A Guide to Managing a Venture Capital Fund

The Basics of Managing a Venture Capital Fund

1.1. The Role of a General Partner / Fund Manager Explained

The general partner (GP) is an individual that manages a venture capital fund. Their role is twofold: on one hand, general partners raise and allocate pooled capital from investors, and on the other, they provide support to invested businesses. 

Typically, general partners have expertise in business analytics, examining business models, and analyzing market and industry trends – this allows them to make decisions effectively on behalf of a fund and assist companies that are part of a venture fund’s portfolio. GPs are ideally specialized in a specific industry they invest in, such as software, fintech, healthcare, consumer information services, and so on. 

In contrast to other investors in a VC fund (called Limited Partners) whose job is practically done after they commit the funds, general partners are actively involved in the whole process of venture fund operations. 

Here’s an overview of general partner’s responsibilities: 

Securing Capital for the Fund

In case the venture capital fund is managed by high-profile individuals in a given industry, raising capital from investors is not too much of a challenge. But if you’re building your reputation as a venture fund manager or GP, this can be an extremely demanding responsibility. Many limited partners actually rely on the general partner’s track record and successful background in venture capital. Raising funds is one of the key responsibilities of a general partner.

Sourcing Deals

General partners are also responsible for sourcing and investing in profitable ventures that will yield returns for limited partners. Their success is measured by their ability to make sound investments that will not only increase their partners’ profits but also maintain the venture capital firm’s credibility to run future funds. Thus, before investing in a new venture, GPs must conduct thorough due diligence by examining the business model, products, management, and operating history of the startup.

VCs may choose to invest in businesses that are not yet available on the equity market but are ready to commercialize their products or services. This approach reduces the time and resources that would have been spent on an early-stage startup with a higher risk of failure. It is important to note that GPs must ensure most favorable deal terms to benefit their limited partners.

Maximizing Portfolio Value

GPs are closely monitoring the progress and performance of startups in their portfolio after they’ve made the investment. In many cases, they provide support to company founders by introducing them to potential customers, suppliers, or professionals that could join the startup’s team. Besides that, GPs can offer expert advice and consulting services, as well as help in raising additional capital if needed. 

Administration 

General partner is there to make sure that tax reporting, accounting, and other administrative tasks related to the venture fund are being executed. 

Team Development and Reporting to LPs

Often, GPs assemble a team to help manage the operational tasks of their fund, as well as to conduct thorough due diligence on potential deals. In addition to these responsibilities, general partners are accountable for providing regular updates on the fund’s investment performance to limited partners. This guide will cover all the essential aspects of venture capital fund management, so keep reading!

1.2. Key Considerations for Being a Successful Venture Capital Fund Manager

Venture capital has become an increasingly popular investment class in recent years. While many entrepreneurs seek VC funding to fuel their growth, numerous investors are attracted to the potentially high returns that come with successful VC investments. However, starting and managing a VC fund is not an easy task, to say the least. In this section, we will explore some key considerations for being an efficient venture capital fund manager.

Strategy

The first and most crucial step in setting up a VC fund is defining its investment strategy. A well-defined investment strategy is essential to attract limited partners (LPs) and to ensure that the fund is successful in achieving its objectives. 

A successful investment strategy needs to define factors such as the fund’s target sectors, stage of investments, and geographic focus. It’s also essential to identify the types of deals the fund will invest in, such as seed, early-stage, or late-stage investments.

Raising Capital

This is another crucial step in setting up a VC fund. Raising capital requires a thorough understanding of the LPs’ investment objectives, including their expected returns and risk tolerance. Successful VC fund managers need to build strong relationships with LPs by demonstrating their expertise in the market, showcasing their track record, and highlighting their investment strategy. As VC funds typically have a longer investment horizon, it’s essential to manage LPs’ expectations on returns and the time required for the fund to achieve its investment objectives.

Legal and Accounting

VC fund managers need to have a thorough understanding of the legal and accounting aspects of managing a fund. It’s essential to have a well-defined legal structure that complies with the relevant regulations, such as the Securities and Exchange Commission (SEC) rules. Accounting is also a critical aspect of managing a VC fund, and it’s essential to have accurate and timely financial reporting to LPs.

