What's the best way to measure and report the ROI of your VC investments?

1 Choose your method

The first step is to decide how you will calculate the ROI of your VC investments. There are two main methods: the cash-on-cash method and the internal rate of return (IRR) method. The cash-on-cash method simply divides the total cash distributions by the total cash invested, while the IRR method calculates the annualized compound rate of return based on the cash flows and the current value of the investments. Both methods have pros and cons, and you may want to use both or a combination of them depending on your goals, preferences, and data availability.

2 Select your metrics

The next step is to choose which metrics you will use to report the ROI of your VC investments. There are several metrics that can help you capture different aspects of your portfolio performance, such as the total value to paid-in (TVPI), the distributed to paid-in (DPI), the residual value to paid-in (RVPI), and the multiple of invested capital (MOIC). These metrics show the ratio of the current or realized value of your investments to the amount of capital invested. You may also want to use the net IRR, which is the IRR after deducting fees and expenses, to compare your returns with other asset classes or benchmarks.

3 Adjust for risk

The third step is to adjust your ROI calculations for the risk involved in your VC investments. VC investments are inherently risky, as they involve backing unproven startups with high uncertainty and volatility. Therefore, you need to account for the risk-adjusted returns of your portfolio, which reflect the trade-off between risk and reward. One way to do this is to use the Sharpe ratio, which measures the excess return per unit of risk, or the standard deviation of the returns. Another way is to use the J-curve, which shows the typical pattern of VC returns over time, starting with negative returns due to fees and write-offs, and then rising as exits and distributions occur.

4 Benchmark your results

The fourth step is to benchmark your ROI results against relevant peers and industry standards. Benchmarking can help you evaluate how well you are performing relative to other VC funds, sectors, stages, or regions. It can also help you identify your strengths and weaknesses, and improve your decision-making and strategy. You can use various sources of benchmarking data, such as industry reports, databases, or networks, but you need to be careful about the quality, consistency, and comparability of the data. You also need to be transparent and honest about your assumptions and methods when benchmarking.

5 Visualize your data

The fifth step is to visualize your ROI data in a clear and compelling way. Visualizing your data can help you convey your story and insights to your stakeholders, such as your investors, partners, or portfolio companies. It can also help you highlight your achievements and challenges, and showcase your impact and value proposition. You can use different types of charts, graphs, tables, or dashboards to display your data, but you need to make sure they are accurate, relevant, and easy to understand. You also need to use consistent and appropriate formats, colors, labels, and legends to enhance your visualizations.

6 Tailor your reports

The final step is to tailor your ROI reports to your different audiences and purposes. You may have different types of stakeholders who have different interests, expectations, and information needs. For example, your limited partners may want to see detailed and standardized reports on your portfolio performance and returns, while your portfolio companies may want to see more personalized and supportive feedback on their progress and potential. Therefore, you need to customize your reports according to your audience, purpose, and context. You also need to communicate your reports in a timely, frequent, and engaging manner.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?