Thread by Henri Pierre-Jacques
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- Feb 2, 2022
- #Investment
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🧵How does Seed stage fund math work?
Now that I invest in funds, I’ve seen dozens of emerging manager decks and the fund model is one of the biggest decisions and misses that I see. VC is as much math as gut/luck.
Let’s get into it
Now that I invest in funds, I’ve seen dozens of emerging manager decks and the fund model is one of the biggest decisions and misses that I see. VC is as much math as gut/luck.
Let’s get into it
1/ First you must decide which camp you are in
1) Concentrated portco (sub 20) w/ significant ownership (10%+)
2) Diverse portco (20-45) w/ decent ownership (5-10%)
3) Large portco (45+) w/ little ownership (sub 5%)
*There are exceptions to each category depending on fund size
1) Concentrated portco (sub 20) w/ significant ownership (10%+)
2) Diverse portco (20-45) w/ decent ownership (5-10%)
3) Large portco (45+) w/ little ownership (sub 5%)
*There are exceptions to each category depending on fund size
2/ The majority of Fund 1 and 2s I see are $10-75M so this applies for them largely
The average Seed fund has 28 investments according to @SapphireVC and its by far where I see the most funds so let’s focus on camp 2 of diverse portfolio and decent ownership.
The average Seed fund has 28 investments according to @SapphireVC and its by far where I see the most funds so let’s focus on camp 2 of diverse portfolio and decent ownership.
3/ Most funds I see are targeting 25-35 companies for 5-10% ownership. The ownership target largely depends on fund size which determines check size. What I’ve seen by fund size
$10-25M-> 5-7%
$25-50M->6-8%
$50-75M-> 8-10%
$10-25M-> 5-7%
$25-50M->6-8%
$50-75M-> 8-10%
4/ Some VCs don’t have ownership targets, but the majority I have invested in or co-invest with do. These targets are important to LPs and can impact the returns dramatically. So assuming you want to have a target how do you determine it??
5/ The calculations followed by an example
Fund Size - Mgmt fees - LP expenses* = Investable Capital
Investable Capital - Follow on Capital = Initial Capital
Initial Capital / Portcos = Initial Check
Initial Check / Post Money Valuation = Ownership target
*discussed later
Fund Size - Mgmt fees - LP expenses* = Investable Capital
Investable Capital - Follow on Capital = Initial Capital
Initial Capital / Portcos = Initial Check
Initial Check / Post Money Valuation = Ownership target
*discussed later
6/ Example with $25M fund
$25M - $2.5M mgmt fees (2% x 10yrs) - $0.5M LP expenses ($50k x 10yrs) = $22M Investable Capital
$22M - $7M Follow on (30% is on low end) = $15M Initial Capital
$15M / 30 portcos (average) = $500k Initial Check
$500k / $10M valuation = 5% ownership
$25M - $2.5M mgmt fees (2% x 10yrs) - $0.5M LP expenses ($50k x 10yrs) = $22M Investable Capital
$22M - $7M Follow on (30% is on low end) = $15M Initial Capital
$15M / 30 portcos (average) = $500k Initial Check
$500k / $10M valuation = 5% ownership
7/ Many emerging managers do not realize they will be investing 40-60% of the capital they raise into their initial checks.
Many founders also think funds can write larger checks than they can. Why it’s important to ask the funds what their check size and ownership target is
Many founders also think funds can write larger checks than they can. Why it’s important to ask the funds what their check size and ownership target is
8/ There are check sizes that founders can estimate based on fund sizes
$10-25M-> $250-500k
$25-50M-> $500-$1M
$50-75M-> $750k-$1.5M
A generally rule of thumb is a fund invest 1-3% of fund size as an initial check
$10-25M-> $250-500k
$25-50M-> $500-$1M
$50-75M-> $750k-$1.5M
A generally rule of thumb is a fund invest 1-3% of fund size as an initial check
9/ There are a few nuances that many managers miss in the model
1) LP fees such as deal legal, taxes, audits, fundraising, fund admin, etc
2) Investing years 4-10 mgmt fees
3) Recycling of early exits
These make a big difference in returns
1) LP fees such as deal legal, taxes, audits, fundraising, fund admin, etc
2) Investing years 4-10 mgmt fees
3) Recycling of early exits
These make a big difference in returns
10/ Subtract LP Fees
Most managers do Fund Size - Mgmt Fees = Investable Capital, but forget to subtract LP Expenses.
Across two funds we have seen ~2.5% to be a good target with fundraising, deal legal and fund admin to be the majority. These are critical and can’t be avoided
Most managers do Fund Size - Mgmt Fees = Investable Capital, but forget to subtract LP Expenses.
Across two funds we have seen ~2.5% to be a good target with fundraising, deal legal and fund admin to be the majority. These are critical and can’t be avoided
11/ Invest Mgmt Fees years 4-10
Most funds have investment periods of 2.5-3yrs, which is the period m they plan to invest in new companies, not follow ons.
After those years, you will have to raise a new fund. Implying you will have new Mgmt fees to cover cost
Most funds have investment periods of 2.5-3yrs, which is the period m they plan to invest in new companies, not follow ons.
After those years, you will have to raise a new fund. Implying you will have new Mgmt fees to cover cost
12/ Investing Mgmt fees has huge implications, an example exc. LP exp.
$25M Fund - $2.5M Mgmt fees (10yrs) = $22.5M Invested
$25M Fund - $750K Mgmt fees (3yrs) = $24.25M Invested
That’s $1.75M more to invest or 7% of the fund. That is 2-3 more companies or more in your winners
$25M Fund - $2.5M Mgmt fees (10yrs) = $22.5M Invested
$25M Fund - $750K Mgmt fees (3yrs) = $24.25M Invested
That’s $1.75M more to invest or 7% of the fund. That is 2-3 more companies or more in your winners
13/ Recycle early wins
Most LPs allow you to reinvest returns 18-36 months after the investment period. The early wins are often small and don’t impact the returns so you are better off reinvesting to go for another unicorn. This is a game of outliers
Most LPs allow you to reinvest returns 18-36 months after the investment period. The early wins are often small and don’t impact the returns so you are better off reinvesting to go for another unicorn. This is a game of outliers
14/ There unfortunately isn’t much written on these nuances and I had to learn by doing and many conversations with other GPs and LPs.
New GPs should have their model down and adjust throughout investing, it shouldn’t be static.
Founders that understand VC math have advantages
New GPs should have their model down and adjust throughout investing, it shouldn’t be static.
Founders that understand VC math have advantages
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