Fund Economics

Yes. The goal is to establish a multi-fund relationship, where the carry declines from 5%, 4% and then 3% for each subsequent fund.

Yes. The goal is to establish a multi-fund relationship, where the carry declines from 5%, 4% and then 3% for each subsequent fund.

Management Fees are not related to the GP investment nor any Carried Interest paid to the GP.

Management Fees are not related to the GP investment nor any Carried Interest paid to the GP.

This really depends on how many deals that you are going to be doing per year. If you assume 8 deals per year with $5K to $10K per deal, depending on complexity, plus random other needs, then you could be at $50K to $100K per year.

This really depends on how many deals that you are going to be doing per year. If you assume 8 deals per year with $5K to $10K per deal, depending on complexity, plus random other needs, then you could be at $50K to $100K per year.

The distribution waterfall is a methodology for splitting distributions between the GP entity and Limited Partners. Typically, the GP takes 20% carried interest on profits. The distribution waterfall outlines how and when this carried in...

The distribution waterfall is a methodology for splitting distributions between the GP entity and Limited Partners. Typically, the GP takes 20% carried interest on profits. The distribution waterfall outlines how and when this carried interest is allocated. An American waterfall refers to a deal-by-deal method of allocating carried interest. This means that the GP entity receives carry on a deal-by-deal basis before investors are made whole overall. This allows the GP to receive carried interest sooner. The American waterfall is juxtaposed with the European waterfall with is a method by which all Limited Partners’ capital contributions (including unrealized investments) have been repaid before the GP entity receives its carried interest. While the American waterfall allows you to take carry earlier usually, in practice, you should not take the entirety of your share of carried interest until Limited Partners are made whole to avoid having to clawback the GP carried interest.

A metric of the ratio of Total Value of a fund based on valuation of the investments relative to the Paid-In capital. This is often used as an interim indicator of fund performance. TVPI is basically equivalent to MOIC. TVPI is calculat...

A metric of the ratio of Total Value of a fund based on valuation of the investments relative to the Paid-In capital. This is often used as an interim indicator of fund performance. TVPI is basically equivalent to MOIC. TVPI is calculated as the sum of the realized return and the remaining unrealized return divided by the total capital paid in to the investment. Here's the formula for TVPI: TVPI = (Realized Value + Residual Value) / Total Paid-In Capital In a simplified example, suppose a venture capitalist (VC) invested $5 million in a tech startup. 1. Realized Value: After two years, the VC sold a portion of their shares for $3 million. This amount is the realized value. 2. Residual Value: The VC still owns some shares in the startup, which are currently valued at $4 million. This amount is the residual or unrealized value. 3. Total Paid-In Capital: This is the initial amount that the VC invested in the startup, which in this case is $5 million. So we can plug these numbers into the formula to calculate the TVPI: TVPI = ($3 million Realized + $4 million Residual) / $5 million Paid-In Capital TVPI = $7 million / $5 million TVPI = 1.4x The TVPI of 1.4x means that for each dollar invested, the VC has so far received 1.4 times that amount back in realized value, and still has additional unrealized value remaining in the investment.

One very large return drives the overall results. Why VC funds are looking for outliers.

One very large return drives the overall results. Why VC funds are looking for outliers.

A metric that describes the value or performance of an investment relative to its initial cost. This is often used as an interim indicator of fund performance. This is distinct from TVPI (Total Value to Paid In) in that fund fees and cos...

A metric that describes the value or performance of an investment relative to its initial cost. This is often used as an interim indicator of fund performance. This is distinct from TVPI (Total Value to Paid In) in that fund fees and costs are not subtracted from the metric, so presents a better view of investment performance.

The annual management fee that is allocated to the General Partner (GP) as % of committed capital. 2% is relatively standard, smaller funds may have higher fees.

The annual management fee that is allocated to the General Partner (GP) as % of committed capital. 2% is relatively standard, smaller funds may have higher fees.

The internal rate of return that a fund must achieve before its general partners (managers) may receive a portion of the proceeds of the fund.

The internal rate of return that a fund must achieve before its general partners (managers) may receive a portion of the proceeds of the fund.

The time allowed for a fund to deploy capital into investments. Usually 24 - 36 months.

The time allowed for a fund to deploy capital into investments. Usually 24 - 36 months.

A standard financial measurement used for investments - based on cash flows. For benchmark, good real-estate investments return 8-11%, upper-quartile VC funds (after 7-10 years) achieve IRR averaging 20% (but with standard deviation of 3...

A standard financial measurement used for investments - based on cash flows. For benchmark, good real-estate investments return 8-11%, upper-quartile VC funds (after 7-10 years) achieve IRR averaging 20% (but with standard deviation of 30!) Note that measuring IRR only makes sense after investments have exited, a single large return will drive all of the fund stats (and make everyone happy). See Power Law.

For VC funds, this is usually 10 years with optional extensions.

For VC funds, this is usually 10 years with optional extensions.

The ratio of actual returns to LP (distributions) to their paid-in capital.

The ratio of actual returns to LP (distributions) to their paid-in capital.

The Fund investments - for Venture Capital funds this is equity as SAFEs, Convertible Note or Stock Purchase investments in non-public startup companies.

The Fund investments - for Venture Capital funds this is equity as SAFEs, Convertible Note or Stock Purchase investments in non-public startup companies.

