What should investors look for in early-stage startups in terms of IRR?

Investors in early-stage startups typically seek higher returns compared to other investments due to the elevated risk associated with startups. Early-stage ventures are often characterized by uncertainty, potential volatility, and a higher likelihood of failure. As a result, investors expect a commensurate compensation for taking on that risk, which usually comes in the form of a higher internal rate of return (IRR).

Higher returns are crucial for these investors not only to achieve attractive financial outcomes but also to offset the potential losses from unsuccessful investments. In the startup ecosystem, the expectation is that while some investments may fail, the ones that succeed should deliver outsized returns to make the overall portfolio profitable.

In contrast, standard market rates typically apply to more stable investments and do not reflect the unique risk-return profile of investing in early-stage companies. Guaranteed principal amounts are unrealistic in the startup context, given the inherent risks, while long-term stable growth is not always applicable or feasible for startups, particularly in their early stages where rapid growth often takes precedence over stability. Therefore, the expectation of higher returns is the most aligned with the risk-reward dynamics of early-stage investments.