Subject: RE: A few here may have an opinion on this
From: "Larry M. Augustin" <>
Date: Thu, 24 Oct 2002 08:05:32 -0700

> From: Forrest J. Cavalier III []
> > Yes.  I have a student who has figures that say that in Japan, where
> > overall investment has an internal rate of return (IRR) of about
> > IT as a whole has an IRR of 75%, and software has an IRR of 200%.
> > know that both the IT and software numbers are huge overstatements,
> > but we expect the qualitative result (IT is "much more" productive
> > than general investment, and software "much more" productive than
> > hardware) to hold up.  So ...
> I am not even close to being an economist.  I can recall taking
> only one econ course (and it wasn't very good.)
> Is IRR a metric only for companies that remain in business?  Does
> risk get ignored in the calculation?
> I would think the numbers can't be true on average, or the only
> business left in the world would be software business.  VCs would
> only fund software businesses.

You are assuming that there is an infinite supply of software
investments.  There is not.  Many VCs I know would only invest in
software businesses if they had a choice.  In addition to high IRR,
software businesses typically require less capital and are simpler to

However, "less capital" is both a blessing and a curse.  Assume a
hypothetical but not atypical venture fund with $1 billion to invest.
If they are lucky, they might find 10 software investments to make in a
With the exception of the Internet bubble years, software investments
are generally small.  Maybe $3M to $5M in a first round, and $10M to
$30M in total paid in capital.  So while the software investments may
get a high IRR, only a small fraction of the available capital can be
put to work there.


Larry M. Augustin,
Tel: +1.650.966.1759, Fax: +1.650.966.1753