Understanding Venture Scale Returns: Unlocking the Potential for Startup Success

For those seeking investors, it’s vital to understand what venture capital funding is looking for in an investment, and understanding the concept of venture scale return is one key component. Venture scale return refers to the potential financial gain that investors expect from investing in a startup. For VC funding, we generally are looking at higher returns compared to traditional, historical investments such as stocks or real estate. Venture scale return is looking for massive returns, and it drives a lot of the decisions made around investments. 

Why Does Venture Scale Return Matter to Investors?

Risk and Reward: Startups are inherently risky investments, and venture capitalists recognize this. We invest in early-stage companies based on their high growth potential, but we go in knowing there’s high failure risk as well. By shooting high for venture scale returns, VC investment helps offset any other risks. 

Portfolio Strategy: Venture capital firms typically invest in a diverse portfolio of startups. While we’d like to think every investment will pan out to be a great one, the reality is that there will be a few that outweigh others and also outweigh any potential losses. Venture scale returns allow investors to achieve the necessary portfolio diversification and increase their chances of achieving substantial profits from a select few companies.

Exit Opportunities: Investors fund startups with the expectation of eventually exiting their investment and realizing their returns. The most common exit routes include initial public offerings (IPOs) and acquisitions by larger companies. Attractive investments will include companies who are positioning themselves to go after goals such as these. 

Position Your Startup for Venture Capital Appeal:

Market Opportunity: One of the best ways to attract funding of any kind, but especially venture capital funding, is to demonstrate that your startup addresses a substantial market opportunity. Investors are looking for companies that can disrupt industries, capture significant market share, and generate substantial revenues in the process.

Scalability: Venture capital like Sentiero are always looking for business models that have the ability to scale. Your business should have the potential to grow exponentially, reaching a large customer base and generating significant revenues within a relatively short timeframe. Scalability is a key factor in achieving venture scale returns.

Competitive Advantage: Any investor is going to want to see a clear competitive advantage that really makes your startup rise above any competitors. Whether it’s proprietary technology, a unique business model, or exclusive partnerships, make sure you’re communicating and building out your competitive advantage in the market. 

Strong Management Team: We don’t look at just the product. Venture capital investors are always looking at who is driving the ship. A strong leadership team is a huge plus when it comes to securing investment. You don’t have to be perfect, but we want to see a deep understanding of your market, vision, and an ability to grow. Investors aren’t running your day-to-day operations, so it’s important to demonstrate that your internal team is up to the task!

Understanding how VCs think helps you understand how we operate. Early stage funding looks very different from investment in a tried-and-true business model, and as such it affects how we look at any potential investment. Not every company has the potential for venture scale returns, but many do. 

At Sentiero, we underwrite every company to a minimum potential exit of 40X our current investment. For example, a company at $10M valuation has to have a potential exit at $400M. Given 8-10x current multiples of revenue for exits/IPOs, that means the company needs to be doing $40-50M in sales WITH upward growth trajectory.

We love finding those synergies and finding companies who have investment potential!