Venture capital funds are typically compared and analyzed based on a few key performance indicators. Here are a few that are important to understand and use in your venture fund model.
Key terms to use in performance metrics
A few terms to understand to use in these calculations:
- Paid-in Capital: PIC, or called capital, this is a measure of the capital contributed by limited partners (LPs) to the fund. Also known as contributed capital, or drawn capital. This will increase as capital is called, and at the end of a fund, this should be equal to committed capital.
- Proceeds: proceeds to the fund from the investments, this is typically from exits through IPOs or acquisitions of the investments, or selling shares through secondary transactions, proceeds from revenue-sharing agreements, or other receipts of capital from investments.
- Distributions: distributions from the fund to limited partners. This will typically be net of fees, carried interest, etc. paid to general partners.
- Residual Value: current market value of the investments. This will include the value of any unrealized gains that come from markups in valuations of the investments. Typically used to understand the unrealized value in a portfolio. This can be used to measure Investment Book Value or NAV (Net Asset Value), which will include the value of the capital invested plus the unrealized gains on those investments.
Multiple-based Performance Metrics
Here are a few multiple-based metrics valuable to understand fund performance.
Gross Multiple
Gross multiple is typically used to understand the performance of the underlying investments, and is calculated as:
Total Proceeds from Investments / Total Invested capital
Net multiple
Net multiple helps you understand the performance of the fund, by including the fees paid by limited partners to the management company
Total Distributions from the Fund / Total Paid in Capital
Net returns are the returns to limited partners, net of management expenses, fund expenses, and carried interest.
MOIC
Multiple on invested capital (MOIC) measures the value of an investment compared to the capital invested. If applicable, it will include unrealized and realized gains.
( Proceeds from Investment + Investment Book Value ) / Value of Invested Capital
In Foresight models, I typically use Gross Exit Multiple to reflect the gross multiple earned on an investment, which is equivalent to MOIC in that usage.
Distributions to Paid-in Capital (DPI)
Distributions to Paid-in Capital, or DPI, represents the value of realized distributions from the fund divided by paid-in capital, at that point in time.
Total Distributions / Total Paid-in Capital
Residual Value to Paid-in Capital (RPI)
Residual value to Paid-in Capital, or RPI, represents the unrealized value in the portfolio, divided by paid-in-capital, at that point in time.
Total Residual Value / Total Paid-in Capital
Total Value to Paid-in Capital (TVPI)
Total value to Paid-in capital, or TVPI, measures the total performance of the fund by adding the realized and unrealized performance.
TVPI can be reported as gross or net; gross uses proceeds in the numerator, net uses distributions in the numerator:
For Gross TVPI:
( Total Proceeds + Total Residual Value ) / Total Paid-in Capital
For Net TVPI:
( Total Distributions + Total Residual Value ) / Total Paid-in Capital
Net TVPI can also be expressed as:
TVPI = DPI + RVPI
In the Foresight models, I typically report net TVPI, and calculate TVPI = DPI + RVPI
Allen Latta covers some pros and cons with using multiple-based performance metrics, well worth reading.
Rate of return, or time-based performance metrics
Rate of return metrics can be used to understand the performance over time, accounting for the time required to create the investment returns. The most common rate of return metrics are Gross IRR (Internal Rate of Return) and Net IRR.
Gross IRR
Similar to Gross Multiple, Gross IRR measures the performance of the investments on invested capital. Gross IRR can be reported on a realized or total value basis; in the Foresight models, I calculate realized Gross IRR, not including fees:
Net cash flow per year = proceeds from investments - invested capital
Then use the net cash flows per year in the XIRR formula in Excel or Google Sheets to calculate IRR.
Net IRR
Similar to Net Multiple, Net IRR measures the performance of the fund on paid-in capital, accounting for the fees involved in operating the fund. In the Foresight models, I calculate realized Net IRR:
Net cash flow per year = distributions from the fund - paid-in capital
Then use the net cash flows per year in the XIRR formula in Excel or Google Sheets to calculate IRR.
Interim IRR
I use Interim IRR to measure the imterim performance of the fund, including the realized proceeds and unrealized value in the portfolio, to create a "J curve" that shows the early negative returns (because of the effect of management fees and fund expenses) that increase over time as the underlying investments are marked up and/or generate proceeds to the fund. Interim IRR involves a detailed calculation that includes the residual value in the portfolio at the end of each period - a critical assumption - but a valuable one to understand the underlying potential performance of the fund.
Interim IRR is included in all Foresight venture capital models.
Max Expected Exposure
This metric measures the actual cash commitment, compared to the total capital commitment, to understand the maximum net capital invested. The goal of this is to help a limited partner understand their capital commitments, to account for the fact that capital calls happen over time, and potentially, a fund will see proceeds and distributions before their total capital calls have been made.
This can be expressed as a total amount, or as a percentage of committed capital.
Maximum expected exposure = Cumulative distributions - cumulative capital calls
Maximum expected exposure / total committed capital
This concept is also explained at Newfund Capital, VC Calculator.
More resources:
- Need to build a fund model to report these metrics? Find examples and templates at Templates and Resources for Modeling Venture Funds.
- Diligent Equity has a good overview of venture capital fund metrics at Venture Capital Fund Metrics Cheat Sheet
- Allen Latta also dives into more methods for comparing venture fund performance in his series on fund performance metrics. I highly encourage starting with his first post, LP Corner: Private Equity Fund Performance – An Overview and reading the entire series.