Venture capital (VC) is by nature a long-term investment strategy. Unlike tactical markets that rely on shifting trends to generate short-term profit opportunities, VC involves funding startups and emerging companies that show high growth potential over time.
Its focus lies upon building companies and successfully maintaining a meaningful presence as they develop. Subsequently, investors need patience and flexibility to deploy capital when opportunities are present and continue to search when value is not as apparent.
From 2007-2018, the median time from initial VC financing to IPO exit ranged from 5.2 to 8.7 years, though more recent trends indicate that startups are starting to stay private for longer periods of time. Most funds or funds of funds will run for several years without seeing any returns, and it is quite common for traditional VCs in the United States to use a 10-year limited partnership structure.
The timeline for ROI also can vary based on which stage of funding VCs or CVCs finance. For instance, ROI for early stage investments will typically take longer than late stage investments because those startups need more time to mature and become profitable. They also tend to yield larger returns once they do exit.
In addition, there is often lag time between each round and stage of funding. The following broadly describes the various rounds.
As the first official equity funding stage, seed funding helps startups finance their first steps, like market research and product development. It is typically the riskiest stage of the investment process, as many companies fail to mature past this point. Financing often comes from founders and friends, angel investors, micro VCs and accelerators, and the average time between rounds at this stage can be 12-18 months (or longer).
Series A funding helps more established startups further develop its business model, scale their product or service and expand operations. Many traditional VC funds often begin investing in this stage, which typically yields larger funding rounds than the seed stage. In many cases, it can take startups a couple years to move from Series A to Series B.
Series B rounds can help startups take their business past the development stage by expanding market reach and helping them grow to meet demand. To qualify, startups need to showcase their achievements and prove that they are prepared for success on a larger scale. Expect at least 15-20 months between rounds at this stage.
Companies that make it to Series C often have proven track records and are already quite successful. Funding at this stage is less risky for investors and usually focuses on scaling the company, such as developing new products or expanding into new markets. After this stage, companies often contemplate exiting or moving onto Series D+ funding.
While it can take some time to see financial returns from venture capital investments, strategically focused investors can reap other benefits much sooner, with value accruing along the way. For instance, they can access innovation through emerging companies, gain market intelligence about industry trends and form new collaborative relationships with founders, entrepreneurs and other investors.
A startup’s exit timeline can vary based on the industry or industry group it’s in. Some industries require more capital to get off the ground or need ample time to conduct testing to move their products or services to the next stage.
For instance, SaaS software companies have a median of nine years to exit while hardware has an even longer timeline of 11 years. Meanwhile, payment software companies have a median exit time of just four years.
While there is never a guarantee of churning a profit from venture capital investments, some industries have proven that they’re worth enduring long exit times. Biotech and medtech companies, for example, tend to have consistently high valuations and exits.
Propeller Health, a Madison, Wis., company that offers sensors, mobile apps, analytics and services to support respiratory health management, is just one case of a medtech company that was worth the wait. In 2018, it was acquired by RedMed for $225 million after being in business for 11 years and raising $69.9 million in financing over seven funding rounds.