Team Skills

A successful VC fund manager needs to have a well-rounded team with a diverse set of skills. Team members should have expertise in areas such as deal sourcing, due diligence, portfolio management, and finance. It’s also essential to have a team that can work collaboratively and has excellent communication skills.

Fund Economics

VC fund managers need to have a thorough understanding of the fund’s economics, including its management fees and carried interest, popularly known as “carry”. It’s essential to have a well-defined fee structure that aligns with the LPs’ interests and provides sufficient incentives for the fund manager to perform well. Learn more about management fees and carry in our separate guide on venture capital investments.

Reporting

Finally, VC fund managers need to have a well-defined reporting structure that provides timely and accurate information to LPs. The reporting structure should include regular updates on the fund’s performance, financial statements, and investment pipeline.

Some of the key data points that VC fund managers need to collect in their reports are: 

• Date of the investment (exact day when the funds were committed to the startup)
• The amount invested during the funding round 
• Pre-money and post-money valuation of the startup

This will help calculate the exact Internal Rate of Return (IRR) as well to track the price paid per share. 

Challenges

Finding and selecting the right investments, managing portfolio companies, and exiting investments profitably are just some of the challenges VC funds are facing. Successful VC fund managers need to have a deep understanding of the market and trends in the target industries, as well as strong analytical skills to identify and select the right investments. 

Portfolio management requires active involvement and support to help portfolio companies grow and succeed. Exiting investments is also a significant challenge, and it’s essential to have a well-defined exit strategy and to work closely with portfolio companies to maximize their value. Ideally, venture capitalists come from the same background as the companies they invest in, as this provides them with the necessary experience to make informed investment decisions.

1.3. Venture Capital Fund Structures

The structure of a VC fund is an essential aspect of its operations, and it can impact the fund’s performance, taxation, and regulatory compliance. VC funds can be structured in several ways, including 2-entity or 3-entity structure. Each structure has a separate entity that serves as a Management Company. 

Management Company

A Management Company is a legal entity that manages the VC fund. It earns a management fee from the fund, which is typically a percentage of the fund’s committed capital. The management company is responsible for the fund’s operations, including investment decisions, investor relations, and regulatory compliance. The management company can be set up as a limited liability company (LLC) or a corporation. The management company allows the fund manager (general partner) to separate the management of the fund from the fund’s investments, which can provide greater flexibility in structuring the fund.

2-Entity Structure

The 2-entity structure is a common VC fund structure that divides the fund’s management and investment activities into two separate legal entities. The first entity is the Management Company, which manages the fund and earns a management fee. The second entity is the Investment Company, which makes investments on behalf of the fund. 

The Investment Company is typically structured as a limited partnership, with the Management Company acting as the general partner. The limited partners provide the capital for the fund and receive a share of the profits generated by the fund’s investments. The general partner (i.e., the Management Company) is responsible for the fund’s operations, including investment decisions, investor relations, and regulatory compliance.

3-Entity Structure

The 3-entity structure is a more complex VC fund structure that separates the fund’s management, investment, and tax functions into three separate legal entities. The first entity is the Management Company, which manages the fund and earns a management fee. The second entity is the General Partner, which is responsible for making investment decisions on behalf of the fund. The third entity is the Limited Partnership, which is responsible for holding the fund’s investments and distributing profits to the limited partners. 

The advantage of the 3-entity structure is that it provides greater flexibility in tax planning and can potentially reduce the tax burden on the fund and its investors. 

1.4. Pros & Cons of Different Venture Capital Fund Structures

Each Venture Capital Fund structure has its potential strengths and weaknesses. For example, institutional investors may prefer a 3-entity structure, while individual investors may prefer a 2-entity structure. VC fund managers must carefully consider the relevant factors when choosing a fund structure, as well as to consult with legal and tax advisors to ensure that the chosen structure complies with applicable regulations and tax laws. Here’s a breakdown of pros and cons of each structure: 

2-Entity Structure Strengths and Weaknesses

Pros:

• Ensures clear separation between the fund’s management and investment activities, reducing conflicts of interest.
• Allows the fund to be structured as a limited partnership, providing limited partners with limited liability protection.

