In investing, folks like to talk a great deal about “multiple”s. IE I got a “1.5X return”. In my experience, professionals are pretty happy with the ones that are >1.0, and it’s common in a successful fund to fall between 0 and 2.5. The ‘X’ is “times”, as in 1.5 times my return. Meaning that I put in 10,000 and I got back 15,000. Depending on how long that takes, that can be pretty good money, or not much at all, as compared to earning interest in a bank. This money invariably costs more in time and effort to make the investment and support it, that’s why it needs to earn a higher return than money in the bank. Otherwise, the only thing left for your investors to gain is ego points, and is that what you want to pay in?
A key tenant of what I’ll call “economic development investing” is finding ways to invest in early companies and get the investment back without requiring that the company be acquired by another company. How do we invest in companies and leave them standing? Methods that I have seen create ways for the company to buyback its shares at a later date, as a multiple of the original purchase price. For a global worker-owned cooperative with >20M in annual revenue and a >10 year track record of paying an annual dividend? That multiple is One. IE, if you sell your shares back to the company, you get back the price you paid for them, and you get to keep your dividends earned in the meantime. For little startups with no operating history and track record? I’ve seen multiples of 2X and 2.5X.
Is that a bargain? Is that fair? Is that outrageous? Well, if our theoretical alternative is buying a CD at the local bank, it depends on how much time goes by before that startup buys those shares back. If I can buy a CD earning about 2.5%, and my startup will pay 10-12% in interest on a loan, there’s a nice window where it’s win-win for both of us, once I get compensated for my time/effort. That ignores the greater risk that some % of my investments will go to zero, which is highly unlikely for a CD. A fund needs returns that can absorb that risk. True Angel investing is best budgeted as an expense that gets to revolve a few times before being totally spent.
To keep my head straight as I look at these investments, I made a handy reference table. Here’s a copy for you!
QuickRef IRR vs multiples as PDF
QuickRef IRR vs multiples as xlsx
Shaulablog 