What Is a Good ROI for Early-Stage Startups?
A good ROI (Return on Investment) for early-stage startups is generally higher than traditional investments due to the high risk involved. Here's what you need to know:
Seed Stage: Investors often aim for 100x returns. These are the riskiest investments, as startups are typically in their infancy with just an idea or prototype.
Series A: Targets drop to 10x–50x returns, as startups show initial market traction but still carry significant risks.
Later Stages (Series B/C): ROI expectations are more conservative, typically 3x–5x returns, as startups have more established business models and revenue.
In general, 20% or higher annual returns are considered good for early-stage startup investments. Factors influencing ROI include market size, team quality, scalability, and exit strategy. High-growth industries like tech and biotech often justify higher ROI targets.
Quick Tip: Diversify your investments across multiple startups and leverage angel networks to improve your ROI potential.
Keep reading for detailed benchmarks, ROI calculation methods, and industry-specific insights.
What Is Good ROI in Early-Stage Startups?
Typical ROI Benchmarks for Early-Stage Investments
Investing in early-stage startups is a completely different ballgame compared to traditional investments. The risks are higher, but so are the potential rewards, which is why investors in this space often have bold return expectations [1][2].
For early-stage startups, the goal is typically an annual return (IRR) of 20% or more [1]. But these targets can vary significantly depending on the funding stage:
Seed investors aim for the stars, often seeking 100x or higher returns on their initial investment [4]. Since these investments happen during the earliest phases (when a startup might only have a prototype), the risks are massive, but so is the upside.
Series A investors lower their expectations slightly, targeting 10x to 50x returns [4]. By this stage, startups have usually shown some market traction, which reduces risk but still leaves room for significant growth.
Later-stage investors, such as those in Series B or C rounds, typically look for 3x to 5x returns [4]. These companies often have more established business models and revenue streams, making them less risky but also limiting the potential for explosive growth.
In general, startup investors aim for average annual returns (IRR) of 20% or higher, with the hope of achieving much larger gains if the startup succeeds [2]. However, these benchmarks can shift depending on the sector and the specific stage of investment.
Why ROI Expectations Change by Sector and Stage
Why do ROI targets vary so much? It all comes down to the unique risks and opportunities tied to different stages and industries.
The investment stage plays a huge role. As Product Manager Warren Smith explains:
"The expected ROI for Series A investments can vary widely, but generally, investors aim for a return ranging from 3x to 10x their initial investment." [3]
For Series B investments, the expectations are more conservative:
"Investors typically aim for a return ranging from 2x to 5x their initial investment, considering the increased valuation and reduced risk associated with a startup's successful transition from early-stage to growth-stage." [3]
Industry sector is another major factor. Startups in industries with high barriers to entry or long development cycles, like biotech, often justify higher ROI targets. For instance, a biotech firm working on a groundbreaking drug might promise higher returns because of the lengthy approval process and significant upfront investment. On the other hand, a SaaS startup might offer a different risk-reward balance due to shorter development timelines and quicker scalability [3].
Market conditions also play a role. For example, 2023 was a challenging year for startup returns. The Cambridge Associates US Venture Capital Index dropped by 3.4%, while the S&P 500 delivered nearly 25% returns during the same period [1]. Such fluctuations in broader market trends can impact what investors expect from startups.
Lastly, company-specific factors like growth potential, competitive positioning, and revenue outlook further shape ROI expectations. These elements, combined with industry trends, help investors assess both the risks and the opportunities tied to their investment.
Startup Investing ROI (Return on Investment)
Main Factors That Impact ROI in Early-Stage Startups
When it comes to early-stage startups, the factors that drive ROI can make or break an investor's success. While startup investing is inherently risky, certain elements consistently influence whether investors see worthwhile returns on their capital.
Market Size and Growth Potential
The size and growth of a startup's target market play a huge role in its potential to deliver strong returns. Investors usually look for markets worth $2 billion or more to justify the risks involved.
Vinod Keni, Co-Founder & Managing Partner at Peachtree Venture, explains:
"We need to understand the current market demand, whether it's growing or declining, and assess whether the startup is merely replacing an existing product or pioneering a new category." [8]
Startups operating in industries with rapid growth trends often attract higher valuations and deliver better ROI. For example, in 2024, AI-focused startups accounted for a staggering 46.4% of the $209 billion raised in U.S. venture capital funding [8].