Cons: 

• May result in conflicts of interest between the fund manager and the investors as the management fee is earned regardless of the fund’s performance
• May result in less operational flexibility compared to a Management Company structure.

3-Entity Structure Strengths and Weaknesses

Pros:

• Provides greater flexibility in tax planning, potentially reducing the tax burden on the fund and its investors.
• Allows for clear separation of the fund’s management, investment, and tax functions.

Cons:

• May result in higher legal and operational costs due to the need for three separate legal entities.
• May result in less operational flexibility compared to a 2-entity structure.

2. Venture Capital Fund Manager’s Strategy

2.1. Industries, Development Stage, and Fund Allocation

Crucial aspects of a VC fund manager’s strategy is to determine which industries to focus on and at which stage of development. Moreover, fund managers should precisely define the approach for fund allocation.

Industry Focus

Investing in startups across different industries can be an effective strategy to achieve diversification and mitigate risk. However, it’s usually better to have a primary industry focus to guide investment decisions. A sector-agnostic approach may be too broad and unfocused, possibly leading to subpar returns.

When choosing the industries to focus on, it’s important to consider trends and opportunities that are driving growth. VC fund managers may consider emerging industries, such as artificial intelligence, blockchain, and cybersecurity, where startups are disrupting traditional business models and creating markets that haven’t existed before. They may also consider well-established industries, such as healthcare, that are undergoing significant transformations.

Development Stage

Another important consideration is the development stage of the startups in which the fund is investing. Generally speaking, startups go through four stages of development: seed, early-stage, growth, and mature or late-stage.

Seed-stage startups are in the earliest stages of development and may not have an established product or customer base yet. Early-stage startups have developed their product or service and may already have some customers, but are still in the process of developing and refining their business model. Growth-stage startups are characterized by a proven business model and are expanding rapidly. Finally, mature startups are already established and have stable revenue streams.

Fund Allocation

Once the fund manager has identified industries and development stages of interest, they must decide how to allocate capital among the startups in their portfolio. The allocation strategy should reflect the fund’s investment thesis, risk tolerance, and investment horizon.

One approach could be to commit a larger portion of the fund to seed and early-stage startups, which typically require significant amounts to get off the ground. Another approach is to allocate a larger portion of the fund to growth-stage and mature startups, which have established business models and are less risky but may require even more capital.

The fund manager should maintain flexibility and adjust their allocation strategy as the market and the startups in their portfolio evolve. They should also consider the potential for follow-on investments in promising startups that require additional capital to scale.

By taking a focused approach to the industry and development stage, fund managers can mitigate risk and achieve strong returns.

2.2. Finding Limited Partners

One of the biggest challenges for general partners is recruiting limited partners (LPs) who will invest in the fund. Typically, LPs are institutional investors such as pension funds, endowments, family offices, and high net worth individuals. Here are some strategies for finding and engaging potential limited partners. 

Build a Strong Network. Networking is a crucial aspect of finding potential LPs. Attend industry events and conferences to meet investors and build relationships. Reach out to other VC fund managers for introductions and leverage their networks to build your own. 

Use Online Platforms. There are various online platforms that connect investors with VC fund managers. These include AngelList, Gust, SeedInvest, as well as Unique.vc. Create a profile on these platforms to showcase your fund and connect with potential LPs.

Cold Outreach. While cold outreach may be exhausting, it can also be an effective way to find potential LPs. Use LinkedIn and other social media platforms to identify potential LPs and reach out to them with a personalized message. However, be mindful of the fact that cold outreach can be seen as intrusive, so be sure to follow best practices and approach potential LPs with respect and courtesy. Consult with marketing experts for the best practices. 

Engage with Consultants. There are also specialized consultants who can help you find potential LPs. These consultants have extensive networks and can help you connect with investors who may be interested in your fund. However, be sure to do your due diligence and work with reputable consultants who have a track record of success. Perform an online research, since the web is packed with reviews of VC consulting firms and individuals. 

Leverage Industry Associations. Joining industry associations such as the National Venture Capital Association (NVCA) and attending their events can help you build relationships with potential LPs. These associations provide a platform for VC fund managers to network and connect with potential investors.

