Return On Investment (ROI)
QUICK ANSWER
Return On Investment measures how much profit is generated from an investment relative to its cost, expressed as a percentage.
In depth
ROI is calculated as (Gain from Investment minus Cost of Investment) divided by Cost of Investment. It is a simple and widely used metric to evaluate the efficiency of an investment. Startups use ROI to assess marketing campaigns, product investments, and hiring decisions. A higher ROI indicates better returns relative to cost. While useful, ROI should be considered alongside time horizon and risk, especially in early-stage businesses where returns may take time to materialize.
Example
Let’s consider a real-world example of a startup evaluating a marketing campaign.
Investment in ads: $20,000
Revenue generated: $60,000
Profit = $60,000 – $20,000 = $40,000
ROI = $40,000 ÷ $20,000 = 200%
This means the campaign returned twice the initial investment.