Shakespeare said, “If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me”. In this quote, replace grain with startups and you get the basic thought that envelops the mind of VCs. In this post, I am going to talk about the importance of monitoring portfolio value as well as how to do it effectively.

After VCs make the first investment in a company, they are thinking about the additional capital requirement for future rounds and ultimately a successful exit. Therefore, having a dynamic portfolio monitoring system built into software venture capital tools can enhance the decision-making power of VCs.

1. Keeping track of valuation of your investments

Valuation of an investment is one of the significant indicators of how the company is performing. Subsequent changes in valuation signal where the company is heading. VCs continually ask portfolio companies to update their metrics. Using excel in such cases requires a lot of manual work (data entry and modelling) where VCs lose their valuable time. And this time can definitely be better spent on sourcing deals or managing the portfolio companies.

The Edda suite provides a platform where VCs can send an email to the representatives of the portfolio company (through the platform) to come to the platform and update the metrics. VCs can then monitor portfolio value of their investments in the portfolio value section, which gets updated with new information.

2. Forecasting the effect of future financing or exit

When you have all historical information in one place, easily accessible in a user-friendly way, the analysis becomes much easier. In order to make the right decisions, It is important to continually speculate future performance of portfolio company. This allows the VC to effectively plan for either additional capital in next rounds of financing to keep fueling the growth or not participate in the next round. In order to do speculation easily, it is essential to again have all information in one place and an option to quickly execute speculative scenarios.

One way to speculate in the Edda suite is to add data for probable future funding/exit directly from the Portfolio Value section. Then you can see how it changes the metrics (such as realized and unrealized IRR, proceeds) of the portfolio company. In fact, you can see the change in metrics for the entire portfolio. You can always delete such speculative funding decisions by clicking on the cross against the funding record from the funding table.

3. Performance comparison of portfolio companies

It is essential to compare the valuation of portfolio companies to see how different companies are evolving. Different portfolio companies operating in the same industry can show different valuations. For example, one is declining or stagnant while the other is growing. Such comparisons can assist the VCs in better allocating their time to manage the portfolio companies. Furthermore, it also empowers them to dig deeper and uncover new information about how successful/unsuccessful companies perform. As a result, they can use that knowledge to better manage new portfolio companies in the future.

The Portfolio Value section of Edda’s venture capital portfolio management software provides an easy to compare tool. Here with one click you can select the portfolio companies and compare their valuation over time. You can either compare companies separately or make groups of companies and compare them. You can always export all portfolio value data to Excel.

We are continually adding new features to our Edda suite to empower investors to better manage their investments. If you want to know more about measuring the performance of your VC fund click here.

Monday, besides being the least appreciated and most hectic day of the week, it is actually quite an exciting day for VCs. The VC Monday meetings are attended by the General Partners along with the investment team. The main purpose is for VCs to make decisions regarding new as well as existing companies in the dealflow.

The duration of the morning VC Monday meetings depends on the number of companies pitching to VCs. Usually, startups have to present a 40-45 slide deck under 45-50 minutes to VCs. Overall, the duration of Monday morning meetings can range from 3 hours to as long as 6.5 hours.  

Admin Work – the mood killer

Now there is one character that acts like the adrenaline killer for VC Monday morning meetings. This character is none other than the Administrative Work. Namely, Analysts and Associates have to spend countless hours putting the data from the companies under consideration into powerpoint. This data consists of a brief introduction about the company, its business, industry and the associated metrics. 

The pain doesn’t end here as they have to take notes about the minutes of the meeting for auditory purposes as well as make a note of the next tasks. Therefore, there is a lot of admin work which has to be done before, during and after the VC Monday meetings. There are numerous tools out there to make the life of VCs easier with regards to optimization of their internal business process. However, before making a decision, VCs should think about the level of integration, these tools can provide.   

There is so much valuable time that can be spent elsewhere is wasted on the admin work. So, after addressing the boring elephant in the room, let’s talk about how you can redefine your Monday morning meetings. The dealflow section of Kushim Suite for VCs features an interactive and customizable dashboard that includes a special feature built in specifically to optimize Monday morning meetings.

