Venture Capital Fund Returns | Seraf-Investor.com (2022)

Note: This article is the sixteenth in anongoing serieson venture fund formation and management.To learn more about managing a fund, download this free eBook today Venture Capital: A Practical Guide or purchase a hard copy desk reference at Amazon.com.

Venture Capital Fund Returns | Seraf-Investor.com (1)In Part I of this article, we discussedthe two key components of compensation in a venture fund - management fees and carry -andwhat level of capital commitmentLPs expect from GPs. Now let's take a look at historical VC fund metrics,what kind of returns LPs should anticipate from a venture fund, andsome ways to improve the rate of return.

What level of investment returns do LPs expect from a venture fund?

Because the risks of investing in startup companies are much greater than the risks of investing in public companies, and the holding periods are long, the fees are significant, and the money is totally tied up and illiquid throughout, VC funds need to outperform the public stock market indices (S&P 500, NASDAQ 100, etc.) by a significant amount to make economic sense. So an annual 10% rate of return for an investor in a VC fund is not enough. LPs are looking for annual return percentages at least in the high teens or low twenties. Or put another way, they are looking for 5-15 percentage points above what the money would have done in a broad-based market index during the same period. And keep in mind that the effective performance threshold is raised by the fact that GPs are taking management fees out as they go along, and also ultimately taking a carry out of any profits. This means GPs have to exceed those levels of return on a gross basis to ensure they meet the performance expectations of the LPs on a net-of-fees-and-carry basis.

Based on detailed research from Cambridge Associates, the top quartile of VC funds have an average annual return ranging from 15% to 27% over the past 10 years, compared to an average of 9.9% S&P 500 return per year for each of those ten years (See the table on Page 13 of the report).

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So, if you are an investor in one of these top quartile funds, your returns are better than what you would expect to achieve in the public market indices. However, if you invested in one of the bottom quartile VC funds over the past 10 years, your returns are mostly in the low single digits. You would have been better off in a fund that tracks the S&P 500 (and you would have paid a lot less in fees)! And, not surprisingly, there has been much written about how the average VC fund has underperformed relative to expectations and various benchmarks. This is a hard business and the only thing that keeps the LPs coming back is the promise of outsized returns that might be achieved if they end up in one of the top performing funds.

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In addition to analyzing annual rates of return, it’s helpful and common for LPs evaluating VC funds to look at the Distributed to Paid-In (DPI) ratio and the Total Value to Paid-In (TVPI) ratio.

  • The DPI ratio is a calculation of the total amount of capital returned to the investors divided by the amount of capital invested into the fund.

  • The TVPI ratio is a calculation of the total amount of capital returned to the investors along with any remaining value still in the fund divided by the amount of capital invested into the fund.

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It should be noted, if you want to be a top decile fund, your final DPI ratio needs to be around 3x. In other words, for every 1 dollar invested in a VC fund, there needs to be a return to LPs of 3 dollars over the subsequent 10 year time period. As you can see in the Cambridge Associates chart below, the TVPI ratio (light blue bars), goes as high as 4.5x in the boom years of the Internet bubble and down to 1.5x during the post-bubble years.

Venture Capital Fund Returns | Seraf-Investor.com (2)

Taken together these VC performance indices should give early stage investors a sense of what the professional money managers achieve when working with these startup companies (albeit at a slightly later stage.)

What are some ways to improve the rate of return for the LPs?

As discussed in the question above, the Internal Rate of Return (IRR), also known as the Annual Rate of Return, for a venture fund should be in the 15% to 27% range. There are approaches that GPs can look at to help improve the IRR results for their LPs. To understand how GPs might apply these approaches to their fund, it is important to understand key factors that affect your annual rate of return. Computing your fund’s IRR is all about tracking the timing as well as the inflows and outflows of money. This can be a rather labor-intensive thing to do manually with a spreadsheet, but fund management platforms like Seraf will do this for you automatically, which can greatly speed up and improve the quality of your reporting to LPs. The longer amount of time your fund keeps the LP’s money, the lower the IRR is for the LP.

To understand this concept, let’s use a simple example. Which of the following two investments would you rather have?

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1) You get 4X your original investment in 2 years

2) You get 8X your original investment in 6 years

Many would reflexively jump for the 8X. But I would go with investment 1, because I am doubling my money every year. With investment 2, you are doubling your money every 2 years. The time and risk horizon on the second investment is longer, and, of course, so is the opportunity cost you would incur by tying your money up in it. Simple though it is, this example shows you the importance of time when it comes to annual rates of investment returns.

