How can you use deal execution metrics and KPIs to evaluate the performance of a Venture Capital fund?

The input metrics can be further refined by subdividing the deal sourcing Key Performance Indicator (KPI) into cold introductions, deals from accelerators, deals from other venture capitalists (VCs), portfolio founder referrals, and angel referrals. Additionally, recording the number of companies screened out in the initial screening, the number of founder calls that results from this, and the subsequent progression through the funnel to the investment committee in the form of Information Memorandums (IMs) can provide valuable insights.

VC Funds can be measured quantitatively by 2 methods: 1) Output metrics (the most commonly used metrics to benchmark a fund vs others). These include IRR, TVPI, MOIC, DPI, portfolio valuation increase, etc. 2) Input metrics (related to deal sourcing aka the top of the funnel). These may be the sheer number of relevant deals that a fund has in the pipeline. However, these metrics don't really tell you the qualitative nature of the deals in the pipeline. Are they mostly second time founders or a particular professional groups of founders with higher chance of success?

Using deal execution metrics and KPIs to evaluate a venture capital fund's performance involves tracking and analyzing key aspects of the investment process. Key metrics include the Internal Rate of Return (IRR), which assesses the fund’s profitability, & the Multiple on Invested Capital (MOIC), measuring the return on each dollar invested. The time to exit is crucial, indicating the fund's efficiency in realizing returns. The hit rate, or the percentage of successful investments, reflects the fund's ability to pick winners. Monitoring the deal flow rate helps evaluate the fund's market presence & sourcing ability. Additionally, the ratio of follow-on investments can indicate confidence in portfolio companies & the fund's support strategy.

The usual metrics used to assess a venture capital fund's performance are IRR and C-on-C. However, a metric that receives less attention is the Public Market Equivalent (PME). It compares a fund's returns with those of a public market index - helping LPs assess if their investment in the fund was more profitable than an equivalent investment in public markets. A PME above 1 indicates that the fund has outperformed the public markets. Consider a scenario where an LP invests $100M in a fund and receives $200M in return. If, during the same period, an investment of the same amount in the S&P 500 would have returned $207M, the gross PME would be 0.97. In this case, the LP would have been better off investing in the public markets.

When comparing the performance of VC funds, there are several important metrics to consider: TVPI (Total Value to Paid In) - This ratio compares the current value of an asset to the cost of acquiring it. DPI (Distribution to Paid-In Capital) - This ratio measures the cumulative capital distributions to limited partners (LPs) relative to the capital they invested in the fund. From the LPs' perspective, DPI is a more relevant indicator as it shows how much capital the general partner GP returned to investors. The best managers can demonstrate positive DPI even during the investment period of the fund. This metric also facilitates GP comparisons regarding exit realization and returns generated for investors.

From the point of view of an LP that entrusts capital to VCs for management, the most crucial thing is investment returns. Funds that can deliver liquidity while still in the investment period rank among the best. For funds that have been in operation for more than five years, it is also worth considering the aggregate DPI. This is the ratio of all returned funds across all funds to the total capital raised from LPs across all funds. The top funds can show Aggregated DPI > 1.

If that nuanced KPI of the company's business life cycle stage is included as part of their thesis and culture, this will affect the other KPIs. The Venture firm will likely have to make fewer investments, so they can make follow-on investments, this increases the risk within the portfolio, but if architected well could also produce much bigger returns for the limited partners and stakeholders. Above the line perspective on the valuation of unicorns is that they have a huge multi-billion dollar market potential. Unfortunately, that valuation is too often based on the amount of money that has been invested and not based on the actual performance indicators of the company's ability to correlate cash revenue with equity investments.

Deal execution metrics and KPIs are the venture capital navigator. They ensure investors grab the best opportunities, compare notes with the cool kids in the field, and tell a clear, honest story when chatting with partners and regulators. It's like having the keys to the VC kingdom in a nutshell – keeping decisions sharp, vibes good, and everyone in the loop. ????

Deal execution metrics and KPIs are crucial in venture capital as they are the compass guiding investment decisions. They measure a fund's effectiveness in identifying, investing in, and exiting from startups. Metrics like IRR, MOIC, and time to exit provide a clear picture of the fund’s financial health and strategic success. Think of them as vital signs in a medical check-up, offering an objective assessment of the fund’s performance and the health of its investment strategy. Without these metrics, it’s challenging to gauge success or identify areas for improvement.

The KPIs, and how they are established and then subsequently measured, could very well be a game changer in the venture capital arena. Consider that the very market accepted performance of a 10 company VC portfolio actually indicates that most venture capital firms, and as an industry, does little to look at KPIs before during and after the life of the fund. If the expectation is only one out of 10 companies will actually produce the targeted return on investment, that would indicate that if the fund has KPIs, those KPIs are more of a wish list than an actual thesis to test and measure.