It’s important to keep in mind that finding the right LPs is a long-term process that requires patience, perseverance, and a commitment to building lasting relationships.

2.3. Deal Sourcing, Portfolio Diversification and Cooperation with Founders

Sourcing Deals

VC fund managers can leverage their own professional and personal networks to find promising startups. This includes reaching out to entrepreneurs they have worked with in the past or getting referrals from industry insiders.

In case there are not enough opportunities arising from personal connections, regular attending at startup industry events can be a good approach. Pitch competitions, hackathons, and industry conferences can help VC fund managers meet entrepreneurs and learn about emerging trends.

Online platforms like Unique.vc, AngelList or Gust provide access to a wide range of startups seeking funding. VC fund managers can use them to screen startups and connect with promising entrepreneurs. Also, collaboration with angel investors or other VC funds can help general partners expand their deal flow and access startups that may not be available to the general public.

Diversifying Portfolio

Diversification is a key strategy for mitigating risk and increasing the potential for returns in venture capital investing: 

Investing Across Different Stages. Investing in startups at different stages, from seed to late-stage, can help VC fund managers balance their portfolio risk and return potential. As already mentioned, early-stage investments generally entail higher risks but can generate significant returns, while later-stage investments are typically more secure but are characterized by lower returns.

Investing Across Different Sectors. Diversifying investments across different sectors, such as fintech, healthcare, and e-commerce, can help VC fund managers avoid over-exposure to a particular industry and capitalize on emerging trends.

Investing Across Different Locations. Investing in startups from different geographic regions can provide access to a broader range of opportunities and help VC fund managers hedge against regional economic risks.

Keep in mind that only a small fraction of newly-established companies reach unicorn status, typically between 1% to 2%. To maximize your chances of success, it’s recommended to diversify your portfolio by investing in at least 50 companies, or possibly more.

Working with Founders

Establishing personal relationships can be even more challenging than executing a successful product pivot. VCs invest in people with good ideas, rather than the ideas themselves. The startup founder’s energy, talent, and capabilities are the key driving force behind a newly established company. Therefore, it’s critical to build trust and strong relationships between fund managers and invested startups.

This entails being transparent and honest in communication, respecting the founders’ vision and goals, and being available to provide guidance and support. VC fund managers should maintain healthy relationships with the founders, even if the startup is not performing well. By demonstrating respect and understanding the challenges that startups face, fund managers can offer support to help them overcome those challenges, which can really make a difference.

Ideally, VC fund managers should add additional value beyond simply providing capital. This can involve leveraging their network to connect startups with potential customers or partners, providing strategic guidance on growth and operational challenges, and assisting founders in accessing follow-on funding.

Thus, aside from sourcing deals effectively and diversifying the portfolio, close cooperation with founders can significantly improve the chances of generating the projected returns for limited partners.

3. Considerations When Raising a VC Fund

3.1. VC Fund Team Capabilities and Fund Structure

Raising a venture capital fund can be a daunting task, but it’s crucial to get the team, fund design, and broader context right. A successful VC fund is a combination of many factors, including team capabilities, fund design, and fund status. Potential limited partners will thoroughly research these factors before committing to a VC fund.

Logically, one of the most important aspects of a VC fund is the team that manages it. Investors will first take a look at the team’s previous experience and track record. The GP’s experience should cover not only the investment industry but also other professional and personal commitments that could compete for investors’ time and attention. Limited partners will seek GPs who are well-connected and networked and have access to the best founding teams. Diversity is another critical factor, as GPs with different perspectives and complementary skills can bring more value to the table.

Another VC fund characteristic important for limited partners is alignment with their investment goals. This includes fee structure, carry, and size of the fund. Furthermore, the percentage of the fund being personally invested by the GPs will demonstrate that they have some skin in the game alongside LPs. The investment stage and overall investment thesis are additional critical factors. A clear investment thesis that targets a particular industry, sector, technology, market space, or other “theme” is more likely to convince LPs that a VC fund would generate superior returns.

Lastly, limited partners will pay special attention to the broader context in which the fund raising is occurring. This involves the number of prior funds still actively investing, the GPs’ current commitment level to those older funds, and the overall fundraising climate. 

