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Performance measurement isn’t a new concept.
Measuring performance in business is essential, as it helps you spot areas for improvement and improves business operations over time.
Successful investors know that they have to measure venture capital fund performance to make the most money out of their investment. Luckily, there are tons of VC fund performance metrics to help you measure your success.
The internal rate of return (IRR) is a popular metric that investors use to predict the profitability of their investment. The IRR is the expected rate of growth for an investment. Specifically, the IRR of a project shows you the annual growth the investment will experience.
IRRs help investors and companies analyze investment returns and predict yearly returns, even if cash flow varies throughout the course of the project.
Here’s the most widely used calculation for IRR:
Self-explanatory, the invested amount is the amount of money you put into a certain investment. While this number is meaningless on its own, it’s particularly helpful compared with other metrics, like return on investment (ROI) and IRR.
Ownership refers to the proportion of ownership your fund owns in a company. For example, high ownership in a portfolio company may mean more decision-making authority than other investors.
You can calculate ownership by multiplying the price per share by the number of shares your ownership percentage corresponds to.
Most commonly, VCs calculate the total number of shares in a portfolio company on a fully diluted basis (includes, for example, ESOP and convertible notes assuming they are converted).
Here’s a basic calculation of ownership:
Multiple of Invested Capital – MOIC (or Total Value to Paid-in Capital), also known simply as “multiple,” is a metric that tells investors how much money they’re getting from an investment. Multiples don’t consider time in the equation, so it’s crucial to compare multiples to other metrics.
Here’s a calculation to find your MOIC:
One of the most popular VC fund metrics, ROI stands for Return on Investment. ROI tells you the profitability of an investment and compares the amount of an investment’s return to the investment cost. ROIs are expressed either as percentages or ratios. Positive percentage ROIs usually indicate that a project is profitable, while negative percentage ROIs indicate a loss.
A simple formula to calculate ROI is:
Many VC metrics predict returns on investments without those returns taking place. There’s a system behind each one, but it’s important to note that any metric predicting a future gain is unrealized. Total cash realized is the number of gains that an investor received as a return in cash.
Fair value is the estimated value of a company or investment, or the estimated amount of money that a company or investment can be sold for.
For example, VCs use discounted cash flow (DCF) analysis to calculate a company’s fair value or investment. This formula assumes that the value of an investment is the total value of its future cash flows in today’s prices. In other words, this valuation demonstrates the cash that a company’s shareholders can distribute upon selling the company.
To maintain success in the long term, it’s essential to know what drives performance within your portfolio companies and your fund, which Rundit’s effective measurement solution can help with.
So, there are many metrics that you can use to measure VC fund performance. The truth is, keeping track of 7 metrics for one fund is tedious enough – imagine the work involved in tracking five funds, ten funds, or even more! Luckily, Rundit can help venture capitalists measure their investment progress more efficiently.
Our portfolio management software automatically calculates Gross IRR, Multiple, Fair Value, Ownership, Invested Amount, Return on Investment, and many more. Then, we display it on a visually attractive, easy-to-read dashboard for your convenience. This dashboard gives you an accurate overview of your fund performance in combination with automatically aggregated data from your portfolio companies.
If you want to save your performance data or share it with your limited partners, you can do that easily. Export data into constructive LP reports with a few clicks and keep your LPs updated with your impressive performance.
Lucky for investors, there are plenty of built-in VC fund performance metrics that you can find in Rundit to help you assess your fund’s profitability.
Are you looking for efficient ways to measure your venture capital fund performance? Book a call today to manage your portfolio with greater efficiency.
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