My friend and TSG Senior Partner, Jeff Strine, pointed out a glaring fault in my ROI thinking.
Jeff is a recovering banker. In the financial world, Return-On-Investment means NET. Jeff says it’s sometimes called NET CONTRIBUTION, which makes sense in our world as well.
Here’s Jeff’s example:
- Gross Revenue: $2M
- Revenues Generated = 2X
- Investment/Expenses: $1M
- Cost of Raising $1 = 50%
- Net Return: $1M
- ROI = 1X … not the 2X I used.
I didn’t want Jeff to think I’m a financial moron, but I’m guessing that the net return of $1M or 1X would be a 100% ROI.
My bottom line: Your NET RETURN/ROI should be WAY MORE than your INVESTMENT/EXPENSES.
3X. 4X. 5X.