4. Time Management of a Venture Capitalist

4.1. Factors That Influence VC Fund Managers’ Time Allocation

For any VC fund manager, time is a precious commodity that must be spent wisely. Successful VCs are able to balance their time between sourcing and evaluating deals, working with portfolio companies, fundraising, and building relationships with key stakeholders. Here’s a breakdown of factors that influence how VC fund managers spend their time:

Deal Sourcing and Evaluation

One of the most time-consuming activities for VCs is deal sourcing and evaluation. In order to find promising startups, VCs must attend networking events, scour social media and other sources for leads, and maintain relationships with entrepreneurs, other VCs, and service providers.

According to a survey by Acuity Knowledge Partners from 2021, VCs spend up to 70% of their time sourcing deals and evaluating potential investments. This includes conducting due diligence, evaluating the market opportunity, assessing the team, and negotiating deal terms.

Working with Portfolio Companies

Once a VC has invested in a startup, they need to spend time working with the company to help it succeed. This can involve anything from providing strategic advice to making introductions to potential partners or customers.

According to Kruze Consulting, VCs spend about 20% of their time working with portfolio companies. This includes attending board meetings, providing operational guidance, and helping with follow-on fundraising rounds.

Fundraising

Raising money for a VC fund can be a time-consuming process that requires a lot of attention from the fund managers. VCs must network with potential investors, prepare pitch decks and presentations, and respond to due diligence requests.

Acuity Knowledge Partners survey has shown that VCs spend up to 10% of their time on fundraising activities.

Building Relationships

Building stable relationships with key stakeholders is important for VCs to succeed. This can include networking with entrepreneurs, co-investors, service providers, and other industry participants. Recent reports have shown that VCs spend around 10% of their time on relationship building activities.

Other Factors

In addition to the above activities, there are other factors that can influence how VC fund managers spend their time. These include:

Fund Size: Managers of larger funds may need to spend more time fundraising, while managers of smaller funds may have more time to focus on deal sourcing and working with portfolio companies.

Stage Focus: VCs that focus on early-stage investments may spend more time on deal sourcing and evaluation, while those that focus on later-stage investments may spend more time on working with portfolio companies.

Sector Focus: VCs that focus on specific sectors may need to spend more time building relationships with key players in the industry and keeping up-to-date on sector trends.

Geographical Focus: VCs that focus on specific regions may need to spend more time networking with entrepreneurs and other investors that operate in those locations. 

4.2. Best Practices for Optimizing Time Management

As explained above, VC fund managers need to balance a diverse range of responsibilities. Here are some tips for optimizing time management as a venture capitalist:

Prioritize

Chances are that you will have multiple tasks competing for your attention, and it’s essential to prioritize them based on their importance and urgency. One useful approach is to categorize tasks into four quadrants based on their urgency and importance, as popularized by the Eisenhower matrix. This approach can help you identify tasks that require immediate attention, tasks that can be delegated, tasks that can be scheduled for later, and tasks that can be eliminated.

Avoid Scheduling Conflicts

Creating a structured calendar enables you to allocate your time efficiently. One best practice is to schedule blocks of time for specific tasks such as sourcing, due diligence, and portfolio management. Additionally, blocking off time for non-work activities such as exercise, family time, and personal development can help you avoid burnout and maintain a healthy work-life balance.

Use Technology

Technology can be a powerful tool for time management, and VC fund managers should leverage it to automate repetitive tasks, streamline workflows, and manage their schedule. Use scheduling tools such as Calendly and Doodle to schedule meetings without the back-and-forth emails. When it comes to project management, tools like Trello and Asana can help you manage tasks, track progress, and collaborate with team members.

Delegate

Delegating tasks is an essential skill for VC fund managers as it enables you to focus on high-impact activities and leverage the skills of your team members. Delegate what needs to be done based on your team members’ strengths and weaknesses. Empowering your team members to make decisions and take ownership of tasks can help them develop skills and increase their motivation and engagement.

Learn to Say No

As a VC fund manager, you will likely receive multiple requests at the same time, and it’s essential to learn to say no to requests that are not aligned with your priorities and goals. Evaluate each request based on its alignment with your objectives, available resources, and potential impact. Providing clear and timely feedback, as it can help you maintain positive relationships and avoid future requests that don’t align with your priorities.

