ROI

In depth

ROI is the simplest profitability ratio in finance. It tells you whether a dollar in came back as more than a dollar, and by how much. It says nothing about how long that dollar was tied up, whether there were intermediate cash flows, or whether the gain is realized or paper.

Venture and private equity reporting almost never uses ROI as the headline because the metric collapses two very different fund outcomes into one number. A 3x return earned in four years (about 32% IRR) and a 3x return earned in twelve years (about 9.6% IRR) have identical ROI. LPs care about the difference, which is why the industry standardized on MOIC for the multiple and IRR for the time-weighted view, per Invest Europe and Cambridge Associates reporting guidance.

Why it matters

The risk of ROI in venture conversations is false equivalence. A founder pitching "300% ROI in five years" sounds comparable to a fund pitching "25% net IRR over ten years", but the underlying math differs in how it treats time, fees, and partial liquidity. When you see ROI quoted in a VC context, translate it to MOIC and back out the implied IRR before benchmarking.

Worked example

An investor commits $1M into a Series A and receives $4M at exit five years later.

ROI  = ($4M - $1M) / $1M  = 300%
MOIC = $4M / $1M           = 4.0x
IRR  = (4)^(1/5) - 1       = 32.0%

Same deal, three numbers. The 300% ROI is correct but uninformative on its own. The 4.0x MOIC anchors the multiple and the 32% IRR anchors the time-adjusted return. A fund manager reporting this position would lead with MOIC and IRR, not ROI.