What Type of Investment Hits are You Going For?



I had lunch with a friend a few weeks ago 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 — baseball season was about to start so we started to make analogies. Based on that we started joking if we’re going for the Pete Rose’s (most singles) or the Barry Bonds (most home runs) of startups.

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/liquidates.

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 8 as a complete loss, 1 might 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
  • 8 losses = $200,000 wrote off
  • 1 slight return so 2x = $50,000 back
  • *1 home run = 10 x $25,000 = $250,000
  • $300,000 – $250,000 (initial investment) = $50,000
  • **1 grandslam = 30 x $25,000 = $750,000
  • $750,000 + $50,000 = $800,000
  • $800,000 – $250,000 (initial investment) = $550,000

*You made $50,000! In about 4–7 years (average time it takes to get an exit) after you invested $250,000, unfortunately most of your investments went out of business and your big hit, well was not enough to win the game. Hopefully you had some other losses to offset your huge (joking!) gains.

** You made $550,000 (minus the initial $250,000 invested)! Oh wait, these are capital gains so about 30% will go to taxes (luckily you have some losses), so now you’re down to $385,000. Hopefully you had QSBS so you can get back most of it (go look it up!).

To put the grandslam into perspective, you put in your $25k at a post valuation of $10M and the startup sold for $300M. Now you know why everyone wants the $1b+ unicorns :)

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 teams in the game that can acquire you.



Reprinted by permission.

Image credit: CC by Dex(07)

About the author: Trace Cohen

Managing Director of New York Venture Partners making angel investments in the best startups/founders. NYC, Whiskey, Bacon, ‘Cuse Alum.

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