Venture Things E03: The Fund Metrics
A VC fund operates as a financial investor and has to report KPIs to its Limited Partners. There are three dimensions of KPIs a VC has to examine on a frequent basis: fund financials, the portfolio company KPIs and the deal flow. The summary below is made for beginners in the industry.
Fund financials
From my view, there are three groups of KPIs associated with fund financials: the fund’s capital status (a), the portfolio valuation (b) and return metrics ©. Therefore, (a) includes the total committed and remaining capital to let LPs know how much money is left. Additionally, the capital allocation split shows how much of cash went into management fee and how much into the portfolio. The capital distribution yields the current amount of money flowing back into the fund because of exits and ultimately LPs. (b) is short and brute: the valuation of the entire investment portfolio based on the recent funding rounds the startup companies have undertaken. © is displaying two bold metrics: the IRR (which we questioned in E01 of Venture Things) and the multiple on the money.
Portfolio company KPIs
Imagine the case that there are no recent valuation rounds of your startup companies: so your portfolio valuation (see (b) above) equals the aggregate costs of investment. Then you are lucky to have the financial (1) and operational (2) KPIs of your portfolio companies at place. Whereas (1) compiles the current cash balance of each startup, the revenues, costs and resulting profits, (2) includes the most important metrics surrounding product/service usage and customer retention. Both sets of KPIs are benchmarked against the business plan — therefore growth and the progress of these KPIs can have explanatory power — even if the portfolio valuation remains somewhat static.
Deal flow
Like every company is defining itself by the demand for its product, the VC does so by evaluating its deal flow. I think there are three main sub-metrics to the deal flow: the total volume and quality (i), the source of deals (ii) and ultimately support & feedback (iii). Starting off with (i), the VC wants to know how many startups knock on the door and how well these startups fit to the fund with regards to: business case, industry, team, phase, funding requirement et cetera. Second question (ii) is “where the startup came from?” Because investing is people business, a VC wants to have a large amount of deals sourced through its own network and events. (iii) is something I understand as the VC’s duty to give feedback and knowledge back to startups reaching out — even if they won’t get money. This service-oriented dimension could be a net promoter score or a qualitative analysis based on feedback from startups.
The metrics a VC faces are pretty straight forward, but a little tricky to get mastered as a whole. Therefore a VC has to combine the capabilities of a well organized and professional financial investor, a corporate finance expert as well as a service-oriented approach to the market.
Further reading on the topic:
http://christophjanz.blogspot.com/2013/06/kpis-for-vcs.html by Christoph Janz
https://medium.com/@olafjacobi/investing-in-startups-is-people-business-f2575dcf9196 by Olaf Jacobi
https://medium.com/@JasonShuman/dear-founders-here-are-my-kpis-dd93d8cda8a0 by Jason Shuman
