Note: This article is the nineteenth in an ongoing series on 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.
In Part I of this article we discussed the importance (and legal requirement) of reporting for early stage funds and what information a fund manager needs to properly track performance. Now we'll take a closer look at the most critical metrics used to measure performance, what information should be included when sending reports to LPs, and how to best communicate with investors.
What are the key metrics that every early stage fund manager should track to measure their fund’s performance relative to other early stage venture funds? What information do I need to include when sending out a report to the fund’s Limited Partners?
Good reporting should go beyond the legally required elements in quarterly statements: high level fund performance, fees, and expenses. Good reporting on fund performance is best thought of like an onion or a Russian nesting doll: from the center outward, you are addressing increasingly broad contexts:
-
At the center, there is the question of how a particular investment in a particular round performed
-
Then, how that company has performed
-
Then, how your overall fund has performed
-
Then, how that fund compares to similar VC funds of the same vintage
-
And finally, how those VC vintage returns compare to broader market averages - the returns your LPs could have achieved in other less risky more liquid investments.
Different LPs may vary in their patience, forgiveness and attention to detail, but overall, this is a very well-quantified business and there is really nowhere to hide in terms of performance and reporting. For a little bit of general context on what good performance looks like, this discussion provides a high level overview.
For your day-to-day, quarter-to-quarter reporting, you are going to focus on changes to the inner circles: new rounds, new companies, updated valuations and fund performance since the last report. But the reality of the venture industry is that your micro-reporting is always happening in a macro context. This is a very well-quantified industry and you are always going to be compared to other early stage venture funds and to broader markets by various rating agencies such as major player, Cambridge Associates. And, over time, your fundraising success will be gated by how you perform in those comparisons.
To help you figure out how to construct your reporting, let’s look at a menu of the potential contents of a typical quarterly or annual report. The report will be customized for each LP to reflect their specific holdings, but certain “fund overview” elements will be the same for every LP, so we have broken it down that way. This list is intended to be fairly comprehensive for educational purposes, so your final report design might not need to include every item.
Common “Fund Overview” Elements Included in All Regular Statements and for all LPs *
-
Table of holdings
-
Portfolio Company Updates - Section of the report with brief written updates on each company (can be at the end of the report but must include company name, website, industry, brief product description, followed by a paragraph giving an update on the company’s status)
-
Fund’s Investment Basis and Current Valuation
-
Current Total (fund holdings) Value to Paid- In Capital (TVPI)
-
Change in Value over the past quarter (qtr) and year to date (ytd)
-
IRR if liquidated at current valuation
-
Residual Value to Paid- In Capital (RVPI)
-
Total Cash Returned
-
Distributed to Paid- In Capital (DPI)
-
Valuation + Cash Returned
-
Combined Exit Multiple
-
Cumulative IRR from all Exits to date
-
Changes in the portfolio holdings during quarter: New Companies/Funds, New Rounds, Amount Invested, Amount Returned
-
Portion of fund’s value per company
-
Transactions during quarter
-
Investments and returns per each year
-
Investments and returns with returns matched to original year of investment
LP Specific Measures to be Reported on a Per LP Per Statement Basis
-
Capital Committed, Capital Called, Amount Outstanding
-
Fees Paid
-
Table of holdings reflecting LP’s percentage ownership
-
LP’s Investment Basis and Current Valuation reflecting LP’s percentage
-
Change in Value over the past qtr and ytd reflecting LP’s percentage
-
Total Cash Returned reflecting LP’s percentage
-
Valuation + Cash Returned reflecting LP’s percentage
-
Changes in the portfolio: New Companies/Funds, New Rounds, Amount Invested qtr, Amount Returned qtr reflecting LP’s percentage
Industry Comparison Benchmarks Which Will Be Applied to Your Fund Regardless and Should Be Included in Reporting
-
Categorizations in terms of your fund’s size, focus, region, using standard VC industry classifications
-
Pooled Return of Similar Funds Compared to Public Market Equivalents on a 1-Year, 3-Year, 5-Year and longer basis
-
Since Inception IRR & Multiples by Fund Vintage Year
-
Since Inception IRR & Multiples Compared to Public Market Equivalents on a 1-Year, 3-Year, 5-Year and longer basis
-
Since Inception IRR Based on Fund Focus, i.e. compared to similarly focused funds and fund sizes
-
Since Inception IRR Based on Fund Region, i.e. compared to funds in your region
-
Since Inception IRR by Company’s Initial Investment Year i.e. compared to the general returns of investments in those industries that year.
And a final note on very specific types of funds such as impact funds, university funds, or other affiliated funds: there are many additional measures that may be appropriate for special kinds of funds. Social Impact funds may want to measure the impact they are having (jobs created, additional money attracted from other investors, founder gender or ethnicity, etc.). Funds focused on geographical diversification may want to include geographical measures such as holdings by region or state. Industry sector funds may want to have special sector-specific measures relating to that industry sector. I go into more detail on social impact investor metrics in Part III of Essentials of Venture Capital Fund Reporting.
* Be sure your report format specifically incorporates the legally required elements in the SEC’s 2023 rules .
Besides written quarterly and annual reports, in what other ways should I communicate with my Limited Partners?
If the regular written reports are about keeping LPs informed, the other channels are about building enthusiasm, rapport and credibility and showing a little bit more of your personality and the firm’s culture and mode of operating. Methods of rapport-building include a variety of things - obviously the bigger funds with more resources will be able to do more - but here are a few examples:
Regardless of size, you should plan annual meetings between fund management and LPs. Most funds should consider an annual social event for LPs that also includes portfolio CEOs. Rapport can be built through events which serve a dual purpose (i.e.community-building as well as investor relations): theme oriented events and conferences, possibly with social or cocktail components afterwards, or community events or open-houses where LPs are on the guest list. Even if they don’t come, it shows the LPs that the fund is active and engaged in its community.
It is also a good idea to keep track of where all your key LPs are located and try to include a meal or a coffee with them when you are traveling in or near their city. You don’t want to impose too much on their time, so make sure they are keen to do it, but making the offer can go a long way in building rapport. In so doing, you will want to be careful about selectively disclosing material information to some LPs but not others. The SEC rules applicable to VCs funds are much less restrictive than those governing mutual funds and listed companies, but you would not want to have LPs question whether you are fair, even-handed and above board at all times.
Other outreach modes that are worth considering, because of their brand- and reputation-building potential, include blogs, social media feeds such as a Twitter or Instagram account, podcasts or speaking engagements. These approaches may be less direct with respect to LPs because they may be positioned as advice for entrepreneurs, or general commentary on company building or the VC industry. But, they are worth considering because they build credibility and brand awareness with both prospective entrepreneurs and prospective LPs. They also allow your LPs to tune in if they have the time or interest, but tune out and focus just on your objective reporting if their plate is very full.
We've talked a lot about the importance of reporting and communicating with LPs. In Part III of the is article we will focus specifically on social impact investor metrics and what information partners need to effectively track performance.
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.
