What is a satisfactory rate of return if investing in a small startup?
Would you for example expect 10% p.a. for an investment of £100k? How long would the investment be for and how soon would you expect your investment back?
Good Answers (5)
Kannan A
Associate Vice President - Banking & Capital Markets, Infosys Technologies
typically you can expect a higher return on a start up - the key is the tenure of the investments and as well as the type of the investmnet instrument; start-ups obviously hungry for cash, may even borrow at higher rates, but then you as a lender need to be convinced about their business model and cash flows;
Neil G
Corporate Finance Advisor and Consulting CFO
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Not all startups are the same and their risk profiles are different. The higher the risk, the higher the potential return will need to be. That said, and knowing nothing about the details of your startup, I suspect a 10% return isn't a sufficient promise. Compare your deal with other readily available investments... the guaranteed return on bank deposits or corporate bonds. What's the expected return from a portfolio of established public companies? I think based on alternative investments, an expected return of 20-25% is closer to reality than 10%. (Multiply 25% by the percentage liklihood of failure and see what rate you get!)
As for time, an expected return in 3-5 years might be okay. Experience shows it always takes longer than planned. Again, this depends on the specific startup.
Joseph G
Director at USM Business & Innovation Assistance Center
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There are several factors involved, all of which center on the "risk factor." If you are talking very early stage, before the company is cash flow positive, you might want to seek around a 10x return over a 3-5 year period. If the company has sales and future growth projections are sound and very positive, you might only expect 5x over 3-5 years. Another central point is what is the expected future "liquidity event" which will result in you being able to take your money and its return out of the company if you so desire at the time you desire? Is the goal for the company to be bought by a larger company in the future, to go public, 2nd and 3rd round investors, or just have excellent sales that can support the expected ROI?
Another issue is knowing the value of the venture you are investing in so you know how much equity you should be given for the amount you invest. Will you be given common or preferred stock? A position on the board?
10% p.a. is much to low as you can easily invest your money in most any mutual fund indexed to the S&P 500 and get a higher rate of return with very little, if any risk involved. The link below might help.
Links:
Ron G
Internet Strategist at 609 Media Solutions
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I agree with those who are talking about risk. But what's fundamentally behind the risk factor with a start-up is management. "You don't bet on the horse; you bet on the jockey." If the management team is the right sort to get the start-up off the ground, THEN three to five years for a return as good as or better than your example is about right. But for as much of an investment as you're talking about, I'd look at the team closely. Cheers!
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Gary C
Innovation | Leadership | Emerging Markets
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In a nutshell, one cannot answer that question. Some of the issues you need to rationalize is the viability of the the business model, core competencies of the team, competitor strategies and time to revenue are just a few things to consider.
As a start-up the growth rate can be much faster than an established plalyer, but over time you cannot sustain that rate of growth for not just financial reasons, but other operational issues.
Finally, to *help* answer your question, there are spreasheets available to help you develop a discount rate, but as with any spreadsheet, beware!
