#Venture capital fund how to#

I focus on creating models that help managers understand their strategies, using their expectations of their investment thesis to understand if their strategies “work” based on their assumptions. Extreme outcomes from a small number of investments usually drive overall portfolio returns, and the resulting power laws make it difficult to create deterministic forecasts of when and how these extreme outcomes will happen. The best models for venture funds are built with the intent of reflecting their investment strategies. Contact me if you have questions on modeling alternative venture structures. For this post, we will focus on closed-ended venture funds making investments into equity or equity-like structures (convertible notes, SAFEs, SAFTs, and other token structures). Open-ended venture funds, evergreen funds, venture debt, revenue-sharing venture funds, and fund of funds share many similarities regarding capital budgeting and deployment, but often differ in the timing and nature of proceeds and recycling. Similarly, hedge funds have different structures and expectations around investment and limited partner liquidity, making them substantially different from venture funds. Private equity funds and real estate investment funds often have fund structures and expectations in how and when proceeds are received that differ substantially from venture capital funds. Modeling a venture fund can vary from modeling other types of private equity investments.

#Venture capital fund how to#

For background on that topic, I’ve written a post for AngelList, How to Make a Budget for a Rolling Fund that provides advice that’s comparable for modeling management companies managing any type of fund. This post will focus on creating a model for a fund, not for the management company. to create a forecast of cash flows and financials. Modeling the management company is similar to modeling any operating company, and typically consists of modeling revenues - primarily management fees from the fund(s) - and expenses - salaries, overhead, legal, accounting, travel, etc. A model for the management company, the entity managing the fund (or multiple funds).A model for the fund, the entity making the investments.Modeling a venture fund typically consists of two models: Forecast and Key Reports for a sample Venture Fund. My goal from this post is for you to come away with a solid idea of what it means to create a financial model for a venture capital fund, the various ways you can create a portfolio construction and operating cash flow model, and provide you with templates and examples that you can use for modeling your fund.

I’ve worked with managers that have raised hundreds of millions of dollars from limited partners around the world, mentored at accelerators for prospective fund managers, and worked directly with angel investors and venture capitalists analyzing their investment portfolios and potential returns. Create a point of view on how your thesis aligns with typical investments in your industry, and create a grounded range of expectations of how those investments will generate returnsĪs the founder of Foresight, and an ex-venture capitalist, I’ve worked with over six hundred emerging and prospective venture fund managers creating financial models for portfolio construction and operating cash flows for their first funds.

Demonstrate to potential limited partners that you have a solid plan on how to deploy capital towards your investment thesis.

Create a forecast of capital reserves and operating budgets so you can plan capital deployment, hiring, and operational strategies.

Reflect your investment strategy, primarily in terms of check sizes, follow on reserves, and investment deployment timelines, and make sure that your strategy reflects reasonable benchmarks and expectations.

Outline to potential limited partners the fund’s expenses, your fees for operating the fund, and their expected capital calls.

While creating a financial model for a venture capital fund is difficult, given the speculative nature of forecasting investment results, the act of creating a forecast is still valuable, as it allows you to: As a prospective or emerging fund manager, you will spend most of your time crafting your investment thesis, and detailing how and why founders and investors should work with you, towards creating a point of view on how you will create a successful venture fund.Ĭreating a financial model for your fund allows you to detail your thesis and strategy in quantitative terms, to create some expectations for how you will spend your investors’ capital and generate returns on your investments.