In traditional finance, the Sharpe Ratio helps us assess whether returns are commensurate with the risk taken to achieve them. It measures excess return per unit of volatility, offering a way to evaluate quality of return, not just quantity.
While we may not apply the formula directly in early-stage investing, the idea behind it remains useful.
In startups, volatility isn’t just statistical, rather it’s contextual. It might show up as capital intensity, unpredictable demand cycles, evolving unit economics, or the natural uncertainty that comes with building something new in an emerging space.
Two companies may grow at similar rates , but the variability in how that growth is achieved can differ meaningfully. One might grow through steady customer behaviour and repeatable business levers; another might be exploring new markets or going through early turning points in its journey. Both journeys are valid, but they reflect different kinds of risk.
As investors, we often celebrate outcomes. The Sharpe Ratio, however reminds us to also observe the path to consider what level of variability a business is absorbing in pursuit of those outcomes.
We may not be able to quantify startup Sharpe Ratios, but the principle holds:
Return, understood in context of volatility, offers a more complete picture.
And in that picture, we often find the quiet signals that guide long-term conviction.
