Startup Funding Espresso -- IRR vs. ROI

Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.

Investors calculate their returns using metrics ROI and IRR.

So what’s the difference?

ROI is the return on investment without respect to time.

IRR is the internal rate of return which is the return on investment with respect to time.

If I invest $100K and 5 years later I receive a return of $300,000, then my ROI is 3x. If I receive my return 10 years later, my ROI is still 3x.

The same scenario with IRR gives a different result for each case as it takes into account the time of return. In this case, the 5-year return yields a 25% IRR, while a 10-year return yields a 12% IRR.

So how do you calculate IRR?

We can use an Excel spreadsheet for that.

1. Open up a column
2. Set each row as one year
3. Put the amount invested in year 1 (use a minus sign for this input)
4. Put the amount returned in the appropriate year (use a positive sign for this input)
5. Put a zero in each unfilled row
6. Apply the IRR formula from Excel to make the calculation

To understand your investment results better, you’ll find IRR is a better metric as it takes into account the time factor.


Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.

Let’s go startup something today.
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