VC Razor Return Analysis
From [Link].
Best to watch VCIC training videos first.
Disclaimer: this is not written in stone. VCs are notoriously individualistic. There is no agreed upon “VC Method.”
VC Razor Return Analysis Worksheet
from Venture Capital Strategy at [Link]
SERIES A INVESTMENT FOLLOW-ON INVESTMENTS EXIT
V ● Startup financing needs ● Fund size / avg. $$ per startup ● Fund size
A ● Fund size / avg. $$ per startup ● Anticipated follow-on ● Exit valuation
R ● Size of Series A investment investments ● Percent ownership at exit
I ● Series A pre-money valuation ● Dilution from future rounds
→ Proceeds to VC firm
A ● Syndication
→ % ownership after this round → X return of total investment
B
L
E
S
● Plan on investing about 1/3 (or ● Reserve 2-3 X of the Series A to ● Find exit comps or otherwise estimate an
maybe 1/4) of the average your fund try to maintain pro rata. exit valuation.
plans to invest in each startup. ● Your total projected investment ● Multiply exit valuation by % ownership to
● If the startup needs more than 1/3 of should be the average your fund get your proceeds.
A
your average, plan to syndicate. invests in each startup. ● Divide proceeds by total investment to
D ● Negotiate for a percent ownership ● Always plan to syndicate future calculate X return.
V that approximates what you need at rounds; you often get bonus ● Summarize/simplify the return analysis as:
I the exit to return your fund. points for identifying relevant “__ X return on a $___M investment over
C potential syndicate partners. __ years”
E
● Startup looking for $1M Series A ● Reserve $4.5M for follow-ons ● With 33% ownership, we need a $240M exit
to return $80M fund.
E ● We have an $80M VCIC Fund II ● Total projected investment: $6M
● In a more conservative region, our threshold
X ● Avg. $6M/startup
may be a 5X return, for which we only
● Offer $1.5M Series A on $3M pre for need a $100M exit.
A
33% ownership
M ● Need to find exit comps to see what exit
P valuation is conceivable.
L ● Be ready with a summary statement, such
E as, “With a $100M exit we could achieve
a 5X return on a $6M investment over 5
years.”
EXIT VALUATION
IT IS BOTH A NUMBER AND THE STORY ABOUT A NUMBER.
When analyzing the potential return of a startup investment, you must estimate an exit valuation. That needs to be a number.
Everyone in the venture industry knows that that number will be speculative and based on numerous assumptions. Nonetheless, it is
a number, and as such it implies more certainty than it really has. Still, I repeat, you do need to pick a number. The number you
VCIC Return Analysis, Page 2
ultimately use for your exit valuation should be derived from a variety of sources using a variety of methods, and you should not fall
in love with any specific number as if it were the right answer. If you do the work and cover all the bases below, you will be able to
choose a number with some degree of legitimacy (not certainty), and you will have the ability to explain how you got that number.
That explanation will be as important as the number.
EXIT VALUATIONS (cont’d)
Revenue Multiple: the fastest (and worst) shortcut to an estimate of exit valuation. Use an estimate of revenue from,
say, year 5, and multiply it by 5 or 10.
Comps: the best (and hardest) way to estimate exit valuation.
● Use exit valuations of similar companies in similar circumstances to estimate the exit valuation of our startup.
● Ways a comp can be “comparable” may include:
○ From the same industry
○ Different industry but similar type of disruption happening
○ Similar growth trajectory
○ Some of the same potential acquirers
● Comps are by far the best sources…if you can find them. It is a core competency VCs develop: keeping up with
the everchanging tech M&A scene, who is buying what and for how much, and developing relationships with
potential acquirers. As VC analysts, we are hampered by a lack of information and lack of connections, but we can
demonstrate that we know what we need to look for and that we’ve done all we can to try to find that
information.
Methodology
● If you can get access, use a subscription database such as PitchBook, VentureXpert, VentureSource or Capital IQ.
● CrunchBase can be a good free resource, though data is sometimes inaccurate.
● Search for exit comps by Googling industry keywords and/or along with:
○ “acquisition”
○ “acquired by”
○ “mergers and acquisitions”
○ E.g., “email marketing saas acquired by”
● Search for similar startups and/or indirect competitors by Googling industry keywords. Then add the keywords
above to each competitor.
VCIC Return Analysis, Page 3
HOW TO HANDLE SEED ROUNDS
There are two different types of seed deals to consider:
Seed Round is Significantly Lower than Anticipated Series A (less than 1/5):
● Think of the seed deal as the chance to get in the deal early but use the projected Series A to calculate potential
return.
● E.g., $100k seed with an expected $2M Series A. You may negotiate the seed at a $1M pre-money, resulting in
lower than 10% ownership. But the Series A is projected to be a 2 on 4, at which time you will get 33%. Base
your return analysis on the Series A.
● You could even offer a SAFE, but you still must project potential return based on the anticipated future Series A.
● Point is, you don’t care (much) about the valuation of this round…you’re focused on the A.
Seed Round is Close to the Size of the Series A (within 4X):
● Use the seed round to establish your percent ownership and reserve 3X of the seed round to maintain pro rata.
● E.g., $1M seed with an expected $3M Series A. For the seed round, negotiate approximately the percentage
ownership you’ll need at exit, say $1M on a $4M pre, or 20%. Reserve another $3M, total investment is $4M
(which is appropriate for a fund size in the $50-80M range).
Other considerations:
Average investment per startup. You should be planning on a portfolio of at least a dozen startups. Divide your fund size
by the number of startups to get average investment per startup OR pick an average per startup to derive the number of
startups, no less than 12. For example, if you are given an $80M fund size at VCIC, subtract around $10M for fees (2% for
5 years, 1% for 5 years) or claim your firm “recycles fees” (you might find out first if this is common in your region). If no
recycle, divide $70M by, say, 14 startups to get $5M per startup. If recycling, $80 divided by, say, 12 startups yields $6-
7M average per startup.
Board Seats: VCIC funds are always “active,” meaning you take board seats. Always be prepared to take ONE board seat
on the investment and indicate which teammate will be the person to be on the board. That person should be the most
obvious fit and should lead (but not dominate) discussions.
Option Pool: Always the norm, usually in the 10% range. Much higher if the team is particularly young or has significant
leadership needs. Can be lower if team is particularly seasoned.