Wed, 31 August 2022
Investment Returns on a VC Fund
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
In a VC fund, limited partners look for greater returns.
The risks are higher, and the hold times are much longer, so LPs look for better returns than the stock market.
In general, they look for a 10-20% IRR better than the market index.
Historically, top VC funds have a Distributed Paid-In ratio of 3X while the Total Value to Paid-In ratio is 1.5X, not counting the dot-com era.
The manager of the VC fund can improve the performance of the fund in several ways:
Remember, IRR is higher the sooner the funds are returned to the LP.
A VC fund manager can increase the IRR by taking funds in a series of capital calls rather than all upfront.
Most funds ask for ⅓ of the invested capital up front and then two more capital calls in the following years.
In pledge funds, the LPs provide the funding for each deal as it arises.
Another option is to shift some of the management fees into the carry. This will increase the return to the LPs.
Seventy-five percent of VC funds do not return anything to the limited partner after the fees are accounted for, and most limited partners know this.
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