Business

It has been said a million times already on this blog – a CEO, especially one which is seeking funds from private equity investors, needs to understand finance.  Often a basic knowledge of sources and uses and cash flow analysis is enough, but in many early stage investment rounds, savvy investors expect the CEO to know the company's internal rate of return (IRR) - and why it matters. 

I meet many entrepreneurs who have served as VPs or middle managers before embarking on their entrepreneurial dream.  There is a key difference between the way a VP or manager looks at finance and the way a CEO looks at finance:

VPs look at margins; CEOs look at cash flows. 

The IRR is the time weighted rate of return of future cash flows.  More specifically it is the NPV of invested dollars, distributions to owners and unrealized investments.  This is a key tool in valuing companies and for investors to determine the expected return of their investment.

Venture capitalists and private equity firms understand IRR well - and most will use a discounted cash flow method (utilizing an IRR) to value companies in considering investment opportunities. 


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Alerding Castor Hewitt, LLP is an Indianapolis law firm focusing on business law, information technology law (including SaaS law and legal technology consulting), private equity consulting, and business and Internet litigation.