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How-To 1 of 3 - How to input your assumptions in the Venture Investor Model

Get started with the venture investor model by setting your goal and inputting the parameters of your investment strategy

This is part 1 of a series to help you use your venture investor model template. Here’s the full series:

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Before you start building your model, it’s important to first identify your goals. The venture investor model can be used in a couple ways:

  • Forecasting a brand-new fund or series of investments
  • Forecasting your fund, including existing investments
  • Tracking your existing investments only

Identifying what you want to do with the model is the first step. Let’s talk about how the inputs are structured so you can get started.

Crafting the right assumptions for your inputs is hard: it’s hard to predict the future and know exactly what is going to happen (more on the broader topic of creating assumptions for financial models here)

In this model, I’ve simplified to assumptions to map back to important decisions you have to make in defining your plans for the fund. The assumptions are located in two places:

Dashboard and Assumptions

The dashboard sheet captures a couple major assumptions - fund size and investment horizon - and then reports out a couple key outputs of the model, namely proceeds, multiple of returns, and IRRs (more on how the returns are calculated in part 3).

Investor model dashboard

The key is to then look at the chart of the distribution of exit multiples to the right, and then input what you think the distribution will be. There’s just a couple numbers to change (the number of returns that are in each of those multiple ranges, as well as the expected average multiple for the big wins), and once the curve looks right to you, then you’re done with the dashboard. Note: you will want to update this to fit your expected number of investments. The model does not adjust this curve automatically, it’s created as a manual input to force you to review the expected exit multiples for your fund.

Demonstrating the Dashboard

Remaining Assumptions

The remainder of the assumptions are located on the Assumptions sheet. Here the assumptions are a little more detailed, and they cover more about fund construction, investment performance, and the operating costs of the fund. It’s broken down into:

Investment Areas In this section you can optionally define up to 4 different “areas” to allocate investments to. An area can be an industry - say tech, retail, etc. - or a country - USA, UK, France, etc. - or stage - Seed, A, B, etc. - and allows you to set a portfolio allocation, average initial check size, and follow on allocation separately by each area.

*Note, this structure is not to allocate follow on capital across different stages, only to represent different areas of initial checks. If you are going to allocate all initial checks to A and reserve for follow on investments in B and C rounds, you will want to only use 1 area, and use the A initial check size. If you are going to lead A and B rounds, i.e. write your first checks into A and B rounds, then you would want to define two areas for A and B, and then set fund and follow on allocation for each area appropriately.

Other key assumptions include: - General partner commitment - how much the GPs contribute to the fund - Organizational and Operating Fees - fees paid by the fund out of the fund commitment, one-time and recurring, respectively - Management fees - the % of the fund that the operating company takes to manage and pay expenses for operating the company that operates the fund - Carried interest - % of gains, above the hurdle rate, that the operating company earns from the proceeds of sales of investments - Hurdle rate - the % that the fund has to return before collecting carried interest fees

Investor model assumptions

Investing Timing - The investment horizon, when you start investing (for the future investments) - The time from investment (and follow-on) to exit, which sets the timing in the model for follow-on and exits

Investment Performance - The assumptions here cover two things that require a bit of explanation. The assumptions are the “% of Initial investment capital allocated to non-zero investments”, and “% of Follow-on capital allocated to non-zero investments”. What does that mean? - Essentially, this is an estimate of how much initial and follow-on investment capital is invested into deals that return > 0. This is a way to assume that you write larger initial checks into better deals, or allocate more capital in follow-ons to better deals. There’s no need to change these assumptions as the default assumption is taken from the exit multiples we created, but if you want to add an extra factor to assume the impact of variation in check sizes in better deals, feel free to edit these assumptions.

Explaining the model assumptions

Operating Assumptions - Fairly self-explanatory, but the assumptions include a hiring plan and a set of assumptions tied to operating the fund (rent, travel, marketing, PR, legal, administration, etc.) - The key to the hiring plan and salary forecasts is to just manually type in the salary for the first year the person joins, and then it will calculate future salaries. - The model used the fund management horizon assumption on this page to set how long to estimate the operating expenses for.

The inputs related to tracking any existing investments is covered in part 2, How to track your venture and angel investments.

If you’re looking for more resources, data points or links to read, check out:

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