One of the purposes of a business plan is to attract the attention of investors.
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Investors are business professionals, but more than anything else they are interested in getting a solid return on their investment. If your business plan doesn't address ROI, investors will quickly lose interest in your company.
It might surprise you to learn that venture capitalists expect an average ROI of around 40%. Why so high? High returns are the reward for high risks. Since startups are some of the riskiest investments out there, the venture capitalist needs a high rate of return to offset the potential loss of his investment.
If you think your business is up to the task of delivering great returns for investors, here is the information you need to include a knowledgeable ROI discussion in your business plan.
ROI is the tool investors use to calculate the value of an investment. The higher the ROI, the greater the value your investment has in the venture capitalist's portfolio. For investors, there is a big difference between potential ROI and actual ROI. As the owner or major stakeholder in your business, you would like to base the ROI business plan discussion on best case scenarios, but investors are looking for ROI discussions that are rooted in hard numbers and business realities.
What factors affect ROI?
The factors that impact ROI are the VC's level of investment and anything that affects the profitability of your business. Revenues, expenses – whatever impacts your income statement will inevitably show up in your investors' ROI, so it's important to make sure your VC's capital is invested in profit-producing assets.
How do you calculate ROI?
Although there are a number of ways to determine ROI, the most common way to calculate ROI is to divide the investor's annual profit by the amount of the investment. If the investor receives $50,000 from a $150,000 investment, his ROI is 30% - okay, but still short of the 40% threshold many investors expect to receive.