Late Stage VCs
Later stage VC firms in Australia and overseas have found it difficult to meet their targeted returns due to the paucity of opportunity/exits relative to the size of their funds.
- To give a VC/PE fund’s investors a 20% annual return, the fund needs to make 3x the money raised within a 6 year period, For a $200 million fund, that means returning $600 million to investors.
- Assuming 10% of the ventures fail, the successful ventures need to increase in value by an average 3.33x
- If a VC/PE fund invests $20 million in 10 companies (each with valuation of $100 million assuming VC does not want to own more than 20% of a company) the fund need to help build 9 of these companies (assuming a 10% failure rate) to an average market capitalization of $333 million within 6 years.
- Currently in Australia there are only 194 public companies with a market cap of > $333 million (source: www.DigitalLook.com ASX 200)
Early Stage VCs/Angels
Early stage VC/Angel Investing does not face the same scalability problems faced by larger and later stage VC firms. Angel investment is in the sweet spot of the VC opportunity
- To give an Angel fund’s investors a 30% annual return, the fund must make 4.8x the money raised within a 6 year period. For a $15 million fund, that means returning $72 million to investors.
- Assuming that 40% of start-ups fail, the successful start-ups must increase in value by an average of 8x.
- If an Angel fund invests $500K in 30 companies (each with a valuation of $1M assuming the Angel fund does not want to own more than 50% of a company) the fund must to help build 18 of these companies (assuming a 40% failure rate) to an average valuation of $8 million within 6 years.
- Currently in Australia (assuming valuation as 4 x turnover). there are approximately 150,000 companies with annual turnover of >$2 million per year or an implied valuation of $8 million (source: ABS Counts of Australian Business 2003-2007)