Limited Partner (LP) commitments to invest in the fund - defined in signed Limited Partner Agreements (LPAs) and Subscription Agreements. Decile’s Cornerstone LPA template integrates a Subscription Agreement - a separate one is not requi...

Limited Partner (LP) commitments to invest in the fund - defined in signed Limited Partner Agreements (LPAs) and Subscription Agreements. Decile’s Cornerstone LPA template integrates a Subscription Agreement - a separate one is not required.

The percentage of profits that will be paid to the General Partner (GP) - calculated following repayment of invested capital.

The percentage of profits that will be paid to the General Partner (GP) - calculated following repayment of invested capital.

Shorthand for 2% management fees and 20% carried interest

Shorthand for 2% management fees and 20% carried interest

The size very stage specific. At seed average is 20-25. At pre-seed it’s more. At Series-A you can do less.

The size very stage specific. At seed average is 20-25. At pre-seed it’s more. At Series-A you can do less.

Minimum commitment should be $100k The ideal # of LPs is in the range of 25 - 50.

Minimum commitment should be $100k The ideal # of LPs is in the range of 25 - 50.

The General Partners jointly contribute 1%, splitting portions of the 1% between them according to an agreement. This agreement is usually based on the ownership of the General Partnership. Technically, the General Partnership is an enti...

The General Partners jointly contribute 1%, splitting portions of the 1% between them according to an agreement. This agreement is usually based on the ownership of the General Partnership. Technically, the General Partnership is an entity, and General Partners are owners of the entity.

The recommendations taking into account fund size. We’re assuming larger fund sizes at later stages. This is just a guide and it’s ok if you deviate from it. At the Series A, the # of investments will be greatly affected by your time....

The recommendations taking into account fund size. We’re assuming larger fund sizes at later stages. This is just a guide and it’s ok if you deviate from it. At the Series A, the # of investments will be greatly affected by your time. Each partner can only sit on a finite # of boards. With your example above, each partner will have to sit on 10+ boards, which is a lot.

Try to optimize for the lower fund size. You will raise a series of funds, and they will likely grow in size.

Try to optimize for the lower fund size. You will raise a series of funds, and they will likely grow in size.

The active investment period of a fund starts when the fund is formed and closes.

The active investment period of a fund starts when the fund is formed and closes.

they are usually pretty similar

they are usually pretty similar

It all depends on what is spelled out within the legal documents, but most times, management fees are calculated on committed capital.

It all depends on what is spelled out within the legal documents, but most times, management fees are calculated on committed capital.

It’s money paid in by LPs

It’s money paid in by LPs

There are 10 years (usually) of annual Managment Fees, so 10 times 2% is 20%.

There are 10 years (usually) of annual Managment Fees, so 10 times 2% is 20%.

LPs typically expect that GPs contribute 1% to the fund. Think of it like skin in the game. This can be done via cash, or, via equity from a warehouse investment. So, for example, if you have equity in company, you can contribute that i...

LPs typically expect that GPs contribute 1% to the fund. Think of it like skin in the game. This can be done via cash, or, via equity from a warehouse investment. So, for example, if you have equity in company, you can contribute that instead of cash to make up the 1%.

Each investor will be charged retroactively on the date they are admitted into the fund, as if they were part of the first close. If the first close is $2.5MM with a management fee of 2%, the fees will start at $50k per year or $12.5k q...

Each investor will be charged retroactively on the date they are admitted into the fund, as if they were part of the first close. If the first close is $2.5MM with a management fee of 2%, the fees will start at $50k per year or $12.5k quarterly.  If a second close takes place 3 months into the life of the fund, bringing the new fund size to $5MM, the LPs that are part of this second close would be charged a catch up fee for the first 3 months of the fund, on the day they are admitted. This would bring the management fees to $100k per year or $25k quarterly.  In the end, each investor will have a 2% management fee charged to their Capital Account balance in the first year of the funds life. 

It’s more of an exception and you should try to avoid hurdles.

It’s more of an exception and you should try to avoid hurdles.

There is no ‘right’ way to diversify. 25 companies is a good starting point, but for some 50 may make more sense, while for others 20. At pre-seed, it’s super risky, so you need to make more bets.

There is no ‘right’ way to diversify. 25 companies is a good starting point, but for some 50 may make more sense, while for others 20. At pre-seed, it’s super risky, so you need to make more bets.

Normally not, but it depends. Most Venture Studios or Venture Builders or Company Builders are funded like startups, but there is a lot of variation worldwide.

Normally not, but it depends. Most Venture Studios or Venture Builders or Company Builders are funded like startups, but there is a lot of variation worldwide.

As an investor you expect to bear diligence costs, especially  1) you (or your team) should have the significant expertise in your thesis sector to evaluate a deal;  2) an investment isn’t a sure thing - so asking a company to pay for di...

As an investor you expect to bear diligence costs, especially  1) you (or your team) should have the significant expertise in your thesis sector to evaluate a deal;  2) an investment isn’t a sure thing - so asking a company to pay for diligence in advance is unethical;  3) with the possible exception of a specific key technology that is completely novel and proprietary which would require a specific expert to evaluate 4) additionally, if the deal is in demand you need to do my diligence quickly…

I would not model them, no. Clawbacks are unusual circumstances that don't occur unless the fund is in trouble. Catch-ups we do not recommend.

I would not model them, no. Clawbacks are unusual circumstances that don't occur unless the fund is in trouble. Catch-ups we do not recommend.

here you go: https://foresight.is

here you go: https://foresight.is