Communications

As limited partners have probably entrusted a significant amount of capital to your fund, they will expect regular and proactive reports on the progress from your end. One solution can be to provide them with quarterly reports that can help them evaluate the fund’s performance. We suggest you that the report includes the following: 

• A sheet with the list of all the startups from the portfolio, including brand names, websites, industry verticals, initial investment information and current investment value. 
• List of valuation updates for all portfolio startups in the recent period
• List of exited companies and amount of returns for each
• Chart overview with key metrics such as investments and ROI by each year or quarter, including Internal Rate of Return (IRR), distributed to paid-in capital (DPI), and other metrics

Additionally, it would be helpful to include brief written updates on progress and financial status of each startup in the portfolio.

5. VC Fund Performance

5.1. VC Fund Performance Metrics

Just as in any other type of business, venture capital requires measuring performance to improve fund operations and identify areas for improvement. In this section, we will go through the key metrics used by venture capital funds:

Internal Rate of Return (IRR)

This popular metric is being used by VCs and other investors to forecast the investment profitability. More specifically, the IRR represents the expected rate of the annual growth; thus, investors use it to predict yearly returns. 

The most common ways to predict the attractiveness of a given investment is by using Gross and Net Rate of Return. Net IRR is the projected return after taking into account fees and costs, while the latter is the return without considering fees and costs. Venture capital firms usually aim for an IRR of at least 20%.

Multiple of Invested Capital (MOIC)

Also simply referred to as “Multiple” this metric is being used to tell investors how much return they are getting from the investment. It is calculated by adding the Fair Value and Total Cash Realized, and then dividing that value by the Total Investment Amount. 

The most used forms of MOICs are: 

• Total Value to Paid-in Capital (TVPI): Measures the total value of an investment, both realized and unrealized, in relation to the amount of money the investor have committed to the fund
• Distributed to Paid-in Capital (DPI): It only takes realized value into the account. DPI is the difference between the funds that actually made it back to the investor’s bank account, vs. the amount of money committed to the fund. 
• Residual Value to Paid-in Capital (RVPI): It only takes unrealized value into the account. This represents remaining unrealized investments relative to the amount committed to the fund.

The Total Value to Paid-in Capital is actually the sum of RVPI and DPI. 

Maximum Expected Exposure 

This metric helps a limited partner analyze their capital contributions in relation to the fact that capital calls occur over time, and the assumption that the fund will get proceeds and distribution before the total capital calls have been made. In other words, Maximum Expected Exposure measures the actual cash committed in comparison to the total capital committed, to understand the maximum net capital that has been invested. It can be expressed as a total amount (cumulative distributions minus cumulative capital calls = maximum expected exposure) or a percentage (maximum expected exposure / total committed capital).

Let’s explain some additional terms mentioned here: 

Fair Value is an estimation of the investment or startup value, ie. the estimated amount that the investment or startup can be sold for.

Total Cash Realized is the number of yields that an investor generated as a return, while Total Cash Unrealized is the estimated, potential profit from an investment or a company that has yet to be sold. 

5.2. Costs of Running a VC Fund

VC funds can be costly to operate, and General Partners need to be aware of the various expenses involved in running a successful fund. Here is a breakdown of some of the key costs to consider:

Management Fees

Management fees are fees charged to the Limited Partners (LPs) to cover the costs of running the VC fund. Typically, these fees are a percentage of the total committed capital, ranging from 1.5% to 2.5% annually. For example, if a fund has a total committed capital of $100 million, the management fee would range from $1.5 million to $2.5 million annually. Management fees cover the salaries of the GP team, rent, office expenses, and other operational expenses. The management fee is generally paid out on a quarterly or monthly basis.

Operating Expenses

In addition to management fees, there are other operating expenses to consider, such as legal and accounting fees, travel expenses, and marketing expenses. These expenses are typically paid out of the management fee, but in some cases, they may be charged as a separate expense.

The costs of filing for a limited partnership (the way VC funds are usually structured), can range between a couple of thousand to tens of thousands USD, depending on the venture capital fund’s complexity – this is needed to cover fees for a legal service that is setting up the limited partnership. Then, there are ongoing fees, which represent the expense of $500 to $2,000 on an annual basis. 

