At the top of our investors' mind is ROI, or Return On Investment. ROI is a compound annual rate expressed as a percentage, and it measures the return an investor gets on the capital that they inject into an entrepreneur's business. The way an investor goes about determining the price for a company or the amount of equity that they're going to ask for in exchange for funding a company is by starting with what they require for an ROI. Then they'll take all kinds of growth, profitability, and valuation assumptions into consideration to determine that price. Generally speaking, it's hard to say what an investor expects in terms of ROI. But Clint Richardson, in his book Growth Company 4.0, says that good rules of thumb are greater than 35% for seed or start-up companies, 20% to 50% for first stage companies, and 15% to 30% for second stage or mezzanine companies.
Another thing to remember about ROI is that it is time sensitive in that the longer the investor has their money in a company, the lower the ROI becomes. Let's take an example. Three times an investment earned over a period of three years is a 44% return on investment. Whereas take that same three-time return and spread that out to five years, the return on investment goes down to 25%. So, if our investors think that they're going to have their money sitting in a company longer, they will raise their price for investment.
And for entrepreneurs that are thinking about ROI that aren't comfortable with the calculation, I recommend that they call us at the Capital Match Point. Because what we would like to do is walk you through how to determine an appropriate ROI for your company, because what we want to do at the end of the day is make sure that our investors have the most information possible for when they begin the negotiation process.

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