An investor is in the business of making money from the funds he invests in a venture. Most investors place their money in a venture for five years or longer. Investment is a risky business. It is not uncommon for investors, especially angel investors, who invest their money in early-stage startups to see that the projected returns are unrealized. Business risk is an element that the investor factors in his financial model.
Statistically, only ten percent of startups succeed. With such high business risk, it is natural for investors to look to invest in projects that have the potential to scale up organically rapidly. Only when that happens will the investor earn enough to cover his risk. Let me explain this with the help of a small financial model further.
Suppose you are a startup. You are confident that your venture will give you an annual post-tax return of 30 percent. The investor’s share in your business is 30 percent, i.e., he owns 30 percent of your company. Given these parameters, the business makes sense to the investor and the startup only when it grows 15 times in five years.
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