How do you report venture capital returns to investors?

1 TVPI and DPI

Two of the most common metrics used by VC funds to report their returns are total value to paid-in capital (TVPI) and distributions to paid-in capital (DPI). TVPI measures the current value of the fund's portfolio, including both realized and unrealized gains, divided by the total capital invested by the fund. DPI measures the cash returned to the investors, divided by the total capital invested by the fund. Both metrics are expressed as multiples, such as 2x or 3x, indicating how much the fund has generated or returned for each dollar invested.

2 IRR and MOIC

Another pair of metrics used by VC funds to report their returns are internal rate of return (IRR) and multiple of invested capital (MOIC). IRR measures the annualized compound return of the fund, taking into account the timing and size of the cash flows. MOIC measures the total value of the fund's portfolio, including both realized and unrealized gains, divided by the total capital drawn down by the fund. Both metrics are expressed as percentages, such as 20% or 30%, indicating the annualized or cumulative return of the fund.

3 Benchmarking and Peer Comparison

To put their returns in perspective, VC funds often compare their performance to relevant benchmarks and peer groups. Benchmarks are standardized indices that represent the average or median performance of a specific market, sector, or stage. For example, a VC fund may use the Cambridge Associates US Venture Capital Index as a benchmark for the US VC market. Peer groups are customized cohorts of similar funds that share characteristics such as vintage year, fund size, strategy, or geography. For example, a VC fund may use a peer group of other early-stage funds in Europe that were raised in the same year.

4 Reporting Frequency and Format

VC funds typically report their returns to their investors on a quarterly or annual basis, depending on the fund's terms and preferences. The format and content of the reports may vary, but they usually include a summary of the fund's performance, a breakdown of the portfolio by company and sector, an update on the fund's activities and milestones, and a commentary on the market trends and outlook. Some VC funds may also provide additional information, such as case studies, exit scenarios, or impact metrics.

5 Reporting Challenges and Best Practices

Reporting venture capital returns is not a straightforward or simple task. VC funds face several challenges and complexities, such as valuing illiquid and volatile assets, accounting for fees and expenses, adjusting for currency fluctuations, and dealing with different reporting standards and expectations. To overcome these challenges and ensure accurate and consistent reporting, VC funds should follow some best practices, such as using reputable valuation methods and sources, applying clear and fair allocation rules, disclosing relevant assumptions and caveats, and engaging with their investors regularly and honestly.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?