Financial Literacy For Entrepreneurs

Riskier technology start-ups need to generate a minimum ten times return on invested capital in no longer than ten years to be considered suitable investments. In fact, ten years is the outside limit for returns that would be tolerated, since many professional funds only fund their management fees for ten years. A ten times return in five years is the more common criteria that is used when looking at presentations, since investors need to assume that there will be delays and that initial projections are always rosier than reality.

 

That means you’ll need to show such excellent returns in five years in your pro forms, even though investors will be giving you some slack and may be willing as long as ten years to get the hoped-for returns. If the investment is in a later stage, say the last private round before the company breaks even, or goes public, or is sold, the minimum return can drop to two to three times, depending on the specific situation.

 

Also if your business opportunity is lower risk (e.g., a group of experienced bankers who are opening a new regional bank), the expected returns can be adjusted accordingly. An investment of equity will generally require higher returns than an investment of debt.