Multiple
In the context of venture capital, the term "Multiple" usually refers to the return multiple, indicating how much money an investor will make compared to their initial investment.
For example, a 3x multiple means the investor will make three times their original investment.
Pros:
- It’s an easy-to-understand metric that provides quick insight into an investment's performance.
- Unlike IRR, it doesn't require assumptions about the reinvestment rate for cash flows.
Cons:
- Does not take into account the time value of money.
- May not reflect the risk profile of an investment.
To go deeper
The multiple is interesting to understand in the context of a VC fund’s investment in a start-up.
A VC fund that invests in 20 different targets, will need to do a 20x return for an investment to be a “fund-returner” (assuming all investments are the same size).
This is why it’s important for founders and LPs to understand the number of lines in a VC fund’s portfolio.
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