In pitches and presentations everywhere, bright young entrepreneur tells cynical skeptical investors, usually with great pride and flourish, about their fabulous IRR for their great new startup. I get a gag reflex.
IRR stands for internal rate of return.
IRR in a business pitch insults my intelligence. It depends on projected sales, costs, expenses, financing, investment, and some hypothetical valuation at some hypothetical time some years in the future. That, by definition, is a crock. Show me the projects, yes. Show me Sales, costs and expenses. Show me cash flow. Go ahead, guess at a future valuation, what the heck. I’ll look at how the assumptions come together and realism, or lack of it, on how the pieces mesh. But the IRR, which summarizing multiple layers of uncertainty as one single percentage number, is totally irrelevant at best, and downright annoying when entrepreneurs act like a projected IRR actually means anything.
And it gets worse, too: there’s the widespread misunderstanding that angel investors and venture capitalists have IRR targets. There’s the unspoken but felt thought: “jeez, what do these investors want? They turned down an IRR of 105%!” And you’ll see people, all over the web, asking what kind of yields they have to give to interest investors. What are the targets?
Talking of IRR if a projected shows me only that you’re too close to the academics. Investors will look at your plan, your team, your product/market fit, and your projections; and they’ll decide what they guess about your future. Stop sooner, before you get to IRR. Let it go.