Which Venture Capital Model Should I Use?
I offer a range of models for venture capital funds. All share the same stucture for reporting cash flows and fund performance metrics, but have a couple key differences, outlined below.
Portfolio Construction
Portfolio construction is the process of creating your portfolio strategy, check sizes, follow on reserves, and expectations around valuations, ownership, and dilution over time. In fund models, portfolio construction drives the logic used to budget for the deployment of capital (e.g. new, follow) and forecast proceeds from investments, both in terms of timing and how much.
The primary differentiation between the models is how the logic for portfolio construction works, and it essentially ranges from simple to more complicated:
- Venture Capital Model, Overall Forecast takes the simplest approach, as it only forecasts the overall fund performance, without detailing the cash flows per time period, and by assuming an average gross multiple on invested capital.
- Venture Capital Model, Annual Forecast is the base for the annual forecast free models. It creates a forecast of investments, proceeds, and distributions per year up to a twenty year period, and uses an average investment approach for modeling portfolio construction, and an average gross exit multiple to forecast proceeds. This model is also available in Causal.
- Venture Studio Model uses the same core structure as the Venture Capital Model, Annual Forecast, but adds on a venture studio using the dual-entity fund plus studio structure. In this, you forecast the operations of the studio (operating expenses and revenues from management fees), the investments by the fund into the companies incubated by the studio, and the returns from the fund investments and the studio's ownership of the companies.
- Venture Capital Model, Manual Portfolio offers a different way to build a portfolio by allowing you to input each specific investment and forecast the result of each specifically. In this, you input each check size, date, follow-on, and result (proceeds and date), and it aggregates each investment to create the total returns.
- Venture Capital Model, Average Cap Table layers onto the average investment approach a more detailed portfolio construction approach that models follow-ons, increases in valuations, graduation rates, dilution, and proceeds per type of exit. This creates the rationale for how a fund returns a gross exit multiple, demonstrating the underlying logic behind stage entry points, ownership, and dilution.
- Venture Capital Model, Quarterly Forecast - this model - expands on the average investment approach with a more detailed approach to defining the initial investment and follow-on strategy per type of exit outcome, calculating the overall capital allocation and investment performance for up to three different scenarios of portfolio construction or investment performance.
- Venture Investor Model expands the timescale to create a quarterly forecast, and expands on the portfolio construction method to model expected graduation rates, follow-ons, proratas, increases in valuations, ownership and dilution, and proceeds per exit and per stage. This creates the detailed logic behind how an investment strategy generates returns, and analyzes the expected value per investment stage based on entry and exit valuations and exit rates per stage.
- Venture Investor Model with Actuals Tracking is the same as the Venture Investor Model, and adds on the ability to track a portfolio using the same tracking structure as the Angel and Venture Fund Portfolio Tracking. This allows investors to update their forecast with actual results and analyze their investment pacing by comparing their budgeted capital deployment to their actual.
Background on portfolio construction and how to choose which is best for you at How to Model a Venture Capital Fund
For tracking a portfolio, the free Angel and Venture Fund Portfolio Tracking offers an easy way for investors to track their portfolio, and the paid Venture Investor Model with Actuals Tracking layers the Venture Investor Model forecast and the tracking model to allow investors to create forecasts, track performance, and compare performance (and most importantly, budgeting for investment pacing) to operate a fund.
Timescale
The paid models - Venture Investor Model and Venture Investor Model with Actuals Tracking - and the Venture Capital Model, Quarterly Forecast create quarterly forecasts that are summed into annual forecasts, all free models create annual forecasts, except for the Overall Forecast variants, which do not forecast cash flows over time (only totals).
Forecasted Cash Flows and Peformance Metrics
All of the venture capital models - except the Venture Capital Model, Overall Forecast - share the same core structure for forecasting the cash flows and performance of the fund. Details on how that sheet work are below:
How to create your own logic around investment deployment, portfolio construction, and investment proceeds and use them in the venture capital models is detailed at How to integrate any model with a Foresight base model
Financial Statements
Financial statements - statement of operations (e.g. income statement), statement of financial condition (e.g. balance sheet), and statement of cash flows are only prebuilt in the paid models, the Venture Investor Model and Venture Investor Model with Actuals Tracking.
Preferred Return and GP Carry
Preferred return (hurdle rate) and GP carry are only prebuilt in the paid models, the Venture Investor Model and Venture Investor Model with Actuals Tracking.
Management Company
The paid models - Venture Investor Model, Venture Investor Model with Actuals Tracking, and Venture Capital Model, Average Cap Table - include an additional sheet used to budget the expenses of the management company running the fund. More details at Budgeting the Management Company of a Venture Capital Fund.
Background on those terms at How to Model a Venture Capital Fund
