If you’ve read my previous pieces, you hopefully have a basic understanding of venture capital, the structure of funds, and the stages of a startup’s life. Thanks to the JOBS Act, entrepreneurs can now solicit investments online. As people look to add high-risk, high-reward alternative assets to their portfolio, questions like, “How long before I see returns?” and “What do returns look like in startup investing?” Now that readers have a better understanding of the lifecycle of a startup, it’s only fitting to talk about when returns can be expected and what returns in startup investments look like.
What Returns Can I Expect and When Can I Expect It?
If you haven’t guessed already, investing in startups can be incredibly risky, but also incredibly rewarding. Venture investing lends itself to rather binary results: you either lose everything you invested or you make a healthy return. As such, It’s honestly very difficult to predict the type of return you’ll see. According to this blog post from Brightstone, venture investors seek a 30% IRR on their investments. Additionally, the National Venture Capital Association states the average holding period of a VC investment is eight years. This means that an investor would need to 10x their investments in order to meet their IRR target.
The eight year holding period for venture investments should also tell you that venture investing is very much a long-term game. As noted in my previous piece, startups begin as early-stage companies that progress to Series A, growth, and pre-IPO. Each of these stages is a lengthy process that, from my experience, can take one to three years in each stage. A liquidity event (IPO, merger or acquisition, secondary market transaction) is possible at any point in a startup’s life which will help you realize your returns, but investors don’t get to choose when they can liquidate their position (unless it’s a secondary market transaction). If pondering whether or not you should invest in startups, potential investors need to seriously consider if they have the patience to hold onto an investment for more than eight years to realize a return.
How Does This Relate to Equity Crowdfunding?
Much like traditional venture investing, investors shouldn’t expect to see a return on their equity crowdfunded investment for a long time. As the space is still rather new, we don’t have too much data on the success of many of the companies or the holding period of many of the companies raising on the various platforms, but we suspect it’s at least 5+ years for the majority of companies. There also isn’t much data to determine the type of returns on equity crowdfunded investments. Either way, KingsCrowd is here to provide institutional grade research on equity crowdfunded investments so that investors can make the best possible startup investment decisions. We want to curate the most interesting and best crowdfunded companies in any industry so that investors can informed decisions. If you’re interested in great companies raising online, read our rating report on NowRX or on Hemster and if interested, invest in either and make sure to subscribe to KingsCrowd so you don’t miss a great deal!
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About: Francis vu
An investment professional with a background in private equity and venture capital having spent time conducting investments at VU Venture Partners and Pacific Oak LLC with a finance and management degree from Tulane University.