Established or nascent, public or private, a fundamental truism to businesses is that they require capital (in some form) to grow. Especially in the early stages of a company’s lifecycle, choosing investment partners can be a critical juncture in the ultimate success or failure of the business. Beyond the money, these partners can support as advisors, subject matter experts, networkers, and in the best cases, ardent advocates for the people and missions they are funding. However, putting aside the budding world of impact investing where investor returns are also judged by more subjective measures, investors invest in opportunities that they believe have a strong likelihood of generating attractive economic returns.
As a founder, it can be intimidating dealing with the world of early-stage financing for the first time (or second, or third… does it ever get easier?). While it is normal to have a myopic focus on executing your own view of success, it is not always clear exactly what existing or prospective investors are looking for and how to best reward them for their belief and (capital) support. Here we attempt to demystify the investor-founder divide by looking at the type of return-oriented performance metrics that investors tend to focus on.
First, the good news. You have some time! In most circumstances, early-stage investors expect that they will not realize any meaningful returns on their money for five to ten years. They are in it for the (relatively) long haul, expecting that there will be some bumps and bruises along the way to fame and fortune. Unlike public stock exchanges, once money is invested in a private company it is much more difficult to get it back. There are several common ways investors can realize returns.
While return-oriented metrics vary in importance to any given investor based on the type of investor, life-cycle stage of the company, and individual investor preferences, they all focus on two fundamental questions; how much will I get in return for my investment and when will I get it? When looking at their financial performance, investors tend to boil it all down to four relatively simple metrics: Internal Rate of Return (IRR), Distributed to Paid-In Capital (DPI), Residual Value to Paid-In Capital (RVPI), and Multiple on Invested Capital (MOIC).
No one metric singlehandedly defines the success or failure of an investment from an investor perspective but will be viewed comprehensively as part of the bigger picture. That being said, all of these metrics really just boil down into a convoluted way of saying investors desire greater returns and they want them faster.
Established or nascent, public or private, a fundamental truism to businesses is that they require capital (in some form) to grow. Especially in the early stages of a company’s lifecycle, choosing investment partners can be a critical juncture in the ultimate success or failure of the business. Beyond the money, these partners can support as advisors, subject matter experts, networkers, and in the best cases, ardent advocates for the people and missions they are funding. However, putting aside the budding world of impact investing where investor returns are also judged by more subjective measures, investors invest in opportunities that they believe have a strong likelihood of generating attractive economic returns.
As a founder, it can be intimidating dealing with the world of early-stage financing for the first time (or second, or third… does it ever get easier?). While it is normal to have a myopic focus on executing your own view of success, it is not always clear exactly what existing or prospective investors are looking for and how to best reward them for their belief and (capital) support. Here we attempt to demystify the investor-founder divide by looking at the type of return-oriented performance metrics that investors tend to focus on.
First, the good news. You have some time! In most circumstances, early-stage investors expect that they will not realize any meaningful returns on their money for five to ten years. They are in it for the (relatively) long haul, expecting that there will be some bumps and bruises along the way to fame and fortune. Unlike public stock exchanges, once money is invested in a private company it is much more difficult to get it back. There are several common ways investors can realize returns.
While return-oriented metrics vary in importance to any given investor based on the type of investor, life-cycle stage of the company, and individual investor preferences, they all focus on two fundamental questions; how much will I get in return for my investment and when will I get it? When looking at their financial performance, investors tend to boil it all down to four relatively simple metrics: Internal Rate of Return (IRR), Distributed to Paid-In Capital (DPI), Residual Value to Paid-In Capital (RVPI), and Multiple on Invested Capital (MOIC).
No one metric singlehandedly defines the success or failure of an investment from an investor perspective but will be viewed comprehensively as part of the bigger picture. That being said, all of these metrics really just boil down into a convoluted way of saying investors desire greater returns and they want them faster.