Is there a target return that I should be looking for when I invest in a company?
I'm thinking of investing in a startup, but I don't know how to determine if the projected return is acceptable. In the first year, the business will need capital equipment costing approximately $100,000 and the operating costs will be around $90,000 (including lease payments) in its first year. It should break even in its second year and be generating positive cash flow of around $60,000 after that. The total investment is $190,000 and the return over 5 years would be $300,000. Should I be satisfied with that ?
One of the things they teach in business school is that there is no standard acceptable risk or standard acceptable return. People have very different risk preferences. Getting $300,000 back from $190,000 is great if it's a sure thing and you can afford it without noticing if you lose. If there's a good chance of failure, then success should be worth more than $300,000. Venture capitalists generally invest only in businesses that can increase their investment value 10 to 100 times in 3-5 years, because they know that the failure rate is so high that the successes have to pay for all the failures.