Key Takeaways

  • Venture capitalists seek higher-than-average ROI due to the risk of startups failing; they typically expect 25–35% annualized returns.
  • VC expected return on investment differs by stage: early-stage may aim for 10x returns, while later-stage targets are closer to 2–5x.
  • Portfolio math drives VC ROI—only a small portion of investments succeed, so the winners must offset the majority that fail.
  • Negotiation of expected ROI is influenced by company valuation, market potential, and risk profile.
  • Exit strategies (IPO, acquisition, secondary sales) are central to meeting VC ROI expectations.

Venture capital ROI expectations can depend on the business in which one is investing. While venture capital investing can be a risky proposition, most investors expect to at least double the money that they have invested.

Introduction to Venture Capitalists and Return on Investment

If you're interested in starting or expanding your business, you can get the infusion of cash that you need to achieve these goals by seeking investments from venture capitalists. Before seeking these investments, however, you should be aware that there will be a cost involved. Venture capitalists don't give their money away for nothing, and will expect a strong return on investment.

To receive an investment from a venture capitalist, you will need to promise them a strong return, and in most cases, you will also need to provide them with an ownership stake in your company.

Why VC ROI Expectations Are Higher Than Average

Unlike traditional asset classes such as bonds or public equities, venture capital is inherently risky. A large proportion of startups fail, meaning venture capitalists must price in this risk when calculating expected returns. To justify the illiquidity and uncertainty, VCs often set ROI targets significantly above those of the stock market. Historically, a 20–35% annualized internal rate of return (IRR) is considered attractive in venture investing Anything less may not adequately compensate for the failure rate of other investments in the fund.

Return on Investment Ranges

The risk of venture capital investing is that it can be hard to tell at the outset whether an investment will actually pay off. While some ventures can result in returns that are multiple times the original investment, many investments will end in a negative return. The National Bureau of Economic Research has stated that a 25 percent return on a venture capital investment is the average. Most venture capitalists or venture capital returns will expect to at least receive this 25 percent return on investment. Depending on your business's potential for growth, a venture capital investor may expect a much greater return.

The purpose of making venture capital investments is the ability to receive a tremendous return from these investment, and it's common for investors to desire that their initial investment be at least doubled. Fortunately, investors do not expect this return immediately. Experienced venture capitalists usually consider a successful investment one that doubles in a period of 10 years.

You should consider several factors when calculating the return on investment you will need to promise:

  • Your company's valuation.
  • How much money the venture capitalist is providing.
  • The risk potential from investing in your business.

ROI Expectations by Funding Stage

Expected returns vary depending on the stage of investment:

  • Seed and Pre-Seed Rounds – Highest risk; VCs may seek 10x or greater returns on successful deals.
  • Series A and B – Moderate risk; ROI targets often range from 5–10x.
  • Series C and Later – Lower risk but smaller multiples; expected returns usually fall between 2–5x.

This risk-reward tradeoff means early-stage investors chase bigger multiples to offset the likelihood of failure, while later-stage investors accept smaller multiples in exchange for more stability.

Negotiating Returns on Investment

Venture capital firms will frequently have a large investment portfolio. This means that your company will be one of many receiving investments from the firms. Depending on your business, this can help you more effectively negotiate your promised returns.

If your company is low-risk, for example, you may be able to promise a lower return than what a high-risk company would need to offer in order to receive an investment. Venture capital firms prefer their portfolio to contain a mixture of low-risk and high-risk investments, known as diversification.

If you are struggling to meet your payroll and don't have the money necessary to grow your business, a venture capital firm will usually consider you a high-risk investment. When a venture capital firm determines there is higher risk involved in investing in your company, you should prepare to offer a higher return.

Portfolio Dynamics and Power Law Returns

Venture capital returns are not evenly distributed. Instead, they follow a power law distribution—a small percentage of “home run” investments generate the majority of the fund’s profits. For example, out of 10 investments, a VC may expect 6–7 to fail, 2–3 to break even, and 1 to deliver an outsized return that drives the portfolio’s success.

This dynamic explains why VCs push for higher return multiples: without one or two massive winners, the fund would not meet its return targets. When negotiating with investors, founders should understand that VCs are balancing risk across their entire portfolio, not just one deal.

Company Valuation and Venture Capital Math

The most common method that venture capital firms use to determine their expected return on investment is by valuating your company. Fortunately, you are not required to accept the valuation determined by the venture capital firm.

In general, after a venture capital firm provides you a valuation, you should counter by asking for a valuation that is 25 percent higher. Requesting this higher valuation is common when negotiating with venture capital firms. Negotiating a higher evaluation will make your company more appealing to the investor, although it will also allow them to ask for a higher return on investment.

In most cases, only a small portion of a venture capital firm's portfolio will result in a return on investment. For example, if a firm invests in 10 companies, it's possible that only two of those investments will result in a gain, meaning the other eight investments ended in a negative return.

Because it's so common for these investments to fail, venture capitalists are very careful about which companies they provide money. If you want to receive a venture capital investment, you will need to demonstrate that investing in your company is likely to result in a big return on investment, particularly if your company is involved in a risky field.

The Role of Exit Strategies in ROI

For venture capitalists, ROI is ultimately realized through exits, such as:

  • Initial Public Offerings (IPOs): High-profile exits that can generate significant multiples.
  • Mergers and Acquisitions (M&A): More common than IPOs, offering liquidity even if returns are lower.
  • Secondary Market Sales: VCs may sell shares to other investors prior to an IPO or acquisition.

The timing and nature of the exit directly affect whether the ROI target is achieved. Because many startups take 7–10 years to reach an exit, VCs must be confident that the potential payoff justifies the wait.

Frequently Asked Questions

  1. What is the average VC expected return on investment?
    Most venture capitalists target 20–35% annualized IRR, though actual outcomes vary widely depending on stage and portfolio performance.
  2. Why do VCs expect higher returns than other investors?
    Because startups are risky and illiquid, higher ROI targets help offset the high failure rate of investments.
  3. Do ROI expectations change by funding round?
    Yes. Early-stage investments may aim for 10x+ returns, while later-stage deals often target 2–5x.
  4. How do VCs actually realize ROI?
    Returns are captured through exits—mainly IPOs, acquisitions, or secondary share sales.
  5. How many VC investments usually succeed?
    Research suggests that only 10–20% of a VC’s portfolio produces meaningful gains, with one or two deals often driving most returns.

If you need help with vc expected return on investment, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.