Evaluating Startups: Key Metrics in Investor Dale W. Wood’s Methodology

With more than three decades of experience in the technology sector, venture capitalist Dale W. Wood has earned an esteemed reputation as a veteran investor. 

His experience has spanned various roles within the start-up ecosystem, including serving as founder, board member, and advisor to numerous startups. Wood’s strategies have led to the growth and success of many startups, and he lists a number of key metrics as the golden rule for success. From seed investments to late-stage takeovers, here are the benchmarks he ranks as the most important in start-up evaluations.

Multiple on invested capital (MOIC)

MOIC is a robust metric used to gauge a startup’s return on investment, or ROI. The formula for its calculation is relatively straightforward: MOIC = Exit value / total invested capital

The salient role of MOIC in startup evaluation rests in its capacity to provide supporters with a snapshot of potential returns on their investment. A high MOIC signals that a startup has the potential to yield significant returns, while a lower MOIC indicates that an investment might not offer an attractive return.

If a startup received a total investment of $10 million, for instance, and ultimately reached an exit value of $50 million, the resulting MOIC was 5x. This figure implies a fivefold return on the original investment, which signifies a substantial appreciation in value. The higher the MOIC, the more secure an investor will feel.

Gross total value to paid-in capital (TVPI)

Gross total value to paid-in capital, TVPI,  is a metric pivotal in measuring the total value of a startup relative to the invested capital. The gross TVPI = Gross value / total invested capital

This key metric is instrumental in helping investors discern the potential value of their investment. A high gross TVPI suggests a capacity for substantial returns, while a lower value implies an underwhelming return on investment.

Dale W. Wood has utilized Gross TVPI to evaluate several startups. In a case where the total invested capital amounts to $10 million and the gross value of the startup is $50 million, for instance, the gross TVPI would work out to be 5x, which represents a return of five times the initial investment.

Net total value to paid-in capital (Net TVPI)

Net TVPI accounts for management fees and carried interest, offering a comprehensive understanding of the potential value of an investment. Net TVPI = Net value / total invested capital

This metric is invaluable to estimate the potential value of an investment after considering fees and interest. A high Net TVPI suggests that a startup can generate impressive returns after deducting expenses and interest.

If a startup has a total invested capital of $10 million, a gross value of $50 million, management fees of $1 million, and carried interest of $2 million, the Net TVPI would be 3x, which indicates a thrice-fold return on the initial investment after deduction of fees and interest.

Residual value per paid-in capital (RVPI)

Residual value per paid-in capital, RVPI, assists in measuring the remaining value of a startup relative to the total invested capital. RVPI = Residual value / total invested capital

RVPI is a valuable tool that aids investors in assessing the potential value of their remaining investments. A high RVPI signals that the startup still has substantial growth potential, while a low RVPI may indicate a less promising return.

Wood’s application of RVPI becomes clearer through a practical example: A startup with a total invested capital of $10 million, a gross value of $50 million, and an exit value of $30 million will have a residual value of $20 million, yielding an RVPI of 2x. This figure implies that the remaining investment could still hold value. 

Distributions per paid-In capital (DPI)

Distributions per paid-In capital, DPI, is an essential metric for evaluating the return from exits relative to the total invested capital. DPI = Distributions / total invested capital

DPI is a significant indicator of the extent of returns realized from exits vis-à-vis the initial investment. A high DPI demonstrates that investors have recouped a substantial portion of their investment through exits, while a low DPI might suggest less favorable returns.

For example, evaluating a startup with a total invested capital of $10 million and distributions worth $15 million from exits means the DPI would be 1.5x. This result denotes that investors have received 1.5 times their initial investment upon exit.

Internal rate of return (IRR)

Internal rate of return, IRR, is a complex but invaluable metric that calculates the potential return on an investment over a specified period.  It considers the relationship of returns with the time spent to generate those returns. It is a significant metric for many venture capitalists – “A dollar today is worth more than a dollar tomorrow.”

The formula for IRR needs to solve a summation and is complex, but an Excel formula will solve it in a snap.

  • Gross IRR and Gross Realized IRR: Gross IRR considers the total return, including both realized and unrealized gains. In contrast, Gross Realized IRR only factors in realized gains.
  • Net IRR and Net Realized IRR: Net IRR subtracts management fees and expenses and carries from the total investment return. Conversely, Net Realized IRR considers actual money returned to investors after deducting fees and expenses.

IRR’s significance in startup evaluation stems from its capacity to provide a comprehensive picture of the potential return on an investment in a startup. A high IRR suggests a more lucrative investment prospect.

Wood’s investment in a gaming company provides an illustrative example of the application of IRR. Dale Ventures, a global venture capital firm based in Dubai, invested $40 million in a company worth $800 million. It achieved a gross IRR of 66.1% and a net IRR of 47.3%. This metric underscores the significant returns the startup investment would yield, and plays a huge part in an capitalist’s decision to invest.

Using multiple metrics: The key to robust evaluation

Dale W. Wood’s methodology exemplifies the astute use of multiple metrics for startup evaluation. Metrics such as MOIC, Gross TVPI, Net TVPI, RVPI, DPI, and IRR offer varied perspectives on a startup’s performance and potential for success, enabling a venture capitalist to make informed investment decisions.

Each of these metrics brings its unique strengths to the evaluation process, which makes using an array of metrics the ideal way for investors to paint a more holistic picture of a company’s potential and enhance their decision-making process.

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