Due Diligence Costs

These are the expenses incurred when the GP team evaluates potential investments. These costs can include legal fees, travel expenses, and consulting fees. Due diligence costs can vary significantly depending on the number and complexity of the investments being evaluated.

Fundraising Costs

Fundraising costs are the expenses incurred when the GP team raises capital for the fund. These costs can include legal fees, travel expenses, and marketing expenses. Fundraising costs can be significant, particularly for first-time funds or funds with a less established track record.

Portfolio Company Costs

Once an investment is made, there are ongoing costs associated with managing and supporting the portfolio company. These costs can include legal and accounting fees, travel expenses, and consulting fees. The costs will vary depending on the needs of the portfolio company and the level of involvement required from the GP team.

5.3. How to Improve VC Fund ROI

As we’ve discussed above, the Internal Rate of Return (IRR) is one of the most important metrics for evaluating the performance of a venture capital fund. To achieve strong IRR results, General Partners can take several approaches to improve returns for Limited Partners.

One of the key factors that affects the annual rate of return is the timing and flow of money into and out of the fund. The longer the LPs’ money is tied up in the fund, the lower the IRR will be. Therefore, GPs need to carefully manage the timing and frequency of capital calls to ensure they only ask for the exact amount of cash they need at the exact time it’s needed. By adopting a program of more frequent, smaller capital calls, a venture fund can boost its IRR for LPs by a few percentage points.

Another option to improve fund returns is to lower the payout percentage of management fees. This approach won’t work for some General Partners because it results in lower income during the early periods of the fund. However, for those who can afford to forgo near-term income, it’s an interesting option. By investing their management fees with the fund, GPs can increase the actual size of the fund’s holdings, while reducing their upfront management fee in exchange for increased chances of the fund’s success. This approach demonstrates LPs how confident the GPs are in the fund.

In addition to these approaches, GPs can also improve returns by focusing on due diligence and selecting high-quality portfolio companies. By investing in companies with strong growth potential, GPs can increase the likelihood of a successful exit and a higher return for LPs. GPs can also mitigate risk by diversifying the portfolio across various sectors, stages, and locations. By spreading investments across different opportunities, GPs can minimize the impact of a single investment failure on the overall fund’s returns.

Finally, it’s important to keep in mind that strong communication and transparency with LPs can also help improve returns. By providing regular updates and being transparent about the fund’s performance, GPs can build trust with LPs and strengthen their relationships. This can lead to increased commitment and reinvestment in future funds.

6. VC Fund Team Profile & Skillset

6.1. Crucial Skills Required for a Venture Capitalist

The role of a venture capitalist has become more demanding and nuanced than ever before. With the industry managing around 100 times more capital than it did around 30 years ago, VCs today need to have more relevant experience and skills to help startups partner with leading entrepreneurs and create value. The contemporary VC needs to have thorough experience and a plethora of skill sets in finance, community, and of course, leadership. 

As a financier, a VC may act as a middleman, expert in structuring and closing deals, and macro analysis investor. When it comes to community building, the VC needs to be a savvy network connector, talent resource for hiring, and brand creator for a company and firm. 

Finally, as a VC fund leader, the individual needs to be able to provide tangible counseling support to portfolio companies in terms of technology, data science, as well as product / service design and development. 

However, not all VCs play all these roles. Some specialize in specific areas, and others have uniquely talented partners that complement each other well. But VCs with relevant experience and skills help startups across the board partner with leading entrepreneurs and create value. In the current climate, where there is an abundance of startup companies seeking funds, venture capital firms are looking for individuals with excellent communication skills, an appropriate degree, relevant experience in a given industry, analytical skills, and a willingness to constantly learn.

It’s important to note that venture capital professionals have a quite similar set of skills as individuals coming from investment banking. People with this type of experience are highly valuable in the venture capital world. 

7. Venture Capital Fund Reporting

7.1. Essential Information that VC Fund Manager Collects

To effectively manage their portfolio and track the fund performance, VC fund managers must collect essential information and data.