Startups that tap into niche markets or use blue ocean strategies - where they create entirely new demand rather than competing in crowded spaces - can also improve profitability [8]. Scalability is another critical factor. Investors tend to favor business models that can grow without costs increasing at the same rate (see our Burn Multiple calculator). However, market potential alone isn’t enough; execution depends heavily on the strength of the startup’s team.
Team Strength and Performance
The quality of the founding team is often the deciding factor in whether an early-stage startup succeeds or fails. In fact, founder conflicts are responsible for 65% of startup failures [9]. Additionally, 95% of venture capitalists consider team quality essential, with 47% naming it the most critical factor in their investment decisions [10].
Michael Ross, President at Joseph Capital, US, highlights this point:
"One of the key indicators we look for is whether the founders have been able to recruit high-caliber individuals. The quality of the people they bring on board can tell us a lot about the leaders themselves." [8]
Execution capabilities often matter more than impressive credentials. Past successes, like Lightspeed Venture's early investment in Snapchat in 2012 or Ben Horowitz's decision to back Airbnb in 2015, show how independent thinking and the ability to execute a vision can drive impressive returns [10].
Strong team dynamics influence every part of a startup’s performance - from daily operations to long-term strategy and even its culture. These elements all contribute to growth and, ultimately, ROI. But even with a stellar team, having a clear path to exit is what defines the final returns.
Exit Options and Ownership Dilution
ROI largely depends on how investors eventually cash out their investment. Acquisitions dominate startup exits, accounting for about 60% of cases, while IPOs have increased slightly, now making up 10% to 15% of exits [6]. A well-defined exit strategy - whether through acquisition, IPO, or another route - is critical for planning how and when investors can realize their returns.
Ownership dilution is another key consideration. With each funding round, early-stage investors typically face some level of dilution, which is why they often aim for a 50x or higher return [7].
Preparation for a successful exit is just as important as the exit itself. Founders and investors who keep financial records, legal agreements, and intellectual property well-organized are better positioned for smooth exits. Building relationships with potential acquirers early on and tracking key metrics like revenue growth, market share, and customer acquisition costs can further enhance exit opportunities [6].
Given that up to 90% of startups fail (with failure rates ranging from 10% in the first year to as high as 70% within five years), the few successful exits must generate significant returns to offset these losses. This reality underscores the importance of careful planning and execution at every stage of the investment.
How to Calculate and Compare Startup Investment ROI
Calculating ROI for startups isn't as straightforward as it is for traditional investments. Startups often have unpredictable cash flows over extended periods, making it necessary to look beyond basic math. By understanding the right metrics and industry benchmarks, investors can better evaluate performance and make smarter decisions. Let’s dive into two key metrics - Internal Rate of Return (IRR) and Multiple on Invested Capital (MOIC) - that are commonly used to assess startup investments.
Common ROI Metrics: IRR and Cash Multiples
When it comes to analyzing startup investments, IRR and MOIC are the go-to tools.
IRR (Internal Rate of Return): This is the annualized return, adjusted for the timing of cash flows. It represents the discount rate at which the net present value of future cash flows equals zero [11][13]. For seed-stage investments, investors often aim for an IRR of at least 30%, while later-stage investments target around 20% due to their lower risk [12].
MOIC (Multiple on Invested Capital): This metric calculates the total return relative to the initial investment, without accounting for the time it took to achieve that return [11]. For example, if you invest $100,000 and eventually get back $300,000, your MOIC is 3.0x. While MOIC doesn’t reflect timing, it provides a clear snapshot of total cash-on-cash value creation [14].
Here’s how MOIC translates into IRR over different timelines:
Complementary Metrics
Other metrics like Total Value to Paid-In (TVPI) and Distributions to Paid-In (DPI) are also useful. TVPI combines realized and unrealized returns to provide a big-picture view of performance, while DPI focuses solely on cash already returned to investors [14].
Both IRR and MOIC offer unique insights. IRR accounts for the timing of returns but can be skewed by irregular cash flows, while MOIC provides a straightforward measure of total return. Using both together helps investors get a fuller understanding of performance.
Comparing ROI Against Industry Standards
Once you’ve calculated ROI, how do you know if it’s good? That’s where industry benchmarks come in. These benchmarks provide context for evaluating startup performance.
