IRR is a common metric in venture capital and private investing, representing the annualized rate at which invested capital grows. However, SmartUp critiques IRR as abstract and potentially misleading for early-stage startups. Instead, Yonatan Stern advocates for measuring Time to Pay Back Investment – the number of months it takes for cumulative profits to cover the total investment required.
This approach focuses on actionable metrics:
Time to Profitability: Months until the company generates positive cash flow.
Investment Needed: Total capital required to reach profitability.
Time to Pay Back: Months for cumulative profits to equal total investment.
SmartUp also considers the VC Ratio (Value at Exit ÷ Capital Invested) to compare efficiency and risk from the investor perspective. A smaller investment with the same multiple is often superior for founders, as it preserves equity and reduces risk. Emphasizing time to payback aligns with VC timelines (7-10 years), highlighting the importance of speed in generating returns.
