#2 VC Fund Model (Back to Basics)

Welcome to the 23 new members of @TheFundCFO crew that have joined in the last week. Thanks for your support and spreading the word! Every week, we’ll bring you actionable tools, real-world experiences, and insider insights for #VC fund managers, #LP investors, and general industry enthusiasts. #OpenLP

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Today’s Top 3:

• Every VC fund manager needs a fund model (portfolio construction & reserves). Why? Provides a plan for investing, is often required by investors, and can drive outsized returns (and help avoid value destroying mistakes)!

• Keep it Simple: you should be able to explain your fund model on the “back of a napkin” in <30 seconds! We share our starter model below (ask and we’ll send)!

• Start with Excel (the language of most investors); add nuance and scenarios over time via more detailed Excel models, Tactyc, Causal, etc.

Random facts to start 😎: KISS is an American rock band formed in New York City in January 1973. The KISS (keep it simple, silly) principle started in the US Navy in 1960.

We apply KISS to everything we do as a #VC Fund CFO, including fund models & portfolio construction.

Portfolio construction matters to #VC funds and their #LP investors.

The optimal portfolio construction can drive great returns! It can make or break your fund. We believe in the importance of a fund model based on our experience meeting with thousands of #VC funds as investors and #VC fund CFOs.

But don’t just take our word for it! Listen to @fredwilson @usv. He leads one of the best returning #VC firms of all time and continues to share great insights on fund modeling concepts (i.e. recycling and investor relations):

Keep it simple (you need a plan)

KISS. We believe a #VC manager should be able to explain their high-level fund model & portfolio construction in <30 seconds. You may only get a short amount of time and the “back of a napkin” with the right #LP investor. “What’s your plan for portfolio construction?” they’ll ask.

You need a simple yet confident answer. You need a plan. In reality, who knows how it’s all going to play out over the next 2-3 years? You have an idea today but if recent history has taught us anything, it’s that market dynamics change fast (and will continue to do so).

We advise funds to start with a plan then adjust over time as needed. Investors have to deal with a lot of uncertainty when investing in you. Give them one less “uncertainty” to worry about with your plan for the fund model.

Start with Excel (the language most investors understand)

Feeling overwhelmed?!?! Don’t worry, you’re not alone! Many great investors we meet with, especially in #VC, don’t have a finance background building fund models. We’ve got you covered!

Let’s start with an example (write it down on your napkin):

• $50m fund size, invest over 2-3 years, target 5% ownership on average

• $20m in core investments (20 total @ $1m each)

• $10m in non-core investments (20 total @ $500k each)

• $20m held for future investments in breakout companies (i.e. reserved/recycled)

From here, you need to answer the question most investors are asking in their head: what needs to happen for this fund to generate a 3x-5x MOIC (multiple of invested capital or “return on my investment”)? Please note that the 3x-5x MOIC is somewhat arbitrary. Your target can be higher or lower depending on your strategy.

If you invest your $50m fund into a basket of companies and generate total returns of 5x ($250m) over 10 years, great work! Simple math says that if you own 5% of each company on average, that basket of companies is collectively worth $5b. On one hand, that’s a big number! On the other hand, it’s reasonable if you’re in the right market and have the right strategy today! Again, this is an example - adjust as needed.

Now, it’s time to build more detail into your model. Here’s a “simple” Excel version to start. We think about things from both a “top-down” and “bottoms-up” perspective. When this starts to feel complicated, come back to your “back of the napkin” approach and eliminate complexity as you apply this to your own strategy. 

The screenshots above are real exports from our fund model. We’re happy to share it with you, just send us an email to ask and you shall receive!

Go deeper (helpful links & resources)

Once you have your initial fund model ready, you can go deeper for a better understanding and to facilitate better investor conversations. To do this, we recommend checking out more detailed Excel models (shout out to Eniac Ventures), Tactyc, and/or Causal.

While not always required, most #VC managers find this deeper analysis helpful. We do highly recommend #VC fund managers develop a simple plan for their fund model! We hope this is a helpful starting point!

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!”