Meet Dealflow Review

The dealflow review is a feature that eliminates the need to spend hours making powerpoint presentations while switching countless times between powerpoint and excel. All data about different companies in each stage of investment cycle along with the metrics is already present, so the dealflow review automatically takes all the data and creates a presentation. With just a click you can select the appropriate stages you want to review- watchlist, new, first meeting or due diligence and commence the presentation.

Real Time Response

Not only does the dealflow review simplify the admin work related to presentation, it also provides comment and task feature. You can make a decision whether to take the company to the next stage of investment or reject it during the presentation. As a result, the change will be reflected in your dealflow once you finish the review process. 

What is more is the ability to assign the company to one of your team members and also assign a task which can be to ask the company for more metrics or data about new contracts they have procured. Additionally, you can also put in some comments for internal references using the “Add a comment” section. 

Automatic Post Meeting Report Generation

When you click on the stop button to stop the review, you get the option to save the presentation. All saved meetings can be accessed from the “Committee” tab where you get two files saved per meeting. Both can be exported to PDF.  The first report contains the slides of all companies that were reviewed along with their metrics and comments that were made during the review. The second one is the task list of your team members specifying which companies they are assigned to and their task. 

Unlimited Storage

The dealflow review makes sure that you don’t have to waste your precious time. Neither for creating presentation nor for worrying about anything you might miss to jot down during the Monday meeting review. The unlimited storage ensures that you don’t have to worry about running out of space. All your Monday meeting reports are stored under the committee section which you can download any time.

If you want to know how you can build a better dealflow you can click here. Ready to start improving your dealflow now? Contact us and schedule your free trial of Edda’s venture capital software.

The objective of this article is to provide insights related to fundraising process for VC professionals. 2018 was a record year for the VC industry, in terms of investment $254 billion was invested globally. By the end of third quarter of 2018, VCs in US and Europe had raised more than $ 40 billion. The median fund size in 2018 was $83.7 million which is phenomenal as the median fund size in 2014 was $34.7 million. Keeping in mind the growing numbers of VCs fundraising, I am going to focus on three key considerations a general partner or an aspiring general partner should have in mind before raising the next or the first fund. 

When Fundraising – Prioritize LP selection based on your decision criteria 

Typically, the LPs of VC funds consist of pension funds, endowment and foundations, insurance companies, family offices, high net worth individuals, fund of funds and corporate funds. However, each LP has different risk profile and liquidity needs. For instance, insurance companies always have an uncertainty associated with their cash outflows. Hence they tend to invest a major portion of their money into risk-less assets such as bonds. In contrast, private foundations typically allocate more than 40% of their assets into alternative asset classes (i.e. PE and VC). Since their short term cash requirements are not high.

Elizabeth Yin, former Partner at 500 startups suggests that you must talk to a lot of fund managers to get advice about LPs rather than devoting your time and energy to approach institutional investors. While establishing her own VC fund, she focused on closing the fund as fast as possible and qualifying investors with smaller check sizes ($25K then going beyond $300K). The reason she prioritized on speed was because SEC in US mandates that you cannot market your fund while raising it. 

Hence, relationship building and transparency are important factors while talking to LPs and especially institutional LPs. For new fund managers, closing an institutional LP can take more efforts and time. Therefore, they have to spend more time building relationships with institutional LPs. 

Edda tip: Use a clear process to track the progress of your partnership with LPs. Here’s one of the best practices to setup a process: 

New opportunities
Initial allocation
Legal/AML
Final allocation
Standby

Differentiate yourself by selecting a unique dealflow strategy or industry expertise

There is a gigantic gamut of VC funds out there. So, when fundraising, you have to think about what is the unique value proposition you can provide. Your UVP needs to separate you from the rest. Do you already have a network with ecosystem builders or a network with established founders to source startups? Does your team have a unique industry expertise that is going to help you find the next unicorns? These are some questions you must think about deeply before you start putting together your fundraising investment strategy.

The figure below illustrates the common categories of expertise of GPs. 

Harvard professor Paul Gompers in his 2007 study on specialist vs generalist approach of VCs concluded that specialists performed better than generalists in VC firms that focused on a particular domain. On the other hand, if a specialist is put to manage a generalist role, the performance of the specialist weakens.   

Thomas Meyer and Pierre Yves Mathonet, in their book, Beyond the J curve state the factors LPs consider on qualitative basis while conducting fund due diligence. Overall the management team’s skills, motivation and stability account for 50% of the qualitative factors LPs consider. 

