Which Cat to Bell? Investment Duration, Exit Type, and Returns in Venture Investments

Abstract

India is one of the fastest-growing markets for venture capital (VC) investments. In this article, the authors use data from 1,190 VC investments and exits in India from 2000 to 2017 to analyze investment duration, exit type, returns, and the correlation between them. Their results show that (i) investment duration in India was 4.55 years; (ii) M&A was the most common route of exit for VC investors; and (iii) the mean return (IRR) to investors was 13.25%. The investment duration is the time interval between investment and exit. The more investors in a venture, the lower the investment duration. Exit type is also correlated with returns. Although average returns are higher when the exit is through public markets, it is more consistent when the exit is through a buyback or M&A. Returns are higher when the quantum of funding and funding rounds are optimal beyond which both hurt returns. Start-ups with four to six investors generated the highest returns.

TOPICS: Real assets/alternative investments/private equity, emerging markets, performance measurement

Key Findings

• ▪ The investment duration is the time interval between investment and exit. The more investors in a venture, the lower the investment duration.

• ▪ There is a dependence between the sector of the start-up and exit type. Similarly, there is a relationship between exit type and returns. Although average returns are higher when the exit is through public markets, it is more consistent when the exit is through a buyback or an M&A.

• ▪ Returns are higher when the quantum of funding and the number of funding rounds are optimal, beyond which both negatively impact returns. Start-ups with four to six investors generated the highest returns.