So, if GPs wish to use this approach to improve LP returns, they need to carefully manage the timing and flow of money into the fund. In venture funds, it is common practice to make multiple capital calls during the early years of the fund’s life cycle. Some funds will ask for 33% of the committed capital at the launch of the fund, followed by two additional 33% capital calls during the early years of the fund’s life. That keeps things simple and efficient for the GPs and ensures that cash is readily available when you need to move quickly to make an investment in one of your portfolio companies. However, it’s not an efficient use of your LPs’ capital. In an ideal world, you would only make capital calls for the exact amount of cash you need at the exact time it’s needed. That way, your LPs keep their cash in their own accounts. But that is an extreme and you are going be looking for a balance. By adopting a program of more frequent, smaller capital calls, a venture fund can boost it’s IRR for the LPs by a few percentage points (in exchange for additional fund management work).

Another option for improving fund returns relates to lowering the payout percentage of management fees. This approach to boosting returns won’t work for many GPs because it results in lower income during the early years of the fund. But for those GPs who can afford to forgo near term income, it’s an interesting option.

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Here’s an example of how it works:

In our $50M fund example, a 2% management fee will result in $7.5M paid out in management fees. Those fees reduce the amount of capital available for investments to $42.5M because the fees come out of the committed capital. If you want to show your LPs that you have real skin in the game, what better way than to invest those management fees with the fund and thereby boost the actual size of the fund’s holdings while reducing your up-front take home management fee in exchange for more of your upside on the success of the fund! This approach gives the fund more money in the winners to base their calculated returns on, and it shows LPs how confident the GPs are in the fund that they will invest their fees alongside rather than take them up front.

Now let's addresssome of the costs associated with running a fund,who pays for these organizational expenses, and the totallevel of compensation a VC can make running an early stage venture fund in Part III of this article.

Want to learn more about managing a fund?Download this free eBook today Venture Capital: A Practical Guide or purchase a hard copy desk reference at Amazon.com.

FAQs

What is the average return for a VC fund? ›

Return on Investment Ranges

While some ventures can result in returns that are multiple times the original investment, many investments will end in a negative return. The National Bureau of Economic Research has stated that a 25 percent return on a venture capital investment is the average.

What is a good venture fund return? ›

So an annual 10% rate of return for an investor in a VC fund is not enough. LPs are looking for annual return percentages at least in the high teens or low twenties. Or put another way, they are looking for 5-15 percentage points above what the money would have done in a broad-based market index during the same period.

What is a 3X return? ›

Returns can also be expressed as a multiple of the fund the investment came from. For a $100M venture fund that has returned $300M, the multiple for the fund would be expressed as “a 3X return cash on cash.”

How do VCs calculate returns? ›

Take the difference between the current value of the investment and the original beginning value, divide it by the original value and multiply the result by 100. If a VC fund makes multiple investments at different times, the calculation gets more challenging, but it still can be done with some basic math.

What percentage of VC funds fail? ›

The idea is that if a startup can land funding, then it will inherently be set up for success. And as founders become blinded by their mission to amass massive amounts of money, they often overlook the main reason why 65 percent of VC-backed startups fail: senior management issues.

What percent of VC investments are successful? ›

The common rule of thumb is that of 10 start-ups, only three or four fail completely. Another three or four return the original investment, and one or two produce substantial returns. The National Venture Capital Association estimates that 25% to 30% of venture-backed businesses fail. Mr.

Is a 4% ROI good? ›

What Is a Good ROI? According to conventional wisdom, an annual ROI of approximately 7% or greater is considered a good ROI for an investment in stocks. This is also about the average annual return of the S&P 500, accounting for inflation.

Which fund gives highest return? ›

Best Performing Equity Mutual Funds
Fund Name3-year Return (%)*5-year Return (%)*
Tata Digital India Fund Direct-Growth31.16%27.03%
ICICI Prudential Technology Direct Plan-Growth34.12%26.41%
Aditya Birla Sun Life Digital India Fund Direct-Growth31.23%25.16%
SBI Technology Opportunities Fund Direct-Growth29.79%24.85%
6 more rows

What does 10X return mean? ›

Obviously, the way to calculate a return multiple is to divide the amount returned from an investment by the dollars invested. If I invested $10M in a company and got back $100M, that's a 10X return.