Choosing Execution metrics and KPIs for a VC fund is somewhat similar to that of a startup. A lot of the times like startups VCs are stuck with Vanity KPIs like capital deployed, which is important to know how active the VC is but it doesn't show the success of the VC. VCs should be Using Formula: TVPI = (Residual Value + Distributed Value) / Paid-In Capital TVPI is the ratio of the total value of the fund to the paid-in capital. TVPI gives a snapshot of the fund's overall performance, indicating how much value the fund has generated in relation to the capital invested. Another KPI to measure is NPS which is not very common but is really important for long term growth of the fund as this will attract the right founders.

Beware of the use of IRR. While some LPs like to see this metric prominently displayed as it provides a benchmarking tool against other asset classes, IRR is not a "venture native" metric and can be misleading, even more so if based on paper gains. IRR is too short signed for it to be relevant in assessing VC performance as today’s value of cash received in 10+ years is negligible in today’s terms. Companies take time to grow, and can easily take 10+ yrs to exit. After that amount of time, the discounted present value of exit proceeds is too heavily discounted for it to be a reliable metric of performance. I would strongly advice both VCs and fellow LPs to focus on the expected long-term cash-on-cash return (i.e. net money multiple or DPI)

Evaluating the performance of a Venture Capital fund requires a nuanced understanding of deal execution metrics and KPIs. Choosing the right deal execution metrics and KPIs is crucial for an accurate assessment of a Venture Capital fund's performance. Metrics should align with the fund's strategic objectives and investment thesis. Key considerations include the nature of the investments, the fund's stage focus, and the intended time horizon. Effective KPIs often encompass deal sourcing efficiency, due diligence thoroughness, post-investment value addition, and exit strategy effectiveness. Tailoring these metrics to the fund's specific context ensures a more precise and meaningful evaluation.

Choosing deal execution metrics and KPIs is a tailored process, considering the unique goals, strategies, and contexts of each VC fund. Key principles guide this selection: relevance, ensuring alignment with the fund's mission and differentiation; measurability, relying on accurate and consistent data; and actionability, providing insights for informed decision-making and performance improvement. It's about crafting a customized metrics toolkit that speaks to the fund's specific mission and sets the stage for smart, data-driven moves. No one-size-fits-all here – it's all about what makes each VC fund tick. ????

This is a valid point. However, it is also valid that any measurable outcome is only as good as the data that is collected. If the fund only looks at the current valuation, the size of the addressable market, the competitive advantage of the intellectual property, etc, then they risk missing the key value proposition from an investor perspective: how will the company achieve an exit, that isn't bankruptcy? Investing in a company that has the ability to maintain its growth path on its life cycle and demonstrates it has the ability to become independent of investment capital and thrive on customer revenue, will translate to market value in the public market of an IPO and in the traditional criteria of setting the value of an acquisition.

Consider using data analytics software. One example popular among VCs is Betterfront. There are some great data analytics tools out there for VCs to visualize KPIs, investment track record and connect with investors in a data room.

Collecting and analyzing deal execution metrics and KPIs in VC requires a systematic approach. Utilize investment management software to track and aggregate data like IRR, MOIC, and time to exit. Regularly review this data to assess each deal’s performance against the fund's objectives. Analyzing trends over time and comparing with industry benchmarks can provide deeper insights. This informed analysis is key to strategic decision-making and optimizing future investments.

Collecting and analyzing deal execution metrics and KPIs can be challenging, as VC funds often deal with complex, dynamic, and uncertain environments. However, some best practices can facilitate the process. First, the fund should establish a clear and standardized methodology for collecting, storing, and updating the data. Second, the fund should define and apply a consistent and appropriate framework for analyzing the data, using methods and models that can account for the variability, risk, and uncertainty of the deals. Third, the fund should review and evaluate the data regularly and systematically, using dashboards and reports that can visualize and summarize the key findings and trends.

Since the performance of a given fund also depends on its vintage year, analyzing funds' metrics (such as MOIC, TVPI, DPI and IRR) you should compare them to the performance of other same-year vintage funds (median and top quartile) to make sure that you compare apples to apples.

Absolutely. When a VC firm establishes Key Performance Indicators and commits test & measure, adjust and validate, and communicate that to their stakeholders, they begin to perform at a higher standard. The Vc firm should as accountable to their investors ad the companies are accountable to their investors.

To evaluate a Venture Capital fund's performance using deal execution metrics and KPIs, focus on these key indicators: Investment-to-exit ratio shows how many investments lead to successful exits. Time-to-exit tracks how quickly investments turn into returns. IRR (Internal Rate of Return) measures the profitability of investments over time. Assess the fund's deal sourcing efficiency by comparing the number of deals sourced to those actually closed. Finally, the follow-on investment ratio indicates the fund's ongoing commitment to and confidence in its existing investments, highlighting its long-term growth strategy.

When sizing up a VC fund, go beyond the numbers and dive into the stories told by deal execution metrics and KPIs. It's not just about returns; it's about the startups transformed, the strategic gems unearthed, and the lessons etched in the journey.