Expected yield / Expected return

Investment is the tying up of capital with the aim of generating profit over a specified period of time. The expected return of the investment result, the profit, is the committed capital in proportion, its value expressed as a percentage.

Every investor is some kind of future yield you want in hope capital put out, so it is also understandable that he formulates expectations regarding the desired profit. Since we do not know the amount due in the future, this is typically a random variable that is taken into account when planning investments.

The expected return and the risk they are related to each other: the riskier a business is, the higher the return expected by venture capital investors. The less certain that the planned business will be successful and that the investment will return, the more you have to pay for the capital involved.

The startups in the case of the expected return and its definition is a particularly sensitive area. Young companies have unpredictable but dynamic growth potential, but at the same time, there is not enough information available in their own history to model this, as they mostly have a few months or years of analyzable history behind them. That's why the venture capital investments its return expectations are very high in the initial stage. The in seeding phase investors usually expect an annual return of over 25-30%, lower values, 12-15%, are typical in the later stages. 

Venture capital investment has a normal for credit compared to incubation costs also arise, the investor needs not only financial but also professional help (for example mentoring) also provides startups, which can increase return expectations.

In the early phase, for the majority of startups, it is also questionable whether they will survive at all, whether they will be able to develop and launch a working business model. Because there are a lot of startup going into bankruptcy, so these financing the investor must also cover it from the return on investments provided to successful startups. This also increases the expected return.

The expected return is not only based on the investor's own aspects and the target company takes into account its characteristics, but the market reference points in the broad sense, benchmarks, the usual product life cycles of the given type of company and any professional or economic political risks that can be associated with the project. 

The optimal level of the expected return is if it offsets the investor's risk factors, but at the same time allows the company to run on a long-term sustainable growth path. Because too high a return expectation can lead the company in the direction of generating profit in the short term, which can endanger the long-term success after the investment is closed.

A typical trend for the business model of startup companies is that in the initial phase for market validation, strives to conquer markets and increase the number of customers, so even an explosively growing sales in addition, it is conceivable that a gain its level remains low, or the company even operates at a loss. 

In the best case, it is successful after that scaling along the line, gain can start to grow in a "hockey stick" shape, so a start-up business in this case, the results of the first years are not really authoritative regarding whether the expected return will be met at the end of the investment. 

This is also true backwards: a promising one cash-flow things can go wrong along the way. The market may change or the startup may make bad decisions, as a result of which the result may melt even in the last quarters of the investment.