J Curve Angel Investing
J Curve Angel Investing
An Introduction to the J Curve & Angel Investors
The following is a brief introduction to the J Curve and its application to private equity and angel investing. Understanding the J Curve is very helpful in angel investing and planning your investments and businesses realistically. Most start-ups follow the J Curve model so it’s good to know.
The J-Curve shows an investor the compound return over time (IRR) of a start-up in order to asses its performance. Most start-ups will exhibit strongly negative returns in the early years as the money is drawn down through expansion costs, mistakes, and other ways that initial investment is spent in the early years. After the business begins to mature, positive inflows of cash come back into the company until the amount of outflows precisely matches the amount of inflows, creating an internal rate of return (IRR) of zero.
As the start-up continues it’ lifespan, the IRR should move into the arena of positive returns demonstrating long-term maturation and an ability to generate profit that is returned to the angel investors.
The J-Curve is so named because the curve resembles a J, usually with a less sharp curve. It is often compared to the shape of a hockey stick. Here is an example of the J Curve:
This is just a brief introduction to the J Curve, if you want to add more to this article send me an email.
Adapted from Private Equity Blogger
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