Is a 200% return doubling your money? ›

An ROI of 200% means you've tripled your money!

Is a 3% return good? ›

It's important to remember, though, that the high yields of the past came at a time of much higher inflation. At today's lower inflation rates, even a 3% yield allows you to stay well ahead of inflation. You're not getting rich quick at that yield, but it's respectable. And importantly, it can be done safely.

What is a 200% return? ›

A 200% return means that the amount of money will increase by twice the original amount. The original amount is $2000. A 200% return will be an additional $4000 for a total amount of $6000. Help improve Study.com.

What does 30% IRR mean? ›

What's an IRR of 30% Mean? An IRR of 30% means that the rate of return on an investment using projected discounted cash flows will equal the initial investment amount when the net present value (NPV) is zero. In this case, when the time value of money factors are applied to the cash flows, the resulting IRR is 30%.

What is a good IRR for 5 years? ›

For levered deals, commercial real estate investors today are generally targeting IRR values somewhere between about 7% and 20% for those same five to ten year hold periods, with lower risk-deals with a longer projected hold period also on the lower end of the spectrum, and higher-risk deals with a shorter projected ...

Do VCs always exit? ›

But VCs must exit. It is a simple fact of life, built into the structure of the investment vehicle, and founders must understand the deal they are seeking when they solicit venture capital.

Which VC firm is most successful? ›

The largest venture capital firm in the U.S. is Intel Capital, with a revenue of $30 billion and an investment-to-exit ratio of 28.5%. As of 2022, the U.S. venture capital industry industry has a market size of $63 billion.

Does VC outperform the market? ›

A recent study published by the National Bureau of Economic Research (NBER) sheds new light on how VC fund of funds outperform the market and reduce risk. The study found that the average VC fund funds generated net returns that outperformed the S&P 500 and Russell 2000 PMEs.

Is VC funding drying up? ›

Even with $290 billion in committed capital, venture capitalists may slow their pace of investing — and focus on the companies they've already backed. Venture funding for startups suffered a 50% year-over-year drop in the 3rd quarter of 2022.

How much do VC fund owners make? ›

The general partners often make $300k-$500k a year, and it can be as much as $1m year if you are 'stacking' multiple funds on top of each other. Series B+ Fund: $1m+ a year for top partners.

Do most VC firms lose money? ›

Even people unfamiliar with VC understand that it's a high-risk industry. Most startups go bankrupt, even – maybe chiefly – VC-backed ones, who play the Go Big or Go Home game. What is often more surprising is that these statistics are the same for the best VC firms. The top firms don't lose less money.

What is the typical lifetime of a VC fund? ›

Most venture funds have a 10 year time horizon to invest all of their capital and then return the profits to the fund's investors. There are exceptions to this 10 year life cycle, but that is fairly standard.

Is 10% a month a good ROI? ›

Most investors would view an average annual rate of return of 10% or more as a good ROI for long-term investments in the stock market.

How do you get a 10% return on investment? ›

HOW TO EARN A 10% ROI: TEN PROVEN WAYS
  1. Paying Off Debts Is Similar to Investing. ...
  2. Stock Trading on a Short-Term Basis. ...
  3. Art and Similar Collectibles Might Help You Diversify Your Portfolio. ...
  4. Junk Bonds. ...
  5. Master Limited Partnerships (MLPs) ...
  6. Investing in Real Estate. ...
  7. Long-Term Investments in Stocks. ...
  8. Creating Your Own Company.
26 Oct 2021

Is a 50% ROI good? ›

Having an ROI of 50% on investment can look good by itself, but there's the context you need to determine how well the investment has done. It's 50% now, but if it was 70% a year ago, this may not be the solid investment you think it has been.

Which fund has the highest 10 year return? ›

Among these four schemes, Nippon India Small Cap Fund delivered the highest return of 22.38% in 10 years. Mirae Asset Emerging Bluechip Fund was ranked second in the list with 22.31% returns. SBI Small Cap Fund and Axis Midcap Fund delivered 21.24% and 20.11% returns respectively in 10 years.

