How to Build a VC Fund Model in 7 Steps | Excel Guide

Key Components of a Venture Capital Fund Model and 7 Steps to Build a VC Fund Model

Creating a venture capital (VC) fund model involves building a financial model that projects the expected performance and returns of the fund over time. This model can help fund managers and investors understand the potential outcomes, risks, and returns associated with the investments.

Key Components of a Venture Capital Fund Model

1. Fund Structure

A venture capital fund is typically structured with several key components that define how capital is raised, deployed, and returned.

• Fund Size: The total capital committed by Limited Partners (LPs).
• Investment Period: The duration during which the fund actively invests (usually 3-5 years).
• Fund Life: The total life of the fund, including the investment period and the follow-up period for exits (typically 10 years).
• Management Fee: Annual fee (usually 2%) charged to LPs to cover operational costs.
• Carry (Carried Interest): Percentage of profits (usually 20%) taken by General Partners (GPs) after returning the initial investment to LPs.

Component	Description
Fund Size	Total capital committed by LPs.
Investment Period	Active investing phase (3–5 years).
Fund Life	Total duration including exits (≈10 years).
Management Fee	Annual 2% fee paid to GPs by LPs.
Carry	20% of profits earned by GPs after returning LP capital.

2. Investment Strategy

A well-defined investment strategy helps venture capital funds manage risk and optimize returns across their portfolio. Here are the core elements:

• Number of Investments: Total number of portfolio companies to be invested in.
• Average Investment Size: The average amount to be invested in each portfolio company.
• Follow-On Investments: Additional investments in portfolio companies in subsequent rounds.
• Reserves: Amount reserved for follow-on investments and supporting portfolio companies.
• Investment Pacing: Distribution of investments over the investment period.

Component	Description
Number of Investments	Total number of portfolio companies planned.
Average Investment Size	Typical amount invested per company.
Follow-On Investments	Additional capital allocated for later rounds in existing portfolio companies.
Reserves	Capital set aside specifically for follow-on support.
Investment Pacing	Schedule of investments over the 3–5 year investment period.

3. Assumptions Behind Fund Returns

To project venture fund performance, GPs rely on several key assumptions that model potential outcomes across the portfolio.

• Success Rate: Expected percentage of portfolio companies that will succeed (e.g., reach IPO, acquisition).
• Failure Rate: Expected percentage of portfolio companies that will fail (e.g., go bankrupt, liquidate).
• Exit Multiples: Expected return multiples on invested capital for successful companies (e.g., 5x, 10x).
• Exit Timing: Expected duration until exit events (e.g., 5-8 years).

Component	Description
Success Rate	Percentage of companies expected to reach a successful exit (e.g., IPO, M&A).
Failure Rate	Portion of the portfolio expected to fail or return little capital.
Exit Multiples	Expected return on capital for successful investments (e.g., 5x, 10x).
Exit Timing	Anticipated timeframe for exits (usually 5–8 years post-investment).

4. Financial Metrics and Outputs

To evaluate fund performance, both GPs and LPs rely on key financial metrics and cash flow indicators:

• Internal Rate of Return (IRR): Measures the annualized rate of return of the fund.
• Multiple on Invested Capital (MOIC): Measures how many times the fund’s invested capital has returned.
• Cash Flow Projections: Cash flows to LPs and GPs, including distributions and management fees.
• Net Asset Value (NAV): The current market value of the fund’s investments.

Metric	Description
Internal Rate of Return (IRR)	Annualized return that accounts for timing of capital flows.
Multiple on Invested Capital (MOIC)	Total return multiple on capital invested (e.g., 2x, 3x).
Cash Flow Projections	Forecast of capital inflows/outflows, including distributions and fees.
Net Asset Value (NAV)	Current market value of portfolio holdings.

Steps to Build a VC Fund Model

1. Define Fund Parameters
   • Set the fund size, management fees, carry, and fund life.
   • Determine the number of investments and pacing.
2. Create Assumptions for Returns
   • Develop assumptions for success rates, failure rates, exit multiples, and timing.
   • Model potential outcomes (e.g., successful exits, partial returns, failures).
3. Develop Investment and Cash Flow Schedules
   • Plan the schedule for capital calls from LPs and deployment into investments.
   • Create cash flow models for each portfolio company based on different exit scenarios.
4. Calculate Fund Metrics
   • Calculate IRR, MOIC, and other key metrics.
   • Account for management fees, carry, and other expenses.
5. Run Sensitivity Analysis
   • Test different scenarios and assumptions to understand how changes affect returns.
   • Analyse the impact of varying success rates, investment sizes, exit multiples, etc.
6. Build an Exit Schedule
   • Create a timeline for potential exits (IPOs, acquisitions) and expected cash inflows.
   • Estimate proceeds and distribute them between LPs and GPs.
7. Model Outputs
   • Generate outputs such as cash flow waterfalls, IRR, MOIC, and NAV projections.
   • Create dashboards or charts for visualising fund performance over time.

Example of Basic Assumptions for a VC Fund Model

Assumption	Value
Fund Size	$100 million
Management Fee	2% per annum
Carry (Carried Interest)	20%
Investment Period	5 years
Fund Life	10 years
Number of Investments	20
Average Investment Size	$5 million
Success Rate	20%
Failure Rate	60%
Partial Success Rate	20%
Exit Multiple (Success)	5x – 10x
Exit Multiple (Partial)	1x – 2x
Exit Timing (Years)	5 – 8 years

Conclusion: Elevating the Accuracy of Your VC Fund Model

Developing a robust VC fund model is vital for predicting potential outcomes and optimizing your investment strategy. By focusing on accurate assumptions, meticulous planning, and thorough analysis, fund managers can better navigate the inherent uncertainties of venture capital investing.

For a more streamlined and effective approach, consider leveraging Rundit’s specialized platform, which provides advanced tools for modeling, tracking, and optimizing VC fund performance. Our solution is designed to help you gain deeper insights, make data-driven decisions, and ultimately, enhance your fund’s success. Whether you’re modeling your next fund or refining your current strategy, Rundit offers the capabilities to ensure you achieve your investment goals. Book a call with our Specialist team and get a free trial!

Additional resources:

Venture Capital Fund Modeling: A Guide for Finance Professionals

Investopedia on Internal Rate of Return (IRR):

Fund Modelling in VC: Portfolio Construction and Decomposition