General Benchmarks: Top quartile venture capital funds typically achieve annual returns between 15% and 27%, while the median global VC fund return is around 13.2% [16].
Stage-Specific Goals: Early-stage investments often aim for 30–50% annual returns due to higher risk, with seed rounds occasionally targeting up to 100× returns. Mid-stage rounds generally look for 10–20× multiples, and late-stage deals aim for 3–5× returns [16].
Sector Variances: ROI can vary widely by sector. In Q1 2023, energy investments led the pack with a 19.99% ROI, followed by technology at 12.52% and retail at 9.50%. Meanwhile, financial sector returns were just 1.18%, with services and utilities lagging at 3.26% and 3.88%, respectively [5].
Market Conditions
External factors also play a big role in ROI comparisons. For instance, the Cambridge Associates US Venture Capital Index, which tracks nearly 2,500 venture funds, reported a 3.4% loss in 2023. Compare that to the S&P 500’s 25% gain during the same period, and it’s clear that market dynamics heavily influence returns [2].
Jason Mendelson, Founding Partner at the Foundry Group, captures the challenge of early-stage investing perfectly:
"At the very earliest stage of any new venture, it's all about hope and not metrics." [15]
This underscores the importance of combining numerical data with qualitative insights. Evaluating factors like a startup’s competitive edge, growth potential, market fit, and the quality of its leadership team provides a more balanced perspective [16].
The Role of Diversification
Diversification is critical for achieving benchmark returns. In venture capital, a small number of investments often account for the bulk of returns. By spreading investments across different stages, sectors, and regions, investors can reduce risk and improve overall portfolio performance [16]. While individual startup returns can vary widely, a diversified approach increases the likelihood of hitting industry-standard results.
How Angel Networks Help Improve ROI
When it comes to boosting the return on investment for startups, network resources are a game-changer. While individual angel investing can be highly rewarding, it also comes with its fair share of challenges. From conducting thorough due diligence to accessing high-quality opportunities and supporting startups post-investment, the process demands significant time and expertise. Angel networks tackle these hurdles by pooling resources, knowledge, and deal flow, ultimately creating better outcomes for both investors and startups.
Benefits of Angel Network Membership
Angel networks have transformed early-stage investing. To illustrate, angel investments have doubled since 2010 [19], and funding rounds through angel networks typically range between $200,000 and $500,000 per startup [20].
One major advantage of joining an angel network is Access to Vetted Deal Flow. These networks pre-screen startups, saving investors time and ensuring higher-quality opportunities. Additionally, the collective expertise within the network makes it easier to conduct the kind of in-depth due diligence that individual investors might struggle to manage on their own [19].
Another key benefit is Portfolio Diversification. By spreading investments across multiple startups, investors can reduce risk - a strategy commonly used in venture capital [19].
Angel networks also provide Mentorship and Strategic Support. Beyond funding, members often offer operational guidance and insights gained from their own entrepreneurial experiences. As Eoin, Head of Africa, CEE, & Middle-East at HubSpot for Startups, explains:
"I've done around 10 angel rounds in the past five years, and the primary focus has always been how can I add value to that startup? Money is secondary to the value you can bring them in the early stages." [17]
Lastly, Networking Opportunities within these groups create valuable connections among investors and entrepreneurs. These relationships can lead to partnerships, customer growth, and even additional funding opportunities.
These collective benefits demonstrate how angel networks improve ROI, as seen firsthand in groups like ours at Allied.
How Allied Venture Partners Supports Better ROI
Streamlined Investment Process
Allied simplifies the process by offering streamlined SPV (Special Purpose Vehicle) investments, ensuring a single cap table entry for founders, and a typical funding process time of four weeks or less. This efficiency helps startups maintain momentum during critical growth periods.
Zero-Cost Participation
By allowing free founder applications and eliminating investor participation fees, Allied removes barriers that might otherwise limit access to quality deals. This ensures that opportunities are evaluated based on their merit rather than financial gatekeeping.
Curated Deal Flow
Allied specializes in Pre-seed, Seed, and Series A software and technology startups. This focus allows our network to leverage deep expertise in evaluating tech businesses and addressing the unique challenges they face.
Long-Term Investment Horizon
Through follow-on funding opportunities, we aim to support startups across multiple rounds, helping investors maintain their ownership stakes while promoting sustainable growth.