Edda tip: Get help from key industry players that can provide you with quality dealflow. In order to make this kind of partnership work, you need to standardize this process. At Edda we develop specific submission forms in our dealflow management software that populate your dealflow automatically.

Design an infallible investment strategy with your LPs

Chris Douvos, Managing Partner at Venture Investment Associates, who is also an LP, had interesting insights regarding GPs pitching. Namely, he states that oftentimes GPs make a pitch to LPs saying that they have designed a new investment strategy. However, they are unaware of the fact that ten or more such strategies have already been pitched to them. So how do you go about designing your investment strategy? Besides the competency and expertise of GPs there are some set factors that contribute to investment strategy.

Factors that contribute to investment strategy

• The market size and growth opportunities– GPs must assess how big is the market they are going to target and the growth opportunities associated with it. Furthermore, what are the current trends and how will you be able to source the companies you want to invest in. 
• Capital requirement and investment returns- Key aspects to note here is whether you will have enough capital to meet the demands of your investment as well as have funds for follow on investment. Secondly, how long will the investment cycle be and most importantly will your approach actually aid you in getting the expected returns? 
• Risk Management- Just including a typical bunch of risks such as an act of God, currency risk, regulatory risk is not enough. As a GP you must think about the risks associated with your team and specific risks associated with your investment strategy. For example, if you are going with an investment strategy to invest in energy companies especially operating in emerging economies, then is there a regulatory or political risk that can prevent you from investing or that can tie your investment for a long time?

Edda tip: Involve your LPs in the investing process and share your dealflow with them. This is the most effective way to leverage their network, build transparency and engagement. Because we know how valuable this is for VC firms, we built a Portal into our deal flow management software where LPs can access dealflow companies. To make this process even more engaging, the LPs receive a monthly fully automated newsletter that redirects them to the Portal.

These are three broad factors that a GP must consider before raising a fund or going into the fundraising. In the upcoming articles, I will delve deeper into asset allocation strategies of different LPs. In addition, I will talk more about how different LPs conduct their fund due diligence. 

If you are interested in knowing more about measuring the performance of a VC fund then click here or schedule a demo of our venture capital portfolio management software today.

After weeks or months of meeting, conducting due diligence, you have finally made an investment in a venture. However, now you can’t sit back and relax as the investment monitoring phase begins. One of the key success factors for a successful exit is to effectively monitor the progress of your portfolio companies. And choosing the right metrics for VCs monitoring is the key.

There are numerous metrics which can help you in monitoring process but it is essential to select the relevant ones. However, the relevant metrics for SaaS (Software-as-a-Service) companies won’t be the same as for the pharmaceutical company. Hence, our goal here is to depict which metrics are important for particular industries and how you can effectively track them with software venture capital tools. 

VCs metrics for Marketplace Startups

For marketing place startups, one of the main metrics is the Gross Merchandise Value (GMV). It indicates the gross value of transacted goods and is calculated by the formula below:

GMV = Average value of an order x Number of transactions 

However, one of the caveats associated with GMV is that it doesn’t take into consideration the value of discounts, returns, cancellations. Furthermore, it is not an indicator of revenue.

This can easily be seen in the chart example below which depicts the GMV of Alibaba from FY 2014-FY 2019 . In FY 2019 it was approximately CNY 5727 billion, while at the same time the revenue for entire Alibaba group stood at CNY 376.8 billion

Take rate or Rake- refers to the percentage of sales and commission a company earns on its sales. For instance, Airbnb charges 3% from the hosts and a variable service fee from the guests which is somewhere around 11% but it decreases as the cost of booking goes up. Similarly this metric is important for payment processing companies as well. 

The figure below shows the rake of some major e-commerce marketplaces:

SaaS Companies (B2B) 

Product market fit

The first step to measuring performance of a B2B SaaS company is to assess the product market fit. This can be done by looking at the Annual Recurring Revenue or ARR and the cash burn rate. If a SaaS startup doesn’t have a product market fit then it will be burning more cash than its ARR. In such cases, the company is spending too much on acquiring new customers who are in turn leaving the product. As a result, the ARR is low. In a nutshell, the lack of product market fit is an indicator of unsustainable growth prospects.

