5 min read · Jul 16, 2023
A common question I get from entrepreneurs is “what is the VC going to expect in return from their investment?” The answer, which I summarize below is rarely believed, but it is my experience. In this article, I explore the expectations for ROI at each series round — Series A, Series B, and Series C — providing insights into the shifting investment landscape and the potential returns that investors anticipate.
Return on Investment (ROI) is a critical factor in assessing the success and attractiveness of startup investments. As startups progress through different series rounds of funding, investors’ expectations for ROI evolve based on the company’s growth, market position, and revenue potential.
During the Series A round, investors typically focus on supporting startups with solid market validation, early traction, and a scalable business model. At this stage, investors expect a higher risk profile but also a potential for substantial returns.
The expected ROI for Series A investments can vary widely, but generally, investors aim for a return ranging from 3x to 10x their initial investment.
However, it’s important to note that the actual ROI can be influenced by factors such as market conditions, industry dynamics, and the startup’s growth trajectory.
Examples of early-stage venture capital firms include:
Andreessen Horowitz
Based in Silicon Valley, Andreessen Horowitz has a notable track record of investing in early-stage technology startups. Their portfolio includes companies like Airbnb, Coinbase, and Slack.
Y Combinator
Known for its startup accelerator program, Y Combinator has helped numerous early-stage startups such as Dropbox, Airbnb, and DoorDash. They offer seed funding, mentorship, and access to a vast network of investors and entrepreneurs.
As startups progress to the Series B round, they are expected to have demonstrated significant market traction, strong revenue growth, and a clear path to profitability. Investors in Series B rounds seek to capitalize on the company’s expanding market presence and scalability. The expectations for ROI at this stage generally become more conservative compared to Series A.
Investors typically aim for a return ranging from 2x to 5x their initial investment, considering the increased valuation and reduced risk associated with a startup’s successful transition from early-stage to growth-stage.
Examples of growth and expansion venture capital firms include:
Sequoia Capital
With a global presence, Sequoia Capital is known for its investments in companies like Google, Apple, and WhatsApp. They provide growth-stage funding and actively assist startups in building their teams, expanding their markets, and preparing for future funding rounds.
Accel Partners
Accel Partners is a prominent venture capital firm that invests across multiple stages, but they are particularly active in growth-stage investments. Their portfolio includes companies like Facebook, Dropbox, and Slack.
Series C funding is typically reserved for startups that have achieved substantial growth, market dominance, and the potential for a significant exit event, such as an IPO or acquisition. Investors at this stage focus on supporting the startup’s further expansion, international market penetration, and strategic initiatives.
As Series C investments involve huge amounts of capital, the expectations for ROI become more tempered. Investors usually aim for a return ranging from 1.5x to 3x their initial investment.
The emphasis shifts from high-risk, high-reward scenarios to preserving capital while still benefiting from the startup’s successful trajectory.
Once you get to this level, there are multiple players and VCs, usually specializing in the market. Some examples include:
HealthQuest Capital
Specializing in healthcare and life sciences, HealthQuest Capital focuses on investing in companies developing innovative solutions in areas such as biotechnology, digital health, and medical devices.
Energy Impact Partners
Energy Impact Partners is a venture capital firm dedicated to investing in startups that are transforming the energy and sustainability sectors. They support companies developing technologies related to renewable energy, energy storage, and grid optimization.
Norwest
Norwest focuses on providing growth capital to high-potential companies in a wide range of industries, including technology, consumer, and healthcare. They prioritize long-term partnerships with entrepreneurs and aim to support their growth through strategic guidance and operational expertise. Norwest also emphasizes building a strong network of industry connections to facilitate business development opportunities for their portfolio companies.
Kleiner Perkins
Kleiner Perkins primarily focuses on early-stage investments in breakthrough technologies and disruptive companies. They have a strong track record of investing in sectors such as clean energy, life sciences, and digital innovation. Kleiner Perkins actively engages with portfolio companies, offering hands-on support and mentorship to help them navigate challenges and scale their businesses. Both firms bring valuable experience and resources to their investments, but their specific focus and strategies set them apart in the venture capital landscape.
It is important to note that ROI expectations can vary depending on several factors, including the industry, market conditions, competitive landscape, and the startup’s specific growth trajectory. For example, startups operating in highly competitive industries with high barriers to entry may have higher ROI expectations compared to those in less crowded markets. Additionally, market trends, economic conditions, and disruptive technologies can influence ROI expectations across all series rounds.
Understanding the expectations for ROI at each series round is crucial for both investors and entrepreneurs seeking funding for their startups. As startups progress from Series A to Series C, investors expect a balance between risk and reward, adjusting their return expectations based on the startup’s growth, market traction, and revenue potential. While the ROI ranges provided in this article serve as general guidelines, it’s essential to consider the unique circ*mstances and characteristics of each investment opportunity.
Entrepreneurs should articulate their growth plans, market potential, and competitive advantages to attract investors and align their expectations. On the other hand, investors should conduct thorough due diligence and consider the broader market conditions to set realistic ROI expectations. By fostering transparent communication and collaboration between entrepreneurs and investors, both parties can work towards achieving mutually beneficial outcomes and driving the long-term success of innovative startups.
