User Tools
IRR Analysis
How to Analyze an IRR Report:
Experienced entrepreneurs rarely provide a slide in their investor pitch showing expected IRRs. The reason in simple: it sets an expectation that could come back to bite them in the future. Instead, entrepreneurs should present pro forma financials, a capitalization table, and data about similar companies that have been acquired (showing their acquisition prices as multiples of revenues and profit). Then let potential investors make their own calculations about expected IRRs; that way they can use their own multiples and apply any discounts they want to, and you have made no implied promises. What Offtoa does for you is (1) it shows you five ways to value your company at liquidation time, (2) based on the cap table and liquidation preferences, shows how the proceeds of a liquidation event would be distributed among the shareholders, and (3) calculates the expected internal rates of return for each class. Finally, Offtoa performs an analysis of these IRRs looking for properties that investors would look for. The primary reason for surfacing these issues is so you can fix them now rather than suffer the embarrassment of potential investors finding them later.
Here is a partial list of the kinds of issues that Offtoa looks for:
- Investors Receive Higher Return Than Earlier Investors
- Investors Unlikely to Find Returns Acceptable
- Some Investors Receiving Zero (or Negative) IRR
Whenever Offtoa finds one of these issues, it highlights the symptom for you on the IRR table, and offers a list of suggested solutions, each of which describes exactly which assumptions you need to change to fix the problem. However, don't just “fix” the problem by blindly selecting one of the suggestions. That will result in you having a set of financial statements that look good but have no basis in reality. Instead, make changes to assumptions that you believe are feasible and then change your business strategy to reflect the new plan. If none of the suggestions are feasible in your mind, then perhaps you don't have a viable company :).
Questions:
What can I learn from the IRR report?
Why do investors want such high IRRs?