ARR Calculation

In the most simple way, ARR = Monthly Recurring Revenue (MRR) x 12

However, the customer must sign up for a yearly subscription contract. Below I am mentioning some more cases to calculate ARR:

Growth prospects

After looking at product market fit, the next avenue to evaluate is the growth prospects. Typically for B2B  SaaS companies, one of the growth benchmarks is T2D3 which translates to Triple, Triple, Double, Double, Double. This means that SaaS companies in Series A-B phase must show at least 3x growth year over year for three consecutive years and then show at least 2x growth.  

The figure below shows T2D3 path of some prominent SaaS companies:

Sales efficiency VCs metrics

One of the most popular VCs metrics for measuring sales efficiency of SaaS companies is the CAC (Customer-Acquisition-Cost) payback period. It shows the amount of time it takes a company to recover the cost it paid to acquire a customer. 

VCs Metrics for SaaS Companies (B2C) 

For SaaS B2C companies, the top metrics to look at are: Customer Chrun Rate, Revenue Chrun Rate, Customer Lifetime Value and Leads to Customer rate.

To start with, the Customer Churn Rate measures the number of customers a company has lost over a specified period of time.  

Furthermore it is very important to calculate the Revenue Churn Rate because different customers can have different revenue weight-age. For example, losing five customers who pay $5000/year is less disastrous than losing a single customer that pays $45,000/year. 

In addition, the Customer Lifetime Value denotes the average amount of money a customer pays during the whole engagement period with your company. It is calculated by finding the customer lifetime rate followed by average revenue per account. 

Finally, the Leads to Customer Rate depicts the percentage of leads that were converted to customers.

VCs Metrics for Pharmaceutical Startups

As aforementioned, different industries will require different metrics for performance assessment. Hence, here we will discuss the relevant VCs Metrics for the pharmaceutical industry. 

In order to show a strong standing the company must have a large number of discovered molecules and a significant number undergoing clinical trials.

Furthermore, an extremely important metrics is the R&D Spending. This metric is calculated by looking at the total amount of funds spent on R&D initiatives and comparing it to the amount spent on completing the development of products in the end cycle. Therefore, a small R&D spending is an indicator of lack of innovation and reluctance to adopt new technology. 

In addition, Investment to IP ratio will depict how successfully the company is utilizing its R&D efforts to get more Intellectual Property (IP). The higher the number of IPs the better.

Moreover, the number of partnerships with other pharma companies is yet another sign of growth and credibility.

Finally, the Team Structure, or the number of specialists in each section is a very important indicator. Typically the team should have the following structure: 33% biochemistry specialists, 33% AI specialists, 33% investor relations and business development. As a best practice, the number of biochemistry specialists should not be less than 10.    

How to track all these metrics?

Evidently, there are countless metrics for tracking the performance of the portfolio companies. However, the burning question here is, how do you keep track of all the relevant metrics? And the answer is the Edda Management Suite which fetches you the most user friendly solution. 

Clean, Precise and User Friendly

The “Companies” section of Edda’s Management Suite illustrates all companies in your portfolio in a precise and user friendly way. It also provides a quick search option. 

One size CAN fit all

With a click you can open the company page which contains its details along with the section for captable and metrics. By default you have 60 different metrics which are well organized and categorized. Some of the categories include: Financial performance, HR, Market, Marketing, Operational Performance and Company.

You can select the metrics which are relevant to you and also create new metrics. 

Stay Updated 

With venture capital management software you can grant access to your portfolio company’s page for the officials of that particular company. In addition, with one click you can send an email to the company representatives to ask them to metrics updates. You can also export company details including the metrics to PDF using the Export button.

Finally, besides the metrics, the Edda Management Suite can do a lot more of the heavy lifting for you. Want to know how it can help you measure the performance of your entire fund or funds? 

That’s all for this post! If you are interested, we have compiled a list of 200+ metrics for SaaS, Pharmaceutical, Social Impact, Real Estate and many more industries.

Click here to learn more about measuring the performance of your fund and contact us for a demo of Edda’s venture capital portfolio management software.

When we say VC fund performance, the first metric that comes up is the Internal Rate of Return or IRR. Indeed, investors typically compare the fund performance with the aggregate returns generated by an entire VC asset class. For instance, let’s say that a specific fund of a certain vintage year generated 34.5% IRR then an investor would use this to compare with appropriate benchmarks. 