What is the safest investment with the highest return? ›

Here are the best low-risk investments in November 2022:
  • High-yield savings accounts.
  • Series I savings bonds.
  • Short-term certificates of deposit.
  • Money market funds.
  • Treasury bills, notes, bonds and TIPS.
  • Corporate bonds.
  • Dividend-paying stocks.
  • Preferred stocks.
1 Nov 2022

Where should I put my money to get greatest return? ›

  1. High-yield savings accounts. Online savings accounts and cash management accounts provide higher rates of return than you'll get in a traditional bank savings or checking account. ...
  2. Certificates of deposit. ...
  3. Money market funds. ...
  4. Government bonds. ...
  5. Corporate bonds. ...
  6. Mutual funds. ...
  7. Index funds. ...
  8. Exchange-traded funds.
27 Sept 2022

What is a 1000% return? ›

The term "percent" means "per 100" so 1000% is 1000/100 = 10. Thus if one invests $4000.00 and makes 1000% then the return would be 10*$4000.00 = $40 000.00.

Is 1000% a 10x? ›

"1000 percent" or "1000%" in a literal sense means to multiply by 10. In American English it is used as a metaphor meaning very high emphasis, or enthusiastic support.

What is the 90 10 rule in investing? ›

The 90/10 investing strategy for retirement savings involves allocating 90% of one's investment capital in low-cost S&P 500 index funds and the remaining 10% in short-term government bonds. The 90/10 investing rule is a suggested benchmark that investors can easily modify to reflect their tolerance to investment risk.

What is the 7 year rule for investing? ›

According to Standard and Poor's, the average annualized return of the S&P index, which later became the S&P 500, from 1926 to 2020 was 10%.  At 10%, you could double your initial investment every seven years (72 divided by 10).

Where should I invest $10000 right now? ›

How To Invest $10,000
  • Open an IRA. Bolstering your retirement savings is a great use of $10,000. ...
  • Invest in Mutual Funds and ETFs. ...
  • Build a Stock Portfolio. ...
  • Invest in Bonds. ...
  • Buy Real Estate with REITs. ...
  • Prepare for healthcare costs with an HSA. ...
  • Considering Crypto? ...
  • Focus on the long-term.
22 Sept 2022

Is 300% the same as 3x? ›

And 3 times 100 is 300%.

Is a 6% rate of return good? ›

A good return on investment is generally considered to be about 7% per year. This is the barometer that investors often use based off the historical average return of the S&P 500 after adjusting for inflation.

Where can I get a guaranteed 4 return? ›

However, you can still find meaningful, guaranteed investment returns if you know where to look.
  • Dividend Stocks. ...
  • Certificates of Deposit (CDs) ...
  • Money Market Account. ...
  • U.S. Treasury Securities. ...
  • Treasury Inflation-Protected Securities (TIPS) ...
  • High-Yield Savings Accounts. ...
  • Municipal Bonds. ...
  • Annuities.

Can you live off of returns? ›

You can live off interest alone, but you need to be careful about understanding your expenses and your current and future assets. Also, remember that investment returns are not guaranteed, and the more risk you take on to achieve a higher return, the greater your probability of losing some of your investment.

What is a 300% ROI? ›

In mathematical terms, ROI = (Revenue generated – Cost)/Cost x 100. So if you spent $250 on Facebook ads last month, for example, and you landed $1,000 in new business, your ROI would be calculated as: ROI = (1,000 – 250)/250 x 100 = 300% That is, for every $1 you spend in Facebook ads, you earn $3. That's a great ROI.

What will 100k be worth in 20 years? ›

How much will an investment of $100,000 be worth in the future? At the end of 20 years, your savings will have grown to $320,714. You will have earned in $220,714 in interest. How much will savings of $100,000 grow over time with interest?

What does a 300% ROI mean? ›

For the example above, an investment of $300 for a return of $200 would be an ROI of -33%. The minus sign indicates that we made less than the initial investment. The second example, with an investment of $500 and a return of $2000 gives an ROI of 300%.

Is 100% IRR possible? ›

If you invest 1 dollar and get 2 dollars in return, the IRR will be 100%, which sounds incredible. In reality, your profit isn't big. So, a high IRR doesn't mean a certain investment will make you rich. However, it does make a project more attractive to look into.

Is IRR better than ROI? ›

ROI is more common than IRR, as IRR tends to be more difficult to calculate—although software has made calculating IRR easier. ROI indicates total growth, start to finish, of an investment, while IRR identifies the annual growth rate.

Is a 20% IRR good? ›

What Does IRR Tell You? Typically speaking, a higher IRR means a higher return on investment. In the world of commercial real estate, for example, an IRR of 20% would be considered good, but it's important to remember that it's always related to the cost of capital.

