Not all venture firms calculate an expected IRR. Some venture firms – especially those focused on early stage investments – will regard the need to calculate an IRR as unnecessary, impossible, and even irresponsible. I’ve heard this more than once.Irresponsible? I personally think that it's completely irresponsible for any VC not to ever consider the potential IRR of an investment. Who the hell said this? The IRR should always be calculated; however the depth of analysis surrounding it can vary depending on the stage of the company.
The accuracy of a suggested IRR is entirely dependent on the quality of a company's financial projections. And, as we all, know, a company's projections get more accurate as they grow and one better understands the drivers of the business.
For earlier stage investments, the expected timing of growth is the most important factor in calculating return. And, in later stage investments, the replicability of sales & expenses is the most important factor. In both of these cases, the IRR is quite relevant. So, I think that any investor who bases an investment decision on cash-on-cash return alone is not only irresponsible but overly simplistic. Money is made in the margins, and every successful investor knows this.
Plus, it takes two minutes to run sensitivity; so why not do it. It'll help you get that much more of an understanding of your potential deal structure.
