Unlocking VC Performance: Key Fund Metrics

Tracking key metrics is essential to assessing Venture Capital (VC) fund performance and aligning investor expectations with fund outcomes. Emerging funds often rely on these metrics to build credibility, while established funds use them to sustain LP relationships and drive reinvestment. This article provides an overview of the key metrics, their formulas, when each becomes relevant, and examples for both emerging and established funds.

1. Internal Rate of Return (IRR)

Formula: IRR is the discount rate that makes the Net Present Value (NPV) of all cash flows (inflows and outflows) from a fund equal to zero. It’s calculated iteratively since there is no simple formula.

NPV = Σ (Cash Flow_t / (1 + IRR)^t ) = 0

• Timeline: Relevant mid-to-late stage, once initial portfolio company exits have occurred or significant valuation gains are visible.
• Example Calculation: If an emerging fund invested $2 million, and after three years, exits generated $5 million, IRR would be approximately 44.22%.
• Importance for Emerging Funds: Emerging funds face IRR fluctuations early on. However, as portfolio companies start to exit, a high IRR showcases value creation potential and reassures LPs.
• Importance for Established Funds: Established funds rely on IRR for performance consistency. Steady IRR demonstrates the fund’s reliability in achieving expected returns, securing LP reinvestment.

2. Multiple on Invested Capital (MOIC)

Formula:

MOIC = (Realized Value + Unrealized Value) / Total Invested Capital

• Timeline: Relevant from early to late stages, as it reflects the cumulative value of investments without the time sensitivity of IRR.
• Example Calculation: If a fund invested $10 million and the current total value (realized and unrealized) is $25 million, then MOIC = 2.5x.
• Importance for Emerging Funds: MOIC allows emerging funds to show value growth before major exits. Even if IRR is low due to early investments, a rising MOIC reassures LPs of the fund’s upward trajectory.
• Importance for Established Funds: Established funds use MOIC alongside IRR to demonstrate consistent value creation over time. A high MOIC signals strong portfolio growth and increases LP confidence.

3. Cash-on-Cash Return (CoC)

Formula:

Cash-on-Cash Return = Total Cash Distributions / Total Invested Capital

• Timeline: Most relevant in mid-to-late stages as it quantifies liquidity and cash payouts to LPs.
• Example Calculation: If a fund has invested $5 million and returned $8 million in cash distributions, then CoC = 1.6x.
• Importance for Emerging Funds: CoC is often limited in the early years but becomes relevant as initial exits are realized. Showing CoC growth can strengthen LP trust by evidencing cash returns.
• Importance for Established Funds: Established funds use CoC to demonstrate liquidity. Higher CoC ratios indicate a fund’s ability to generate real returns, appealing to LPs looking for reliable payout schedules.

4. DPI (Distributions to Paid-in Capital)

Formula:

DPI = Cumulative Distributions / Paid-in Capital

• Timeline: Primarily late stage, reflecting capital returned to LPs in relation to what was invested.
• Example Calculation: If LPs contributed $15 million, and the fund has distributed $18 million in returns, DPI = 1.2x.
• Importance for Emerging Funds: Emerging funds may not achieve significant DPI until later. However, as they reach initial exits, DPI reinforces credibility by showing real returns to LPs.
• Importance for Established Funds: DPI is a key indicator for established funds, showing the proportion of returns already distributed. High DPI values are critical in LP reinvestment decisions, as they highlight cash flow performance.

5. Total Value to Paid-in Capital (TVPI)

Formula:

TVPI = (DPI + Remaining Portfolio Value) / Paid-in Capital

• Timeline: Useful throughout the fund’s life, but especially relevant from the mid stage, combining both realized (DPI) and unrealized returns.
• Example Calculation: If paid-in capital is $20 million, DPI is $5 million, and the remaining portfolio value is $30 million, then TVPI = (5 + 30) / 20 = 1.75x.
• Importance for Emerging Funds: Emerging funds use TVPI to show potential upside even without significant exits. A high TVPI value can attract LPs, as it showcases unrealized but expected value.
• Importance for Established Funds: Established funds rely on TVPI to provide a holistic picture of the fund’s performance. High TVPI assures LPs that both realized and potential returns are on track.

6. Residual Value to Paid-in Capital (RVPI)

Formula:

RVPI = Remaining Portfolio Value / Paid-in Capital

• Timeline: Mid-to-late stages, reflecting unrealized value in the portfolio.
• Example Calculation: If the fund’s remaining portfolio is valued at $12 million with paid-in capital at $10 million, then RVPI = 1.2x.
• Importance for Emerging Funds: RVPI can show growth potential, reassuring LPs about the value yet to be realized. It is particularly useful when most of the portfolio remains active with unrealized gains.
• Importance for Established Funds: Established funds use RVPI to showcase potential future returns in conjunction with DPI, balancing current distributions with unrealized portfolio growth.

7. Public Market Equivalent (PME)

Formula: PME compares the performance of a private investment against a public index. A PME greater than 1 indicates the fund has outperformed the public market.

PME = Fund Returns / Market Benchmark Returns

Timeline: Most relevant in later stages or at the end of a fund’s life to provide a benchmark comparison.

Example Calculation: If a VC fund generated 15% annualized returns while the benchmark index returned 10%, PME would be 1.5.

Importance for Emerging Funds: Emerging funds may not focus on PME initially, given their shorter history. However, a favorable PME can support performance narratives as the fund matures.

Importance for Established Funds: Established funds use PME to showcase value generation relative to public alternatives, reinforcing VC’s appeal as a strong alpha source.

Final Thoughts

Monitoring these metrics is foundational to a VC fund's success. Emerging funds use them to validate performance and secure future investments. For established funds, consistent metrics provide a track record that strengthens LP loyalty. Understanding these metrics—and when they matter—helps VC managers communicate effectively with LPs, adapting strategies that reinforce confidence and long-term value.