News Flash: investors don’t believe your ROI projections. News at 11.

Why is this news? It shouldn’t be. But recently I joined two other angel investor members of our local group in a conference call giving companies feedback on why they didn’t make the final rounds in our annual event.

As the session got into open-ended questions, I was surprised, and even shocked, by a frustration shared by several of the entrepreneurs. Several of them seemed to think that we were comparing different plans, and making decisions, based on what the entrepreneurs projected as our return on investment; as if they were cheated, somehow, by not having the highest projected ROI win.

The three of us said about the same thing: the high projections weren’t credible, so we ignored them. We looked at the product, the market, and the management team, with some attention to defensibility and scalability, and we made our own intuitive comparisons of possible ROI.

Then I got the same thing again this year, more than in the past, in the business plan contests I judge. As if we were obligated to rank companies according to projected returns.

I find myself mildly offended by the idea that I’m supposed to give real importance to numbers for five years in the future produced by unbelievably high sales projections coupled with unbelievably high profitability rates and linked with hypothetical valuations based on high multiples of sales or profits. I’ll look at your plan instead and figure out what I think you can do. I trust my judgment on that.

And Internal Rate of Return (IRR)? Come on, I went to business school too, and I know the academics like it, but it depends on a realistic sales projection, realistic costs and expenses, plus a discount rate … so many unknowns. It’s a complete waste of time.

If you’re the one telling entrepreneurs they need to show some fantastic return on investment, stop it. It isn’t helping them.

Tim BerryTim Berry

Tim Berry is the founder and chairman of Palo Alto Software and Follow him on Twitter @Timberry.