What Is a Good ROI for Your Startup?

A financial advisor helping a client evaluate a startup.

Investors in traditional businesses might aim for a return on their investment of 10% to 15%, but startup investors are likely to have in mind a much wider range of return estimates. Early-stage startup investments might be made in hopes of a 25% annual return, but startups tend to produce a binary outcome, meaning investors either make attractive profits or lose much or all of their investment. Startup returns also vary by industry and the stage of the company when the investment is made.

If you want to build an investment portfolio, a financial advisor can help you analyze investments and manage risks.

How Do You Calculate Return on Investment (ROI)?

Return on investment (ROI) is a financial metric used to evaluate the profitability of an investment. To calculate ROI, you subtract the initial cost of the investment from the final value of the investment, then divide this result by the initial cost. The formula is typically expressed as ROI = (Net Profit / Cost of Investment) x 100. This calculation provides a percentage that represents the efficiency of the investment, allowing investors to compare the profitability of different opportunities.

Accurate ROI calculation helps guide investors toward the most lucrative opportunities. By understanding ROI, investors can also identify underperforming assets and make necessary adjustments to their portfolios. This metric is not only useful for individual investors but also for businesses evaluating the success of projects or marketing campaigns.

Market conditions, economic trends and the time horizon of the investment all play significant roles in influencing investment ROI. Additionally, external factors such as inflation and interest rates can impact the real value of returns. Investors consider these variables when calculating ROI to assess potential outcomes and anticipate risks.

What Is a Good ROI for a Startup Investment?

Investors in startups look for a higher ROI when compared with more established companies due to the increased risk involved. While a 10% annual ROI might be satisfactory for a stable, blue-chip stock, startup investors often aim for average annual returns of 20%, with the potential for much higher returns if the startup succeeds.

Risk is ever-present in startup investing, however, and often to a much greater degree than when investing in established companies. For example, the Cambridge Associates US Venture Capital Index of nearly 2,500 venture funds lost 3.4% in 2023, a year during which the S&P 500 returned close to 25%.

Many startups fail, which means that investors must be prepared for the possibility of losing their entire investment. However, successful startups can provide exponential returns. For example, early investors in companies like Uber or Airbnb saw returns that were many times their initial investment. This high-risk, high-reward dynamic is why venture capitalists and angel investors often diversify their portfolios across multiple startups, hoping that the success of a few will outweigh the losses of others.

high While returns can be appealing, investors should maintain realistic expectations. Not every startup will become the next unicorn, a term used for startups valued at over $1 billion. In fact, very few achieve anywhere near such high-flying valuations. Realistic ROI goals are based on the specific circumstances of each investment rather than the exceptional performance of a small handful of unusual cases.

Tips for Investing in Startups

For those looking to dive into startup investing, having a grasp of key strategies and considerations will help make the move a success. Here are five tips to guide you through the process of investing in startups:

Conduct thorough due diligence: Before investing in a startup, perform comprehensive research. This includes evaluating the company’s business model, market potential and competitive landscape. Understanding the startup’s financial health and the experience of its leadership team can provide insights into its potential for success.
Diversify your investments: Just like in traditional investing, diversification is key when investing in startups. By spreading your investments across multiple startups, you reduce the risk of losing your entire investment if one company fails. This approach increases the likelihood of having at least one successful investment in your portfolio.
Understand the risks involved: Startups are inherently risky, with many failures within the first few years. It’s important to be aware of the high risk-to-reward ratio and only invest money you can afford to lose. Being prepared for the possibility of failure can help manage expectations and reduce stress.
Look for strong leadership: A startup’s leadership team plays an important role in its success. Look for founders with a proven track record, industry expertise and a clear vision for the company. Strong leaders are more likely to navigate challenges effectively and drive the company towards growth.
Stay informed and engaged: After investing, stay informed about the startup’s progress and industry trends. Regularly reviewing updates and reports can help you make informed decisions about future investments. Engaging with the startup community can also provide valuable insights and networking opportunities.

Bottom Line

Investing in a startup can offer high returns, but it can also come with high risks. Understanding the ROI for a startup could help you make an informed decision about adding this type of asset to your portfolio. If you decide to invest in a startup, think about the risks, potential returns, the company’s growth prospects and the possibility of losing your entire investment.

Tips for Investment Planning

A financial advisor can help you create an investment plan for your portfolio. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Inflation can eat into your returns over time, meaning that your investments may not grow enough to keep up with rising prices. SmartAsset’s inflation calculator can help you estimate how much a dollar today will be worth in the future.

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