Some of our portfolio companies

How our portfolio can deliver above 70% IRR

Luca Banderet
Jun 26 · 3 min read

Our portfolio companies (DHS) keep growing impressively. This growth has translated into an increasingly stable performance of over 70% gross IRR, including a first M&A exit earlier this year.

The is our gross IRR (=IRR on invested capital) over time, reported according to Invest Europe standards. As our portfolio grows, it has become less bumpy, increasingly stabilizing around 70%.

Luck? Certainly part of it. But let me share another possible explanation that I found crunching some data — below the average share price development relative to when we first invested — what we call “Angel Stage”.

Share price multiple relative to when we first invested. Round by round, portfolio average.

The graph suggests, for example, that the average increase in share price after a third round as compared to our initial investment is 3.5 times — 3.5x. Or simply, it’s 3.5 times more expensive to invest at “Late Seed” vs. “Angel” stage (ignoring the factor of time). Makes sense.

Our data set is of course way too small to be statistically significant. However, having followed about 1500 companies over the last year in Sweden, we think the pattern is valid for the companies we’d consider to back.

Of course, not every company will actually raise follow-on rounds. That’s the assumption we all work with.

If you look at the graph once more, it also suggests that investing at Angel we can take 7.4 times more risk than A round investors. Say 5 times generously adjusting for time. So, if 1 out of 5 of our companies raises a bigger A round we should end up with the same expected performance as the A round investors.

Interestingly, to date 100% of our companies have either raised an A round, are on track to do so, or have been acquired (Qasa exit, earlier this year).

And this is despite a lack of capital in the market at the seed stage…

New Strategy: Possibility to Double-Down at Seed Stage where the upside is still high but risk lowered

Share price multiple relative to the first round after our initial investment. Round by round, portfolio average.

With our new strategy, after first investing at angel stage and mitigating early risks through the help of our angel network (DHS), we’ll aim to double-down in ownership at the seed stage before valuations increase significantly at A-round and beyond. Based on that data, we expect to pay about 1.4 times the price at the seed stage relative to today’s main focus at the Angel Stage.

To deliver great returns, namely maximize IRR, the factor of time is of course equally important. Looking at the same data, we found that the time between the seed stage (which often is a kind of a “bridge” that was not necessarily planned for) and the consequent round — call it Late Seed or Early A — is the shortest, 0.9 Years on average, whereas the time between the initial round and the Seed Round is 1.2 years (33% longer).

This means that in terms of IRR, on average, it might be really worth taking the additional risk to invest earlier than in A rounds, but later than Angel, in a stage where even the best companies struggle to raise capital from great investors.

In summary, that’s why with our new strategy we’ll continue to discover deals early, co-investing with our Angel Network (DHS) at Angel Stage and “Double-Down” on ownership at the Seed stage, before valuations stick up. Mathematically, we might be able to deliver an even higher IRR than with our current portfolio. Most importantly, we’ll be able to help entrepreneurs build even better companies, earlier and faster.

J12 Ventures

A look at the early stage of innovation

Thanks to Emmet King

Luca Banderet

Written by

Early-stage tech investor and Saxophonist | www.j12ventures.com

J12 Ventures

A look at the early stage of innovation

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