However, in this process, there are some caveats- 

1. The Vintage Year Temptation
   Sometimes fund managers are tempted to assign vintage year when he started raising the fund not when the final close happened. 
2. The Categorisation Issue
   There is a gigantic gamut of universes to compare. Of course, it is a good practice to position your fund in an appropriate category to avoid comparing apples with oranges. For instance, the appropriate categories can be:
   a) All Early stage VC funds or Technology VC funds or
   b) All French early stage technology VC funds
3. The Peril of Unrealized Returns
   It is a good practice to not include unrealized returns in calculating fund performance as unrealized returns are risky since value of shares held in a private company can often exhibit large deviation. 
4. The Precision of data
   In general, VC industry has the self-reporting culture and often LPs have opinionated that mostly the mediocre managers report data. 

DRAWBACKS OF IRR     

According to an informal research done by McKinsey in 2004, only 20% of executives understood the critical drawbacks of IRR. For instance, if you compare two funds, one with an IRR of 24% with that of 11%, one would be inclined to regard the first fund as better performing. However, the devil here is again in the details. This is due to the fact that the IRR is not telling us the reinvestment risks and capital redeployment in other investment opportunities. 

Next, the IRR is a percentage and so there is a case where a small investment can show a big double digit or a triple digit IRR while a large investment can show an IRR of single digit but be more lucrative once it is accounted for the net present value (NPV). 

OTHER VC FUND PERFORMANCE METRICS

Besides IRR, some LPs are also using metrics such as COC, TVPI or DPI to measure the performance of a VC fund. using metrics such as.

Cash-On-Cash return (COC)
In VC and PE landscape, COC multiple shows how much return the fund received after exiting the investments. Of course, the investors will always prefer an investment with 40% IRR over a 5 year period with 4x COC over an investment with 100% IRR over a 1 year period with 2x COC. The COC multiple of an entire fund helps the LPs know how much carried interest will be available to split. 

To explain the next multiples, we will first introduce some terminology which is used to calculate the multiples listed below: 

Paid in Capital
This refers to the capital contributed by the LPs to a fund. It is also known as “Contributed Capital”. 

Distribution
This is the value of cash stocks that is given back or distributed by the fund to the LPs. 

Residual Value
It is the remaining value of a fund at a given point in time. It is calculated by adding fair value of all remaining investments plus any cash equivalents minus any liabilities. 

Total Value (TV)
The total value of a fund is the sum of Residual Value and Distribution.

TV = Distribution + Residual Value

The figure below shows an illustration of the terminology discussed above.

Now let’s have a look at different multiples

Distributions to Paid-in Capital (DPI)
It is calculated by dividing distributions by paid-in capital. 

A DPI of 5x means the fund provided a return to LPs that was 5 times the paid-in capital. Therefore, LPs desire a higher DPI multiple. 

Residual Value to Paid-in Capital (RVPI)
It is calculated by dividing residual value by paid-in capital.

Total Value Paid-in Capital (TVPI)
It is calculated by dividing the Total Value by Paid-in Capital.

Since Total Value = Distribution + Residual Value 

Hence, TVPI = DPI + RVPI

ENTER THE PUBLIC MARKET EQUIVALENT (PME)

Besides IRR, the other multiples discussed above serve as a good metric to measure the performance of a fund. However, there is another measure called Public Market Equivalent which basically measures the performance of a fund compared to a public market index such as S&P 500. A fund having a PME of more than 1 indicates that the LPs received better return by investing in the fund rather than investing in the market. 

Let’s say an LP invested $100 million in a fund and received $500 million after 5 years. In the same time frame, had the investor invested in S&P 500, he would have earned $395 million.  So the gross PME = 500/395 = 1.26. In this case, the investor didn’t lose money by investing in VC fund as the PME is greater than one. 

What I have described above is a simple way to calculate PME, there are different forms of PME which have been developed over the years such as LN PME, KS PME, mPME, PME+ and Direct Alpha. 

THE KUSHIM WAY OF MEASURING VC FUND PERFORMANCE

The venture capital portfolio management software of Kushim offers customization and user friendly interface to continually monitor the VC fund performance.

All Fund Performance Multiples

The fund performance section offers all the information about your fund’s performance and all the multiples mentioned above are calculated as well.

