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Valuation Series #15: Funding Process and ROI Calculation

In this article of The Startup Club Valuation Series, we untangle the tech startup funding process and the specifics of the Venture Capital Return on Investment (ROI) calculation.

This is a good place to start for the VC funding negotiation process.

A. Calculation of VC Funding: Series-A Investment

Assume Five Levels of Development- each worth- $1M during the Start-Up Life Cycle.

A.1>Market Potential with a relatively small market penetration of large market size and well written & validated Business Plan- $1M

A.2>Credible & in-place Management team covering expertise in all the functional areas- $1M

A.3>Beta tested Technology- $1M

A.4>Well protected technology and platform and working prototype-$1M

A.5>Customer acquisition and product sales-$1M

A.6>Total required Series A round Investments are-$5M

B. Calculate VC’s ROI: Required Return on Investment ($)

B.1>Assume VC- IRR (Internal Rate of Return)-40%

B.2>Number of Years (YRS) until ROI is realized= 5 Years

B.3>Total Amount of Investment- $5M(I)

B.4>Hence: Non-Compounded Return on Investment= ROI=(IRR*Yrs.*I) +1

B.5>ROI based on our Example= (40%*5*$5M) +$5M= $15M

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