Operational Support and Strategic Introductions
Startups benefit from Allied's mentorship and operational expertise, which includes connecting them with experienced entrepreneurs who’ve been there before. As Nilanjay, Angel Investor & CMO at Nymiz and Startup Wise Guys Angels Network, puts it:
"The right angel investor - especially one from your industry - can bring real value beyond just capital. If you find an angel with relevant experience and connections, they can help you land customers and accelerate growth." [17]
Platform Integration
Lastly, our use of the AngelList platform makes deal syndication and portfolio management simpler, providing tools and infrastructure that individual investors might not easily access on their own.
These strategies foster an environment where startups backed by angel networks often achieve higher survival rates and faster growth [20]. For investors, this means improved ROI through reduced risk, better deal quality, and ongoing support that helps portfolio companies thrive. Additionally, angel investments can validate startups, attracting further funding and creating positive momentum for all stakeholders [18].
Let’s Recap: Getting Good ROI from Early-Stage Investments
Achieving strong returns from early-stage startup investments is all about finding the right balance between high risk and high reward. Unlike traditional businesses that aim for returns in the 10% to 15% range, startup investors generally set their sights higher - around 25% annually - to account for the unpredictable nature of these ventures [1].
It all begins with thorough due diligence. Evaluating the team, understanding the market size, and planning for a solid exit strategy are essential. As Matt Wilson, Founder & Managing Director of Allied VC puts it:
"Staying disciplined and on-thesis will be your most difficult challenge as a new angel" [22].
Market validation is another critical factor. Eric Bartha, Head of Financial Services at Seedblink, highlights this point:
"The most obvious factor is market traction, which I find a no-brainer for founders who look at a fundraising round. Put your product out there so I can see how the market pulls you in. This will lead to revenue generation, a larger user base, and interest from the market" [17].
Given the inherent risks - only about 11% of angel-backed ventures succeed [21] - diversification is a key strategy. Spreading investments across various startups, industries, and stages can reduce the risk of significant losses while increasing the chances of benefiting from the outsized returns that successful startups often deliver.
Angel networks also play a significant role in improving outcomes. Groups like Allied bring together thousands of angels and VCs, offering access to shared expertise, carefully vetted opportunities, and collective due diligence. These networks not only simplify the investment process but also provide ongoing support to boost the success rate of portfolio companies.
The path to maximizing ROI in early-stage investments is clear: make informed decisions, diversify your portfolio, and tap into the collective knowledge and resources of angel networks. By sticking to these principles, investors can position themselves for better outcomes in this high-risk, high-reward landscape.
FAQs
How does the industry impact ROI expectations for early-stage startup investments?
The industry a startup operates in has a significant impact on shaping ROI expectations for early-stage investments. Elements such as market growth potential, advances in technology, and risks unique to the industry play a direct role in determining the returns investors might expect. For example, industries with higher risks often require higher returns to make the investment worthwhile, whereas sectors with steady growth or cutting-edge innovations may present more predictable outcomes.
Moreover, industry-specific economic trends and market conditions can either enhance or diminish ROI expectations. Grasping these subtle differences is essential for investors as they assess opportunities and craft effective investment strategies.
How do angel networks help improve ROI for early-stage startup investors?
Angel networks are instrumental in boosting returns for early-stage startup investors. They provide access to a wide variety of investment opportunities and serve as a hub for valuable resources. These networks not only connect investors with up-and-coming startups but also offer mentorship and strategic advice – key factors that can significantly improve a startup's chances of thriving.
By pooling resources, angel networks allow investors to spread out their risk while giving startups the funding they need to grow and scale efficiently. On top of that, they open doors to industry connections and insider knowledge, giving investors an edge in achieving better returns.
Why is diversification key to achieving strong ROI in early-stage startup investments?
Diversifying your investments is a smart move in early-stage startup investing. Why? Because it helps cushion your portfolio against the unpredictable nature of individual companies. Startups face all kinds of challenges - market shifts, team issues, or even unexpected regulatory hurdles. Spreading your investments across multiple startups, industries, and regions lessens the blow if one venture doesn't pan out.
Not only does this strategy help steady your portfolio's ups and downs, but it also boosts your odds of seeing solid long-term returns. Early-stage investing is inherently risky, but with a diversified portfolio of 30-50 companies, you have a better chance to balance out the inevitable losses with some big wins.