Venture capitalists typically seek a 5x-10x return on their investment. I have used a Rule of Thumb I have coined the “Factors of 10′s”. It goes like this: If a VC wants a 10x return on a $6 million investment (for, say, 60% of the company)
- The VC would need to cash out at $60 million
- Which implies that the company would have to be worth $100 million when sold
- And the entrepreneur’s company aims for 10% of the addressable market
- The company would need revenues of perhaps $50 million (for a valuation of 2x Revenue)
- Which implies a total addressable market size of $500 million, or an addressable market of 10x the company’s revenues.
This is based on a lot of broad assumptions, especially that the company would not need any further funding.