9 Venture Capital Metrics Every VC Should Know [Explained]
Venture capitalists use a variety of metrics to measure the potential success of a startup. In this article, we explain how VC metrics are calculated, used, and read for more profitable investment decisions.
Venture capital funds finance high-growth potential companies, and to do so, they must determine the value and whether it's worth investing in. Since it is much riskier to invest in startups compared to mature, established companies, investors must analyze different Venture Capital metrics in order to understand the risk and return for a venture opportunity.
In today's article, a team of experts at Dialllog CRM is going to explain how venture capital metrics are used by the top VC investors.
Most importantly, Venture capital metrics provide a way to compare different investment opportunities and make informed decisions about where to invest. It is necessary to make calculations on companies that have high growth potential because of the risk factor.
VC metrics can also give insight into the overall health of the startup ecosystem. Venture capitalists use these calculations to assess the performance of startups.
Additionally, these metrics can help identify trends and red flags that may be indicative of problems down the road.
One of the most important things to keep in mind when looking at venture capital metrics is that no metric is perfect. They all have their own strengths and weaknesses, so it's important to look at a variety of them when making investment decisions.
There are typically nine VC metrics used to determine fund's health and performance. This consists of 5 multiple calculations metrics and 4 internal rates of return calculations metrics. Let's break them down.
The following multiple calculation metrics can offer significant insight into a VC fund's performance.
1. Multiple on Invested Capital (MOIC Metric)
Multiple on Invested Capital (MOC) is a gross VC metric that assesses the value or performance of an investment. To do this, it compares the value of the current investment to what was initially invested. It can be calculated at the portfolio level, but also at the deal level. In terms of analysis and reporting, it is highly valuable for both. It is best used to determine a general partner's ability to choose investments likely to have high returns and the ability to make good raw investments. It is important to note that with MOIC, investment returns are from liquidation (partial or full), the book value does not include any expenses or fees, and the basis consists of the deal costs and invested capital.
2. Gross Total Value to Paid-In Capital (Gross TVPI Metric)
Gross Total Value to Paid-In-Capital is based on a General Partner's ability to invest. This venture capital metric specifically shows a GP's ability to turn an LPs investment into a large profit. Gross TVPI is the ratio of the current value of investments remaining within a fund, plus the total value of all distributions, respective to the total capital amount paid into the fund. The paid-in capital amount consists of all the funds raised by the firm through the sale of equity, not business operations.
3. Net Total Value to Paid-In Capital (Net TVPI Metric)
Net TVPI is known as the second most important VC metric for LPs. Net TVPI and Gross TVPI have slight differences. Net TVPI utilizes distributed capital and fund book value, while Gross TVPI uses investment returns and investment book value in the calculation. Regarding Net TVPI, distributed capital is all the expenses, fees, and carry added together.
4. Residual Value per Paid-In Capital (RVPI Metric)
RPVI is an important VC metric used to calculate the worth of a fund on paper. It essentially reveals what the owner of the business believes his company is worth. RPVI metric is used to estimate the Venture Capital fund's performance in the beginning and middle of its life cycle. It can also reveal: ● Potential of a portfolio ● The odds for RPVI to turn into DPI
5. Distributions per Paid-In Capital (DPI Metric)
DPI is the most important venture capital metric to both General Partners and Limited Partners. This metric calculated the proportion of money distributed by the fund. Therefore, a high DPI is much more favorable than a low one. It is simply calculated by dividing the distributed capital amount by the paid-in capital amount.
Internal Rate of Return (IRR) Based Metrics For VCs
Here are some of the most important rate of return metrics that can help VCs with understanding performance over time:
6. Gross IRR Metric
The gross IRR is the return on investment. This rate of return is valuable because it measures a GPs ability to create returns based on the capital invested. This VC metric reveals a GPs raw investment ability. Gross IRR does not consider fees and costs. The outflows from gross IRR are determined by Investment Cost/Basis or Paid-In Capital and the inflows are determined by Investment Proceeds/Returns or Investment Book Value. The gross IRR is always greater than the Net IRR. However, in the rare case that there are no management costs or fees, then gross IRR is equal to net IRR. The gross IRR is all about the performance of investments.
7. Gross Realized IRR Metric
When assessing a GP's capacity to make raw investments, this is the best rate of return, akin to the gross IRR. It applies to securities, businesses, and funds and assesses the actual cash return on all assets. You should be sure that either paid-in capital or invested capital was used before calculating gross IRR. Ensure you are aware of this because it may significantly affect how you calculate your gross IRR. Gross realized IRR outflows are determined by Investment Cost/Basis or Paid-In Capital and inflows are determined by Investment Proceeds/Returns. This Venture Capital metric ignores any unrealized gains or dividends that are not the result of disposals and excludes Net Asset Value from the end value.
8. Net IRR Metric
The internal rate of return after fees and carried interests are considered is known as the net internal rate of return or Net IRR. This is what differentiates it from gross IRR. The ability of a GP to provide returns on the capital contributions of an LP is measured by their net IRR. Although GPs frequently mention this measurement, it is only the LPs' second-most important metric. The net IRR should only be utilized at the fund level. Net IRR outflows are defined by analyzing Paid-In Capital and inflows are determined by Distributed Capital and Fund Book Value.
9. Net Realized IRR Metric
The most crucial statistic for LPs at the fund's conclusion is net realized IRR since it displays the whole yield or quality of an investment. Net realized IRR can be used to create a J-Curve. The normal trajectory of investments made by a private equity firm is known as the "J-curve." The J-curve is a chart representation of the simple fact that situations sometimes worsen before improving. Net realized IRR considers the impact of costs, fees, carried interests, and other variables that multiple calculations do not. Net realized IRR outflows are determined by analyzing Paid-In Capital and inflows are determined by examining Distributed Capital.
Revenue is the money made from business operations and is calculated by multiplying the average selling price by the quantity of units sold or estimated to sell. This Venture Capital key performance metric is significant since a company needs to generate income in order to make a profit. All things being equal, a corporation will generate less money if its revenue is lower. If you are able to make more than you spend, it will also assist you in calculating the burn rate.
Customer lifetime value is a measurement of how much a company may expect to make from the typical client over the span of the relationship. Calculations of client lifetime value can be very different based on variations in items, prices, purchase frequency, and volume.
The goal of the unit economics performance metric is to calculate the overall return on investment for each pre-selected unit of measurement. The most typical unit of measurement for many startups is per client. This measurement describes the revenue you generate from each sold unit.
Venture Capital funds are highly sought out by businesses looking for private equity financing to grow. However, these VC investments are risky. Even investments in high-growth potential companies still pose a lot of risks. That is why VC fund metrics are so essential.
It is necessary to take measurements and to make calculations on a company to make educated risks. Measuring business performance is not only important but also critical. Successful investors recognize the value of tracking venture capital fund performance metrics to maximize their returns.
What is Dialllog?
Dialllog is the first ecosystem relationship CRM software designed specifically for PE, VC and M&A funds to manage the full investment cycle.
No more endless Excel spreadsheets, docs, notes and emails. Dialllog brings all the sporadic information into one PE software to create data-driven workflows.