from late-stage investors, don’t expect that they are looking to invest for a further 10 years.
When a founder goes through multiple funding rounds and ends up with a very reduced stake in the company with little say in board matters, is it better for him to quit at that point or continue working with the company?
It is important to remember that even late-stage investors are looking to invest in the entrepreneur as much as the company. It is the entrepreneur who decides (or at least, should decide) when and how to run one’s fund-raising process. That means deciding the amount to be raised, valuation, identity of the investor, etc. Certainly one’s existing investors will have views on each of these but the entrepreneur should be the face of the company when talking to investors.
If you accept all of this, then it should be clear that late-stage investors will not want the entrepreneur to take the back seat when it comes to making decisions post-investment. Really the only reason for an entrepreneur to find himself side-lined is sub-par performance — and if that does happen, your shareholding has nothing to do with it.
This being said, this is ultimately a personal decision. If it turns out that you do not feel comfortable answering to several investors or if starting another venture from scratch feels more exciting than guiding your current venture further forward, you can certainly consider handing over the reins to someone else. This is not that unusual a decision. However, be aware that, for better or for worse, the future value of your shareholding depends on someone else’s performance from that point on.
What are the typical challenges when one gets funding from multiple VC’s?
That’s quite a perceptive question. I believe that it always pays to understand the perspectives of one’s counter-parties, whether they be investors, customers, employees or anyone else. If you do this, you understand both the areas of congruence for you and your counter-party as well as potential pitfalls.
Here are some things to watch out for on the investor front:
– It is not very common to have many VCs early in the game. Companies tend to acquire multiple investors only after two or three rounds of funding. This means that your relationship with your earliest investor may be different from your relationship with your later investors. This doesn’t have to be a challenge in and of itself — just make sure that you build trust with all of your investors, disclose all necessary information to everyone equally and don’t play favourites (even if you do have a favourite).
– Ensure that you have a good idea of each investor’s desired time horizon for an exit while you consider which investors to raise money from. Some investors (possibly your earliest investors) may be looking to exit sooner than others. If you know this in advance, you can manage the situation appropriately, e.g., by finding a buyer for one investor’s shares instead of selling the whole company.
– Similarly ensure that everyone is reasonably aligned on exit price. You don’t want to be in a situation where you have an offer on the table that some investors jump at while others say, hell no. Even if one group of shareholders has the legal right to overrule another group, this is not a terribly fun situation to be in. A collaborative approach is much better. You can maintain alignment over time by initiating discussions on price expectations at reasonable intervals.
– Sometimes two or more investors will want to be heavily involved with your company — and may have differing opinions on key issues. It is your job as the entrepreneur to navigate this delicately and ensure that your company isn’t derailed by disagreements or decision paralysis.
– Investors often have varying views on the legal rights and protections they may need. Unfortunately, maintaining a simple, aligned set of rights comes down to who has greater bargaining power. If you are a super-star entrepreneur running a high-flying company, you may be able to convince all investors to agree to a basic set of protections. If you are not in this fortunate situation, your most paranoid investor may drive the agenda and all your other investors may (quite reasonably) ask that the same protections apply to them too.