Is a 15% IRR good? ›

You should consider more than just the IRR of a project when comparing investments, although IRR can be one important factor. You definitely want a positive IRR—a negative IRR indicates you'd lose money on the investment. In general, an IRR of 18% or 20% is considered very good in real estate.

Is a 25% IRR good? ›

Strategic and financial buyers use the internal rate of return as one of the primary measures to assess the attractiveness of an investment. Sophisticated buyers look for a minimum IRR of 25% for their investment in mid-market companies due to the risk and more limited liquidity options available.

Is a 10% IRR good? ›

As with any other financial metric, what's good for one investor may be bad for another. An investor who is risk-averse may be satisfied with an IRR of 10% or less, while an investor seeking a balanced blend of risk and potential reward may only consider properties with a projected IRR of 20% or more.

How much do VCs expect on return? ›

Today, we'll explore the question: what are your VC's return expectations depending on the stage of investment? The TLDR; seed investors shoot for a 100x return; Series A investors need an investment to return 10x to 15x and later stage investors aim for 3x to 5x multiple of money.

Do VCs get dividends? ›

​ caution​ Companies backed by traditional venture capital firms will almost certainly not ever issue dividends. Because of this, most founders don't negotiate on dividend rights in term sheets. Venture capitalists are looking for fund-returning results, not 6–8% dividends.

Should you take VC money? ›

Taking a VC round instead of some form of debt financing means you won't be saddled with repayments when your company is growing rapidly. And with the one-time large cash injection, you have the potential to bring on an important strategic partner.

Can you make a lot of money in VC? ›

If you're successful, you will build a reputation. This, in turn, will lead to better and higher-profile deals. From there, you can get a job at a venture capital firm, where you might earn a salary of $1 million per year.

Do VC funds make money? ›

VCs raise money from a network of limited partners, who can be wealthy individuals or institutional investors. Venture capital funds make money when a portfolio company exits (e.g., via acquisition or IPO), typically within a 10-year timeframe.

Which VC firms pay the most? ›

GPs, who sit at the top of the ranks at VC firms, have the largest compensation packages. Their yearly bonuses are, on average, larger than an associate's, or entry-level investor's, average base pay.

Does VC pay more than investment banking? ›

Venture capitalists also receive salaries and bonuses. Associates in this field usually make more money than those in investment banking or private equity, with salaries of $150,000 or more common in the first few years.

Is VC or PE better? ›

PE associates can earn up to $400K, compared to $250K at VC. Larger fund size and more money involved are what makes private equity pay higher than venture capital. Moving up the career ladder, a director in PE can earn up to $800K, whereas the number for a partner in VC is $600K.

Who is the most successful VC? ›

Who are the top venture capitalists in the USA
  • Bill Gurley. For over 10 years, he has been a general partner at Benchmark. ...
  • Peter Fenton. Fenton has expertise in open-source technology and has been at Benchmark since 2006. ...
  • Mitch Lasky. ...
  • Matt Cohler. ...
  • Rebecca Lynn. ...
  • Lightspeed Venture Partners. ...
  • Jeremy Liew. ...
  • John Vrionis.
16 Mar 2021

How much money do you need to invest in a VC fund? ›

Most funds, whether venture capital, private equity, or hedge fund, have a standard minimum of $500k. Many funds will agree to lower this amount depending on their strategy, the investor's value-add as a Limited Partner (LP) of the fund, or whether the fund is in high-demand.

How many hours do venture capitalists work? ›

The hours worked vary by firm type and size, but the average is around 50-60 hours per week. That means that you'll be in the office or meetings most of the day on weekdays, with relatively free weekends.

How do people make money with VC? ›

VCs make money in two ways. Venture capitalists make money in two ways. The first is a management fee for managing the firm's capital. The second is carried interest on the fund's return on investment, generally referred to as the “carry.”

Do VC funds pay dividends? ›

​ caution​ Companies backed by traditional venture capital firms will almost certainly not ever issue dividends. Because of this, most founders don't negotiate on dividend rights in term sheets. Venture capitalists are looking for fund-returning results, not 6–8% dividends.

Does VC or PE make more money? ›

In general, you'll earn significantly more across all three in private equity – though it also depends on the fund size. For example, in the U.S., first-year Associates in private equity might earn between $200K and $300K total. But VC firms might pay 30-50% less at that level (based on various compensation surveys).

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