In this quick article on The Startup Club Valuation series, we look at the Internal Rate of Return and how it's calculated.
The internal rate of return (IRR) is a metric used in financial analysis to estimate the profitability of potential investments. The IRR can also be defined as the discount rate which, when applied to the cash flows of a project, produces a net present value (NPV) of nil.
More specifically, this valuation method calculates the the Venture Capital investor's required rate of return on investment (ROI) given the VC's required internal rate of return (IRR), the number of years(rs) until ROI is realized, and the amount of VC investment(I).
Hence: Non compounded return on investment ROI=( IRR X Yrs X I)+ I
Example: IRR=35%, Yrs =5, I=$5M Hence= ROI=(35% X 5 X$5M)+ $5M ROI= $13,75M
IRR is based on the type of industry and stage of the start-up company
By Dulal Das
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