{"id":1848,"date":"2023-11-24T08:51:41","date_gmt":"2023-11-24T07:51:41","guid":{"rendered":"http:\/\/www.ikigai-colors.com\/?p=1848"},"modified":"2024-07-17T17:01:50","modified_gmt":"2024-07-17T15:01:50","slug":"heading-for-value-the-10x-rule-in-venture-capital","status":"publish","type":"post","link":"https:\/\/www.ikigai-colors.com\/index.php\/2023\/11\/24\/heading-for-value-the-10x-rule-in-venture-capital\/","title":{"rendered":"Heading for Value: The ’10X’ Rule in Venture Capital"},"content":{"rendered":"\n

Version fran\u00e7aise\/French version: LINK<\/a><\/strong><\/p>\n\n\n\n

\n

This article posits the existence of the \u00ab\u00a010X rule\u201d in seed and venture capital, where investors have an implicit goal of multiplying their invested capital. If a venture capital fund injects \u20ac1 million into a startup in exchange for often a minority stake, it will aim for an \u00ab\u00a0exit\u00a0\u00bb equal to or greater than \u20ac10 M to achieve its financial goal. Median performance in terms of exit value for startups funded by venture capital, supports the assumption of the 10X rule and allows for a quick estimation of the minimum valuation target for a startup at the time of its sale.<\/em><\/strong><\/p>\nE. Krieger<\/cite><\/blockquote>\n\n\n

\n
\"\"
G\u00e9n\u00e9r\u00e9 par DALL-E \/ Generated by DALL-E<\/sup><\/em><\/figcaption><\/figure>\n<\/div>\n\n\n

Venture capital is a particularly demanding discipline in terms of creating financial value. Investments in startup capital aim to accelerate the development of carefully selected companies to enable investors and founders to achieve significant capital gains upon exit. This exit is planned within less than 10 years, even though the pursuit of liquidity is a challenge in itself, and effective exit timelines exceed 7 years for half of the companies funded by venture capital funds.<\/p>\n\n\n\n

A few simple calculations help understand the challenge these investments pose in terms of the overall exit value goal for funded startups.<\/p>\n\n\n\n

If you raise \u20ac1 million in exchange for 20% of your startup’s equity, you value it at \u20ac5 million post-money since your investors subscribe to new shares representing one-fifth of the company. In reality, you have valued your startup at \u20ac4 million pre-money (before the investment), and you retain your shares, which now constitute 80% of the company’s equity.<\/p>\n\n\n\n

Post-money valuation and \u00ab\u00a0money-multiple\u00a0\u00bb goal for investors<\/strong><\/p>\n\n\n\n

If your investors aim to double their investment within 5 years, and no new capital increase occurs in the meantime, your company must be listed or (more commonly) sold for an amount equal to or greater than 2 \u00d7 \u20ac5 million = \u20ac10 million, i.e., 10 times the amount invested by them<\/span>.<\/p>\n\n\n\n

A doubling of the investors’ investment within 5 years represents an annual return of 14.9%, which is not excessive considering the risk of \u00ab\u00a0losing everything\u00a0\u00bb due to the particularly high failure rate among startups.<\/p>\n\n\n\n

A similar reasoning helps understand the relevance of this \u00ab\u00a010X goal\u00a0\u00bb in terms of the future equity value: if you raise \u20ac1 million in exchange for 30% of your startup’s equity, you now value it at \u20ac1 million\/30% = \u20ac3.33 million post-money. If your investors are more demanding than in the first example, both in terms of percentage and financial return, and their minimum goal is to triple their investment within 5 years without any new capital increase, your company must be listed or sold for an amount equal to or greater than 3 \u00d7 \u20ac3.33 million = \u20ac10 million, again, at least 10 times the amount invested by them.<\/p>\n\n\n\n

Median exit values confirm the assumption of the 10X rule<\/strong><\/p>\n\n\n\n

These order of magnitudes in terms of the percentage negotiated by investors align with the reality of early-stage financing rounds for startups. The investment bank Avolta indicates that the median percentage taken by investors in \u00ab\u00a0seed\u00a0\u00bb funding is 29% in exchange for a median investment of \u20ac1.2 million, and the median percentage in \u00ab\u00a0Series A\u00a0\u00bb funding is 28% in exchange for a median contribution of \u20ac3 million (2022 data).<\/p>\n\n\n\n