Financial Profile of Startups

The first and most crucial piece of information that a venture capital fund manager collects is the financial information of the startups they are investing in. This includes financial statements, cash flow projections, and revenue forecasts. By analyzing this data, fund managers can assess the financial health and growth potential of the startup. They can then use this information to make informed investment decisions and determine the appropriate valuation for the company.

Market Insights

In addition to financial data, VC fund managers also collect information about the market and industry trends in which the startups operate, such as analyzing the competitive landscape, market size, and growth potential of the industry. Besides adequate decision making, staying up to date with market trends can help fund managers identify potential acquisition targets.

Startup Personnel

The information about the startup’s management team experience, track record, and expertise of the founders and senior management team are also crucial data points. Fund managers carefully assess the capabilities of the management team, as it is often a key factor in the success or failure of a startup.

Startup Milestones

VC fund managers also need to collect performance data about the startups they have invested in. This is reflected in revenue growth, customer acquisition, and other key performance metrics. It allows fund managers to identify potential issues in a timely manner and take corrective action.

Fundraising Activities

Fund managers also collect information about portfolio companies’ fundraising activities, such as tracking the amount of capital raised, the timing of each round of funding, and the valuation of the company. This information helps fund managers determine the performance of their investments and make proper decisions about future funding rounds.

Exit Strategies

In addition to all of the above, VC fund managers also obtain insights about the exit strategies of their portfolio companies. This includes information about potential acquirers, IPO plans, and other exit options. Close monitoring of potential exit opportunities allows fund managers to decide when to sell their stakes to maximize returns.

7.2. Key Elements of VC Fund Reports to Limited Partners

Reporting is an integral part of the relationship between venture capital fund managers and limited partners. Investors expect fund managers to provide regular reports that track the performance of their investments. A comprehensive report should include investment-by-investment data in addition to overall fund performance data. To report with that level of detail, fund managers need to gather and track a range of data points.

Investment-by-Investment Data for Priced Equity Investments

To track the performance of a priced equity investment on a round-by-round basis, fund managers need to gather and track the following key data points:

Investment date: This ensures that the performance of the investment is tracked accurately from the date the fund committed it to the startup.

Investment amount: To track the exact amount of investment into the round.

Capitalization details: This includes pre-money and post-money valuation and helps accurately track the price paid per share.

Investment-by-Investment Data for Convertible Debt Investments

When it comes to the performance of a convertible debt investment, fund managers track the following:

Investment date: Since convertible note rounds tend not to have defined closing dates, tracking the investment date is critical to ensure accurate performance tracking.

Investment amount: As with equity investing, this helps tracking the exact amount of investment into the round.

Conversion price cap: This data point is essential to convert the notes into stock holdings at the appropriate per-share price when a qualifying round occurs.

Discount on conversion price: Essential for calculating the conversion price accurately.

Interest rate: The type of interest rate being paid (simple, cumulative, non-cumulative), and how frequently it is being calculated (daily, monthly, quarterly, annually).

Derivatives being issued: This data point includes whether there are any warrants or other derivatives being issued as part of the deal.

Fund managers need to keep separate track of any interest earned for tax purposes and income generated from their vs. other investors’ contribution. The value of the warrants is typically viewed as taxable imputed income by the IRS. Tax issues arising from convertible notes can be complicated, so it is essential to consult an experienced tax advisor.

Proper Data Collection and Recording

For the reports to be comprehensive and reliable, it is best to record the data as soon as the check is written and when all the final documents are prepared. Waiting until later can make it harder to collect the relevant information and reconstruct the deal from the scattered historical pieces.

Fund managers should go back to the primary documents to find this data and not rely on the term sheet. The term sheet lacks sufficient detail, and the final deal documents often differ slightly from the term sheet. Even if fund managers go back to the official deal documents, it is good practice to ask the company for a post-closing cap table. Reviewing the cap table is an excellent way to cross-check ownership percentage and can be a handy historical record for questions in the following phases. 

With the advent of web 3.0, a new breed of platforms has emerged, such as Unique.vc. This app provides VC fund managers with a decentralized and fully automated on-chain fund that can be customized to fit their investment strategies. The platform enables VC funds to streamline their investing processes by performing all tasks from a single location.