Time is a key component of startup investing. There are two methods for measuring the return.
IRR vs. ROI:
- ROI stands for Return on Investment, IRR stands for Internal Rate of Return.
- ROI is return on investment withOUT respect to time, IRR is the return on investment with respect to time.
- If I invest $50K and receive $150K back in 3 years then my ROI is 3X. If I invest $50K and receive $150K back in 5 years my ROI is still 3X.
- IRR takes into account the amount of time to return.
- If I invest $50K and receive $150K back in 3 years my IRR is 44%. If I invest $50K and receive $150K back in 5 years my IRR is 25%.
- Investors should use IRR in calculating returns due to the time value of money and consider the time in the investment as a key decision point for making that investment.