#17 RTF (Return The Fund) Math

Gm crew! Remember, you can’t spell “fund finance” without “FUN” :)!

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Why RTF? A VC Fund Needs Home Runs to Win

Last year, we wrote that every VC fund manager needs a fund model (portfolio construction and reserves). Why? A fund model provides a plan for investing, is often required by investors, and can drive outsized returns (and help avoid value-destroying mistakes)!

While our fund models typically get super-detailed with various scenarios in play, we always find it helpful to simplify VC fund math (credit Fred Wilson in 2008) to something like the following:

• 1/3 of your investments lose money

• 1/3 of your investments breakeven

• 1/3 of your investments make money, with “~6% of investments generating ~60% of total returns” (credit Chris Dixon on the power law, citing Horsley Bridge industry data)

This point can’t be overstated! In a VC fund portfolio with 30 investments, this means that ~2 companies will drive ~60% of the total returns. 

You need to hit home runs to deliver superior performance to your investors!

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.

In the example below, a $50m fund making a $2m investment will require a $1b outcome to RTF (assuming a $20m valuation and 50% dilution). These assumptions can vary by fund strategy and sector focus so modify as you see fit!

Additional Resources

“Performance Data and the ‘Babe Ruth’ Effect in Venture Capital” by Chris Dixon

“Picking winners is a myth, but the PowerLaw is not” by Clint Korver

“Venture Fund Economics: When One Deal Returns The Fund” by Fred Wilson

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!”