This study also indicates that at the time of their sale, the median value of companies funded by venture capital funds is \u20ac38 million for a median funding of \u20ac4 million. This corroborates the 10X multiple to be applied to venture capital funding to estimate the target value of a startup at the time of its sale. In fact, our \u20ac4 million generates a resale value close to \u20ac40 million.<\/p>\n\n\n\n

These amounts naturally fluctuate over time, but recent data support this \u00ab\u00a010X coefficient,\u00a0\u00bb which has the merit of quickly estimating the valuation target of a startup at the time of its sale based on the cumulative capital invested since its creation.<\/p>\n\n\n\n

In 2021, the median value of companies funded by venture capital funds at the time of their sale was \u20ac48 million, for a median funding of \u20ac3 million, resulting in a coefficient of 16 during a bubble period. When the market is euphoric, multiples soar, as do investor expectations. However, our \u00ab\u00a010X coefficient\u00a0\u00bb remains a useful reference in initial analysis.<\/p>\n\n\n\n

If you are an entrepreneur, these orders of magnitudes help grasp the value to create if you seek investors. In this case, you can see if you can do better in terms of resale value: more quickly and with less (or more) capital than the mentioned median amounts.<\/p>\n\n\n\n

Beyond Excel-derived fantasies<\/strong><\/p>\n\n\n\n

Median values are interesting indicators of central tendency as they are not sensitive to extreme values that impact average values, which are, by nature, less informative.<\/p>\n\n\n\n

If you manage to finance your startup through venture capital funds, you can try to develop it more quickly and advantageously than these median data, both in terms of timing and resale value. However, reality is not always as simple as an Excel simulation. This explains why venture capitalists strive to select exceptional teams capable of creating considerable economic and financial value in a few years.<\/p>\n\n\n\n

When a startup triumphantly announces a funding round of \u20ac15 million in Series A, you can deduce that its investors anticipate a resale equal to or greater than \u20ac150 million\u2026 which is only the case for 12.5% of startups funded by venture capital professionals, or one successful startup out of 8. Be assured that the pressure on management will be commensurate with the stakes.<\/p>\n\n\n\n

Exegesis of announcements regarding funding rounds of future unicorns<\/strong><\/p>\n\n\n\n

Keeping this \u00ab\u00a010X\u00a0\u00bb rule in mind, in 2021, when valuations reached peaks and money flowed abundantly, startups that raised funds equal to or exceeding \u20ac100 million were destined to become unicorns, valued (sold or listed) at more than one billion Euros in the long term. In the meantime, several of them went bankrupt, including \u00ab\u00a0rapid delivery\u00a0\u00bb startups whose value proposition’s strength could legitimately be questioned.<\/p>\n\n\n\n

Venture capital is a discipline suited to outstanding teams venturing into huge markets (exceeding \u20ac1 billion) with exceptional value propositions… but it remains a particularly Darwinian activity since 50% of investments in startups result in a loss (source NVCA), and only 5% of investments generate a multiple equal to or greater than 3 for the funds involved.<\/p>\n","protected":false},"excerpt":{"rendered":"

Version fran\u00e7aise\/French version: LINK This article posits the existence of the \u00ab\u00a010X rule\u201d in seed and venture capital, where investors have an implicit goal of multiplying their invested capital. If a venture capital fund injects \u20ac1 million into a startup in exchange for often a minority stake, it will aim […]<\/p>\n","protected":false},"author":1,"featured_media":1849,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[16],"tags":[],"class_list":["post-1848","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-innovation-entrepreneuriat"],"_links":{"self":[{"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/posts\/1848","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/comments?post=1848"}],"version-history":[{"count":2,"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/posts\/1848\/revisions"}],"predecessor-version":[{"id":2258,"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/posts\/1848\/revisions\/2258"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/media\/1849"}],"wp:attachment":[{"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/media?parent=1848"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/categories?post=1848"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.ikigai-colors.com\/index.php\/wp-json\/wp\/v2\/tags?post=1848"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}