Hurdle Rate
Posted on 12. Sep, 2008 by squareroots in Venture Capital
In the Venture Capital world, IRR (Interal Rate of Return) is used by the Limited Partners to measure the performance of the VC funds. The Venture Capitalists themselves use a guideline, called the Hurdle Rate, when talking about a startups potential. If the startup has the potential to exceed the hurdle rate then they may be “VC Fundable”. The chart below shows the hurdle rate, which is an IRR of 40%, depicted by the thick black line starting in the upper left, and ending in the bottom right.
Hurdle rate chart
If you click on the chart, you can download an Excel file with both the image and the formulas used to create it. For a startup, the most important aspect to the Hurdle Rate is not the 40% IRR number, but the fact that most VCs use the multiple (shown on the verticle axis) when discussing an investment’s potential. A venture capitalist might say a deal is a “10 bagger”, which means the deal could return 10 times their money. Rarely, if ever, will a VC say that a deal shows the potential for an IRR of 63.3%. However, as VCs report to their limited partners using IRRs the hurdle rate is still something on their mind when evaluating investments.
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