What is a Good ROI for a Business Investment?

It was a deal that seemed too good to pass up—an investment opportunity with promises of returns that would change the game. A new tech startup, a revolutionary product, and a market eager for disruption. You hesitated, considering the risks, but the potential return on investment (ROI) kept you up at night. How do you determine if the ROI is worth it? Let's break down the components of a "good" ROI and how to use it to guide smarter business decisions.

ROI: The Real Measure of Business Success?

We hear the term ROI everywhere. It's thrown around boardrooms, investor meetings, and financial presentations. But what makes an ROI "good"? Is it 10%, 50%, or more?

To start, ROI is a simple formula: ROI = (Net Profit / Cost of Investment) x 100

In essence, ROI measures the efficiency of an investment. It tells you how much profit you make relative to the cost. A good ROI varies depending on the industry, the scale of investment, and the risk involved. For instance, real estate investors may expect an annual ROI of 10-12%, while tech startups can see returns of 20% or higher—if they hit it big.

The ROI Spectrum: What's Considered "Good"?

Here’s where things get interesting. A 20% ROI sounds amazing in theory, but what if you’re investing in a high-risk venture? What if the industry standard for that particular market is even higher?

• Low-Risk Investments: If you're placing your money in relatively stable, low-risk industries like government bonds or large-cap stocks, an ROI of 5% to 7% may be acceptable. These investments typically offer safety over spectacular returns.
• Moderate-Risk Investments: For moderate-risk investments like real estate, mutual funds, or blue-chip stocks, an ROI between 7% and 12% is typically seen as "good." These investments still offer stability but with the possibility of better returns than low-risk options.
• High-Risk Investments: If you’re venturing into high-risk sectors like cryptocurrency or tech startups, expect ROI figures to soar or plummet. A "good" ROI here could range from 15% to well over 100%. But remember—with great reward comes great risk.

Case Study: The Unexpected Winner

Now, let’s paint a picture: Jane, a cautious investor, decides to allocate $100,000 to a combination of real estate, blue-chip stocks, and a venture capital fund. Over three years, her investments returned 8%, 9%, and an eye-popping 200%, respectively.

What’s the takeaway? Jane’s overall ROI ended up at 45%, driven by the stellar performance of her high-risk investment. But here's the kicker—had she played it safe and only invested in real estate or stocks, her total ROI might have hovered around 8-9%. This illustrates the importance of balancing different risk levels in your portfolio.

ROI Benchmarks Across Industries

Industry | Average ROI (%)

• Real Estate: 8-12%
• Tech Startups: 20-50%+
• Retail: 10-15%
• Manufacturing: 6-10%
• Cryptocurrency: -50% to 200%+

Understanding your industry's ROI benchmarks gives you a clearer perspective on what’s "good" for your specific investment. For instance, a 10% ROI in real estate may be great, but the same number in cryptocurrency might be below par.

Breaking Down ROI by Time Horizon

Another factor to consider is the time horizon for your ROI. If you’re expecting quick returns, a "good" ROI might look different than for a long-term investment.

• Short-Term (1-3 years): Investors often aim for higher returns in a shorter period, especially in industries like tech or startups. An ROI of 15-20% may be considered excellent in this timeframe.
• Medium-Term (3-5 years): As you extend the time horizon, a "good" ROI may stabilize at 8-12%. This is common in real estate or more established ventures.
• Long-Term (5+ years): For long-term investments, especially in lower-risk categories, an ROI of 5-8% is often expected.

Factoring in Risk Tolerance

Now, before you rush into high-ROI opportunities, it's crucial to assess your risk tolerance. Here’s a simple breakdown of how ROI can change based on risk:

• Low Risk: Consistent, but lower ROI (5-7%).
• Moderate Risk: Fluctuating, but with higher potential (7-15%).
• High Risk: Wide variance, with the potential for massive gains—or losses (15-100%+).

Your personal risk tolerance should guide your investment choices, and knowing when to take calculated risks can define whether you hit your ROI targets.

Conclusion: What’s Your “Good” ROI?

In business investments, there's no universal "good" ROI. What might be a solid return for one person could be a missed opportunity for another. It all boils down to your risk appetite, your industry, and your investment timeline.

For most investors, achieving an ROI between 7-15% is a reasonable goal. But for the more daring, pursuing higher-risk ventures with the potential for 20%, 50%, or even higher can be the thrill that makes all the difference.

So the question is: How much are you willing to risk for a good ROI?