Hello, this is Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
In calculating returns the timing of the return is a key factor.
There are two metrics for measuring return. ROI is return on investment without respect to time, and IRR which is Internal Rate of Return, is ROI WITH respect to time.
If I invest $50K and receive $150K back in three years, then my ROI is 3X. If I receive it back in five years the ROI is still 3X.
For IRR the timing makes a difference on the calculated result.
If I invest $50K and receive $150K back in three years, then my IRR is 44%. If I receive it back in five years the ROI is 25%.
The sooner the return comes back the higher the IRR.
That’s why most angels and VCs quote IRR on their investment results rather than ROI.
Angels and VCs look for a 20%-30% IRR on their investments.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.