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VENTURE INVESTING - THE MATH BEHIND HIGH VC RETURN EXPECTATIONS
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Last updated on 28-Feb-2024
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A. VC Fund Level Return Expectations
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DescriptionValueUnitNotes
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Fund Size$20,000,000USD
The size of the fund with the simplifying assumption that the whole fund is raised in the first year
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Fund Life (Duration)8Years
Life of the fund after which it is liquidated and the proceeds returned to the fund's investors (LPs)
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Expected Fund Return (Gross IRR %)17%%
Average returns expected from VC funds by its investors (LPs)
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Expected Multiple on Invested Capital (MOIC)*3.51xmultiple
The fund growth multiple based on the Fund Duration and Expected Gross Return
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Targeted Fund Size at Exit$70,229,066USD
The VC's target final fund size after applying the expected MOIC multiple to the initial Fund Size
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*Calculated as (1+17%)^8
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B. Portfolio Company Level Return Expectations
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DescriptionValueUnitNotes
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Management Fees (%)1.5%%
Fees that the fund investors (LPs) pay to VCs to cover the operating expenses
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Cumulative Mgt Fees over the Fund Duration (%)12%%
Cumulative fee percentage over the life of the fund
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Cumulative Management Fees$2,400,000USD
Cumulative fee amount over the life of the fund
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Investable Fund$17,600,000USD
The cumulative amount the fund can invest in Portfolio Companies (PortCos) after setting aside cumulative management fees
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Average Number of Fund Investments10#
The average number of PortCos the fund invests in
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Average Ticket Size$1,760,000USD
The average cheque size per PortCo calculated as Investable Fund divided by Avg No. of Fund Investments
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DescriptionValueUnitNotes
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Average Number of Fund Investments10#
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Expected Win Rate (%)20%%
The percentage of portfolio companies that are successful
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Expected Number of Fund Winners2#
The average number of portfolio companies that are successful
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Cumulative Proceeds Expected from the Fund Winners$70,229,066USD
The total amount of proceed that is expected from the winners with the simplistic yet relatively realistic assumption that majority of the fund returns are generated by the winners
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Exit Proceeds Expected from each Fund Winner$35,114,533USD
The average amount of proceed that is expected from each winner to meet the Target Fund Exit Value assuming equal contribution by each
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Required PortCo Valuation at ExitSeedSeries ASeries B
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Investment Details:
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Investment by the Fund$1,760,000$0$0
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Seed Stage Post-Money Valuation$12,000,000
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Cumulative Equity Stake Calculation:
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Avg Round Dilution15%12%
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Diluted Equity Stake at each Funding Round14.7%12.5%11.0%
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Equity Stake at Exit*11%
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Targeted Proceeds from Equity Stake at Exit$35,114,533
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Required PortCo Valuation at Exit$320,076,563
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*Calculated as [14.7% x (100%-12.5%) x (100%-11%)]
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DescriptionFund LevelInvestment LevelPortCo Level
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Beginning Value$20,000,000$1,760,000$12,000,000
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Ending Value$70,229,066$35,114,533$320,076,563
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Growth Multiple3.5x20.0x26.7x
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Compounded Growth over 8 Years17%45%51%
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Appendix: Reconciliation of Net IRR with Gross Fund IRR
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Limited Partner (LP) Level Distributions
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Fund Profit
ValueUnitNotes
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Fund Size at Closing$70,229,066USD
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Fund Size$20,000,000USD
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Fund Profit$50,229,066USD
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Carried Interest
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Carried Interest %20%%
The share of profits that the VC receives after LPs have received their capital back
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Carried Interest to GPs (VC Fund)$10,045,813USD
Fund Profit multiplied by Carry %
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Distribution of Profits to LPs$40,183,252USD
Fund Profit less Carried Interest
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LP Distributions
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Return of Capital to LPs$20,000,000USD
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Distribution of Profits to LPs$40,183,252USD
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Total Distribution to LPs$60,183,252USD
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Net Return (IRR %)15%%
Pitchbook Benchmarks, Global Q2 2023; Cambridge Associates PE/VC Benchmark 2021
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