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 ?
Return has to relate to risk too. You don't know the future. Are you ready to lose $190,000? Do you have a good business plan, have you studied this business well and do you feel you've minimized the risks? Does the return depend on you? Or are you investing in somebody else (which always increases the risk)?
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.
Tim Berry is the chairman of Eugene, Ore.-Palo Alto Software
, which produces business-planning software,