A common misconception about Venture Capital is that raising a Venture Capital Fund is easy. At the beginning, it is like raising a seed round, but over time, you have to show traction and progress. Those metrics are tracked in a very straight forward way: IRR, Unrealized Gains, and Social Validation.
IRR (Internal Rate of Return):
This number is what all Venture Capital is measured off of. However, I find this number to be miscalculated all the time, because the IRR assumes that you have “Returns” on capital, and realistically for an early stage fund that is raising Fund 2 — 3, the IRR can’t be accurately calculated unless you make a lot of assumptions about the portfolio. It has been very common to raise on “Unrealized” gains. This would be in reference to the valuation increase your portfolio has received, even if exits have been minimal.
Unrealized Gains:
This means that you are selling the idea of your best companies that have not exited, but there are metrics for what valuation the next investor paid for a deal that you paid less for.
“We invested at a _____ Valuation and Sequoia just followed on at a $100m.”
This quote references an uptick in valuation, which is an unrealized gain. It makes you feel good, because you have social validation in the Venture world that your investment has a future, but you still have no money to show your investors.
Social VC Validation
Limited Partners like to know what VCs you have in your network. LPs love it if you can say that “Accel, Sequoia and A16Z lead the rounds of our last three deals.” This give the investors assurance that the venture capitalist is running in the appropriate networks to make the right investments.
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I’m sure what you are starting to see is that in order to invest in an early stage venture fund the decision is still largely focused on whether or not the person is good. On whether or not the LP thinks the VC has an unfair advantage in potentially making money.
Being an new VC is very similar to being a new startup CEO, you are raising on a dream and hard work.