You want metrics? Here they are!

Kushim’s venture capital management software offers 60 in built metrics to measure the performance of your portfolio companies. In addition, keeping in mind the bespoke nature of our solutions, now you can add your custom metrics. Moreover, you can even send an email directly from Kushim Management suite to your portfolio company and invite them to update the metrics. 

The representative of your portfolio company will only be able to access the company page of his/her company and update the metrics.

Reporting simplified 

The software venture capital tool offers dynamic data about your portfolio’s performance that can be exported to Excel with a single click.

The report generation tool

For those who love analytics and want to create custom reports, the Kushim venture capital software features a report generation tool that is dynamic in nature. All you need to do is select the type of data you want to compare and create dynamic reports that can be downloaded any time.

These are some of the salient features of Kushim’s venture capital software. If you would like to know more click on the below button to book a demo. 

Finally, in this article we have presented some of the basic metrics for measuring the performance of a VC. If you would like to read more on advanced methods for measuring a fund’s performance click here.

Source: 

John C. Kelleher and Justin J. MacCormack, “Internal Rate of Return: A Cautionary Tale,” McKinsey Quarterly, October 20, 2004.

The Business of Venture Capital by Mahendra Ramsinghani

The number of VC investments has been increasing rapidly over the past decade. And the number of deals as well as the size of investments is increasing along with the number of stakeholders. As a result, with an increased flow of information, the task of tracking the activities of a fund and maintaining LP-GP relationship becomes quite arduous.

As a VC, how do you stand out and enhance your productivity? The competition among VCs is getting intense. More and more corporates are entering the VC game. Last year more than 260 corporate venture funds invested for the first time.¹ Amidst this brewing competition, the hunt to identify the next unicorn is on.

Let’s say you have identified and invested in the next unicorn. Now you must monitor your investment and report to your Limited Partners (LPs). VCs waste a colossal amount of time preparing LP reports and keeping up with the stringent demands of their LPs. In large firms, even more time is consumed in double checking many documents internally. Using email, as a means of internal communication is the yesteryear way of doing things.

Edda’s venture capital software Portal is the gateway to optimizing LP reporting, maintaining transparency and improving the LP-GP relationship.

What does the Portal offer?

Keeping your LP’s informed dynamically

Portal’s dashboard features various sections which are crafted in a user-friendly way. The statistics section empowers the LPs to view essential stats such as amount of money invested per month, number of companies in the dealflow, number of companies accepted, rejected and under considerations and much more. Your LPs can have a brief look at the portfolio companies profiles, as well as other companies in the dealflow.  

The news section of the portal showcases news about the portfolio companies. Keeping in mind customization aspect, Portal allows users to add specific news and announcements for your LPs. For instance, adding relevant articles from other websites takes just a few clicks. In addition, the event section allows you to organize exclusive events and invite your LPs in a completely hassle-free way.

Now let’s talk about the dreaded monthly reports about your activities which you have to prepare and send to LPs. The Portal gives you the option to automatically email the latest reports to your LPs. Hence you can sit back, let the software venture capital tool do the work, and focus more on finding the next unicorn.

The power of collaboration and access at your fingertips

The portal is not just a gateway to provide information to your LPs. In fact, it gives you the power to collaborate not only internally but also externally. Hence taking the LP-GP relationship to another level. You can share relevant documents such as pitch decks, annual presentations or statistical reports with your lawyers, accountants and advisers via the portal.

There are two access levels for GPs to share dealflow data. The first level is for ambassadors who can see general dealflow statistics and companies under consideration while the second level is for affiliates who are the trusted third parties invited by the ambassadors.

You can absolutely control the access rights of every individual you collaborate with.

Sharing and growing

Many research studies have shown that VCs can improve the performance of their ventures by sharing their dealflow and networking with other VCs. You can share your dealflow with other investors and reap the networking benefits. Since, the portal fetches you with networking benefit, it also helps you find new LPs to raise new funds.

To solve this problem, Edda built the Portal into its venture capital portfolio management software. The Portal enables LPs  to actively participate in their internal processes by helping them find all the relevant information swiftly and easily. Portal also enhances the communication among the various stakeholders by providing them with a platform to connect and share dealflow.

Thank you so much for reading. I would love to read your comments and to know more about the Portal you can request a demo by clicking below.