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
By Dulal Das
Please contact email@example.com for any questions, clarifications and further help.
Learn more about startup valuation with our dedicated services.