Measuring Startup Investment Returns
Three metrics define investment performance in venture capital: ROI, MOIC, and IRR. Each tells a different part of the story.
ROI vs MOIC vs IRR
- ROI (Return on Investment): (Proceeds − Investment) / Investment × 100. Simple percentage gain, ignores time.
- MOIC (Multiple on Invested Capital): Proceeds / Investment. A 5× MOIC means you got back 5 times your money.
- IRR (Internal Rate of Return): The annualised rate that makes the NPV of cash flows zero. Accounts for time — the most useful metric for comparing investments with different hold periods.
SAFE Notes and Convertible Notes
SAFE (Y Combinator model) and convertible notes are pre-priced instruments common in European seed rounds. They convert to equity at a future priced round with benefits: a valuation cap limits the conversion price, and a discount reduces it further. Both improve investor returns compared to investing at the priced round valuation.
Luxembourg Investment Tax
Capital gains for Luxembourg resident individual investors on long-term equity holdings (6+ months) are generally exempt from income tax. Dividends face a 15% withholding tax. For professional investors and funds, Luxembourg's extensive treaty network makes it a preferred holding location for EU venture investments.
FAQ
What is IRR and why do VCs use it?
Internal Rate of Return (IRR) is the annualised return on an investment, accounting for the time value of money. VCs use IRR because it normalises returns across different holding periods — a 3× return in 2 years is far better than 3× in 8 years. Most VC funds target 20–25%+ IRR.
What is MOIC?
MOIC (Multiple on Invested Capital) is the simple ratio of proceeds to investment: if you invest €500K and receive €2.5M, MOIC = 5×. Unlike IRR, MOIC ignores time. Both metrics together give a complete picture of investment performance.
How does a SAFE note affect investor returns?
A SAFE (Simple Agreement for Future Equity) converts to equity at the next priced round, usually with a valuation cap and/or discount. The cap and discount effectively give SAFE investors a lower effective entry valuation, improving returns compared to investing at the priced round.
What is a good return for a European angel investor?
European angel investors typically target a portfolio IRR of 20–30%. Individual investments often return 0× (loss), but the portfolio is designed so 1–2 exceptional investments (10×+) compensate. For VC funds, the standard hurdle rate is 8%, with target returns of 3× fund (net).