Startups begin, move forward and grow or fail in a vague atmosphere. or maybe the speed of changes and pitstops are so quick that traditional ways of measurement lag behind.

But, since they need funds in several stages, it is very crucial for them to provide facts and figures of their growth, numbers and financials. one of the most famous numbers usually asked by investors, is ROI

The importance

It's a loud message for startup owners: investors, whether angels or whales or sharks or VCs, whatever you call them, are putting their money at big risk. less than 10% of such investments can return a profit. so:

• they need right and real stats and finance calcs. since the forecast and scope is based on imagination and hopes, atleast they need solid ways to measure the measurable. so you shouldn't fail in meeting their expectations.
• they look for scale-able companies; those which can grow revenues to millions of dollars, within five to eight years. if you are in a country which have high inflation rate or uncertainty in future of economy, this period of time may be reduced (also called as PBP - Pay Back Period)
• investors have learned a lot from the dot com bubble; over valuation and high advertising costs are warning signals for them

For above reasons, investors will look cautiously in to your ROI.

The formula

The simple idea of ROI is to find a relation between money amounts you have received and spent (aka cash flow). this number comes as a percentage of your initial investment, by the value returned to you. Here's the simplest form:

(Return/Initial Investment) x 100 = ROI
Return = gross profit – investment

As you can see in the above equation, there is no trace of the time and the time-value of the money.
Dealing with ROI has two different approaches: Quantitative vs Qualitative

For startups, I recommend Quantitative approach, which concentrates on the income statements, balance sheets, and cash flows, and analyzes the relationship between price and intrinsic value. This approach also increases the need for a margin of safety and is more suitable for short holding periods (less than 5 years).

Using EXCEL

while it is very good to know the financial definitions and measurements by the math behind, tools like Microsoft Excel spreadsheet can help you do these maths precisely and effectively.
I prepared some screenshots to put them here, but it will make this post a mess with lots of images, I will try to prepare videos for later posts on such subjects. for instance, I checked some videos on youtube and this one is simply informative and easy to understand:

Engaging the Time parameter

If you have owned a business for sometime, the return of money is a result of your efforts and the time you have lost on the business (also your asset). To bring these things into consideration you need a different measurement, called NPV which stands for Net Present Value.
NPV is a measurement of profit calculated by subtracting the present values of cash outflows from the present values of cash inflows over a period of time.

Image Sources:

1. https://www.moneymax.ph/blog/best-investments-for-every-risk-appetite
2. http://www.arborinvestmentplanner.com/quantitative-vs-qualitative-approach-to-value-investing/