I had lunch with a friend a while back and we were talking about some of the companies we were seeing in the market and how our portfolios were doing. Generally when this happens you break out in hyperboles and metaphors so we started joking if we’re going for Pete Rose (most singles) or the Barry Bonds (most homeruns).
Everyone invests for their own reasons but if you’re trying to make money over money (more than you invested) you at least need to understand how. This means that when you make an investment, you have to assume what the potential outcome (multiple) might be when it exits.
The industry standard assumption to hopefully get a successful portfolio is that you need to make at least 10 investments. You will most likely write off 6 as a complete loss, two might break even or give you a little return and hopefully your last one will be a homerun. This homerun needs be at least a 10x+ in order to make all of your money back and then some.
Simple math (average angel investment is $25,000)
- 10 investments x $25,000 = $250,000 invested
- 1 homerun = 10 x $25,000 = $250,000 (make your money back)
- 1 grandslam = 30 x $25,000 = $750,000 (money-over-money)
Let me also clarify that the average valuation of a company we invest in is around $5M, so to achieve these exits that company needs to exit between $50M for a 10x and $150M for a 30X. You also shouldn’t expect any potential return for at least 5yrs+ as that’s how long it takes to build a viable company with any potential for an acquisition.
Now hopefully it makes sense why when you pitch an investor they want to know that you’re going after a big market, can hopefully generate a lot of revenue and have some big companies in the game that can acquire you.