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- #157 VC Fund Budgets & Models, Unpacked
#157 VC Fund Budgets & Models, Unpacked
👋 Hi, I’m Doug! Welcome to @TheFundCFO crew! Every Tuesday/[Thursday], we publish VC/CFO insights that matter - highlights from notable VC GPs, LPs, and CFOs/finance pros. Check out our VC Fund Playbooks, Models, Budgets, & Compliance Checklists @ Streamlined.Fund! Love what we’re doing? Consider upgrading to paid for deeper dives on Thursdays (most paid subscribers expense these insights!).
“In the end, it’s not the years in your life that count. It’s the life in your years.” -Abraham Lincoln
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We’ve been really impressed with recent thought leadership pieces from Vector. Here are some of our favorite takes on fund budgeting and portfolio construction:
“Effective fund management requires an understanding of the various expenses involved. Fund expenses and management company expenses are two primary categories that every fund manager must plan for over the lifetime of the vehicle.
Fund expenses are typically borne by the fund/investors and these expenses are paid directly from the fund’s assets.
Management fees, paid by investors as a part of their capital commitment to the fund, are typically a percentage of the committed capital (or invested capital, though generally that strategy is less common in VC and utilized in the latter half of a fund’s life) and are paid to the fund managers.
The difference between fund expenses and management company expenses are typically defined by the fund’s governing documents. For Registered Investment Advisers, the allocation of expenses between the fund and the management company are often highly scrutinized by the regulators, and adherence to fund’s governing documents is paramount.”
A recent X post from Martin Tobias on VC fund math inspired us while also reminded us that VC is hard! You have to worry about things like dilution, protecting your ownership, etc. to hit a 10x return on just one investment. Then to have a great fund, you really need a 100x fund driver. That’s hard to get!
We’ve written about this topic extensively (more below). In the meantime, we’ll pass the mic to Martin to share more on his 15.6x mark-up that was really a 5.5x after accounting for dilution (spreadsheet linked in thread):
“Making 10X in Venture is more complicated than most people think. I recently invested in a $16M post, and the company just raised a $250M post. Up 15.6X? No, only up 5.5X. Here is the math. For early investors to make 10X, the valuation has to be over 40X higher than our entry price. It is much harder for VCs to get outlier returns than most understand.”
We’ve written about VC Power Laws & RTF Math (w/ Template) many times but it keeps coming back up! How Can This Deal RTF? The Investing Math (Yes or No)
Every venture fund manager I know wants to deliver superior performance. Before investing in any deal, a VC fund investor should ask: “How can this deal RTF? Or 2x, 3x RTF? What do I need to believe about the future for that to happen?” There’s always a story around things like an amazing founding team and an exciting market to capture. What about the math to RTF?
It’s possible to lose sight of RTF math as a VC fund investor moves quickly to close an investment. In response to this challenge, we’re sharing a simple RTF Calculator for VC fund investors to use when thinking about a new investment opportunity.
Read more on this here: #154 VC Fund Math: The Path to 10x+
As we approach the end of another quarter, we’re revisiting one of our favorite posts that touches on playbooks, models, and budgets. You can see the full post linked above. Here are a few things to highlight:
Cash Flow Management: Cash flow is king, especially in the early stages of any company, VC or portfolio. Make sure you have a clear understanding of your burn rate and budget. This will help you make informed decisions about your spending.
Budget: complete budget vs. actual for current quarter; confirm/update forecasts for next quarter and rest of year.
Budget template: want access to our budget template for free?! Check out the link at the top of this post!
That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”