Will Hsu had a very interesting post on his blog, Hitchiker’s Guide to 650.  (Yes, it’s a pretty cool blog title)

Will overlayed the now infamous Hype Cycle and a hypothetical startup valuation J-Curveover each other, like this:

(Minor nits – the J-Curve here likely shouldn’t start at zero, but at some higher amount.  The founding team and the concept itself has some value, and typically, while the startup is nascent, the value hinges on that alone.  In fact, it probably rises initially as risk is taken off the table with a few key hires/revisions.  It doesn’t change the insight from the overlay, however.)

He then postulated a few different exit points, with reasonable valuations and time frames, and then highlighted the different ROI values for each.

• Exit #1: 2~4x, 50~150% IRR (assuming 1.5~2yr hold, 1~2 rounds)
• Exit #2: 2~4x, 30~70% IRR (assuming 3~5yr hold, 2~3 rounds)
• Exit #3: 10~100x, 30~70% IRR

(You can read the full details here)

I must have seen versions of the  J-Curve and The Hype Cycle curves a hundred times, but for some reason, seeing them overlayed in the context provides some unique insight into the highs (and lows) of a venture backed startup.  It also highlights the incredible cost to being caught flat-footed (ie, needing cash) at the wrong points in the curve.

I also like the clear, numerical validation of a simple truth of venture investing (and entrepreneurship):  you achieve the highest internal rate of return by cashing out quickly.  But to achieve truly game-changing cash returns for investors (ie, return the fund), the big win is required.

The numbers really aren’t as material as the visualization of the two curves together.