VenChar: IRR Calculations

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February 20, 2005

IRR Calculations

One of the blogs I track is Concrete Covina by Jim Lejeal. Jim has a recent blog on IRR calculations

He talks about the "First Chicago" method of calculating IRR's and how various top tier firms use a scenario based model (probability based outcome) to calculate IRR and if a certain threshold is reached then they will do the deal everything else checking out okay.

This definitely flies against the way I work (yes I know maybe that why I am not a top tier venture capitalist ;-)) I have never made an investment decision based on an IRR model. As a firm we use a financial model as part of the investment memo but its done more to get a general sense of how this company's business plan looks. We also use the financial plan to check assumptions and understand how well the entreprenuer has thought about his/her business. The only thing I know about financial plans for startups past 18 months is that its going to be wrong (mostly on the downside but sometimes on the upside). Excel sometimes makes people confuse between precision and accuracy . . .

Posted by Venky Ganesan at 07:25 PM in ventures | Permalink

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Comments

We touched on the problem of projections for startups in this week's Business Plan Tips and list some traps to be avoided. We particularly like the Double-Double-Half rule. For a living, we sell Excel-based tools for doing financial projections. We sometimes worry that we are selling tools to starry eyed entrepreneurs whose optimism knows no bounds and use our tool to generate unrealistic and unattainable projections. Hence the double-double-half rule.

Posted by: Brian Flanagan | Feb 21, 2005 2:38:16 AM

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