ROI (Return on Investment) . . .

is the premium an investor receives for investing in a company when he liquidates his holdings. Venture capitalists expect high returns from their investments.

Venture investors express the return they want to make from an investment in terms of percentages, much the same way lenders price their loans. By determining what compounded annual rate of return he wants from a given investment, a venture capitalist can then work with his projections for the company’s growth to arrive at the percentage of the company’s stock he needs to receive in order to do a funding.

What ROIs do most venture capitalists require to fund a company? They vary from company to company. The following chart gives some general ranges, based on an economy supporting prime interest rates at or near 10 percent.

Company Stage	Compounded Annual ROI
Seed or start-up	40% and up
First and second stage	30% to 50%
Third stage and mezzanine	20% to 30%

How these rates of return translate into cost to a company depends in large part on how long it takes the investor to exit. The following table illustrates this fact.

Payoff	Compounded  Annual ROI
Three times investment in three years	44%
Five times investment in three years	71%
Seven times investment in three years	91%
Four times investment in four years	41%
Three times investment in five years	25%
Five times investment in five years	38%
Seven times investment in five years	47%
Ten times investment in five years	58%

As these tables show, venture capital money is expensive. The longer management can delay its need for funding and the earlier it can provide an investor with an exit, the less expensive the money will be. See Pricing, Procrastination, Projections.