VC & PE Glossary
What Is Return on Investment (ROI)?
Updated
Definition
Return on investment (ROI) measures net gain or loss from an investment relative to its cost — expressed as a percentage or ratio so different bets can be compared.
Useful for: Founders, Investors
Return on investment (ROI) is the profit or loss from an investment expressed as a percentage of the amount invested.
How it works
Basic formula: ROI = (Current value − Cost) / Cost.
Invest $1M in a startup; later stake is worth $4M on exit. ROI = ($4M − $1M) / $1M = 300%. If the stake goes to zero, ROI is −100%.
Marketing teams use the same logic: spend $50K on a campaign, attribute $200K in gross margin, ROI = 300% — though attribution is often debated.
ROI ignores time. A 3x return in two years beats 3x in ten years; that is why venture funds emphasize IRR and MOIC alongside simple ROI. ROI also ignores risk: treasury bills and seed equity can both show positive ROI in hindsight with very different paths.
Why it matters
- Founders: Customer ROI stories close deals — quantify time saved, revenue gained, or cost avoided in the buyer’s terms.
- Investors: Quick ROI math screens deals, but portfolio construction depends on power-law outcomes and risk-adjusted return, not average ROI.
Common mistake
Using ROI alone to compare a five-year fund hold with a six-month angel flip. Always pair return with time horizon and probability of success.
Related ideas
See also IRR, MOIC, risk-adjusted return, and CAC payback.
Related terms
- IRR — IRR (internal rate of return) is the annualized discount rate that makes the net present value of all cash flows — investments in and distributions out — equal to zero.
- Risk-Adjusted Return — Risk-adjusted return measures investment performance relative to the volatility or downside taken — rewarding strategies that earn returns without extreme swings or loss depth.
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Common questions
Short answers for founders, LPs, and operators