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Beyond pitch decks, valuations, term sheets, and growth rates, fundraising is about relationships. Behind every round of capital is a series of conversations, introductions, and partnerships that result from human-to-human connection. That’s why we’re excited to announce the launch of our new podcast season, Thrive Through Connection, a series dedicated to exploring the human side of fundraising. Why Thrive Through Connection We’ve seen firsthand that at the center of successful startups, good old-fashioned relationship building consistently shows up, because founders don’t raise capital in a vacuum. They rely on their teams, peers, and investors to navigate the ups and downs of building something from nothing. Thrive Through Connection highlights the relationships that fuel the growth of both founders and investors. We candidly discuss what it really takes to raise venture capital, including the setbacks, tactics, and stories you won’t hear anywhere else. What to Expect Each episode features real stories and actionable insights from founders and investors, from first-time founders reflecting on closing their first round to seasoned investors sharing what they look for in a deal. Every conversation is packed with lessons you can apply to your fundraising journey. The First Episodes We’ve got three episodes to get things started, and we’re excited to continue recording and publishing new episodes throughout the year. Check out the first three below: Finding the Right Investors with Laurel Hess On the first episode of the Thrive Through Connection Podcast, we welcome Laurel Hess, the CEO and Founder of hampr. Laurel has raised over $10M for hampr across multiple rounds. She joins us to share her journey and the importance of building genuine relationships with investors. Navigating Investor Relationships with Brett Brohl On the second episode of the Thrive Through Connection Podcast, we welcome Brett Brohl, Managing Partner at Bread & Butter Ventures. Brett joins us to dive deep into all things founder fundraising, sharing tactical advice on everything from cold outreach to evaluating if an investor is a true culture fit. Going From Operator to Funder with Leo Polovets On the third episode of the Thrive Through Connection Podcast, we welcome Leo Polovets, the General Partner at Humba Ventures and Co-founder of Susa Ventures. Leo joins us to talk about his journey from operator to supporting over 100 companies as an investor at both Humba and Susa. The first three episodes are live now on Spotify, Apple Podcasts, and most places you get your podcasts. Subscribe to the Thrive Through Connection Podcast to stay in the loop as more episodes are published.

On the third episode of the Thrive Through Connection Podcast, we welcome Leo Polovets, the General Partner at Humba Ventures and Co-founder of Susa Ventures. Humba Ventures invests in early-stage deep tech startups and is part of the broader Susa Ventures network. Leo joins us to talk about his journey from operator to supporting over 100 companies as an investor at both Humba and Susa. About Leo Before founding Susa, Leo worked as a software engineer at companies like Google and LinkedIn. Since launching Susa with a $25M fund in 2013, the team has raised over $750M across both Susa and Humba Ventures. Leo and the team have had a front-row seat in helping scale a portfolio that includes Robinhood, Flexport, Stord, and many more. Mike, the CEO and Founder of Visible, had an opportunity to sit down and chat with Leo. You can give the full episode a listen below: Spotify Link Apple Link Google Link What You Can Expect to Learn from Leo Why Leo and Susa Started Small How Seed Stage Companies Can Prepare for a Series A The Importance of Building Relationships Before a Fundraise How Investor Updates Can Create Traction Why Storytelling is Crucial to Raising Capital Stay up to date with the Thrive Through Connection Podcast by subscribing wherever you listen to your podcast. You can find links to your favorite podcast hosts below: YouTube Spotify Apple

On the second episode of the Thrive Through Connection Podcast, we welcome Brett Brohl, Managing Partner at Bread & Butter Ventures, an early-stage venture firm based in Minnesota. Brett joins us to dive deep into all things founder fundraising, sharing tactical advice on everything from cold outreach to evaluating if an investor is a true culture fit. About Brett Before founding Bread & Butter, Brett started multiple companies and spent time at Techstars. He’s a mainstay on LinkedIn and YouTube, where he shares countless takeaways for founders navigating the journey of raising capital while building their businesses. From his experience raising and managing four funds at Bread & Butter, Brett brings a wealth of knowledge, especially when it comes to the fundraising process. Mike, the CEO and Founder of Visible, had an opportunity to sit down and chat with Brett. You can give the full episode a listen below: Spotify Link Apple Link Google Link What You Can Expect to Learn from Brett Why Finding a Cultural Fit With Investors is Essential Why the Best Communicators are Often the Best Performing Companies What it Means to Treat Fundraising Like a Sales Funnel How to Maintain Momentum in a Fundraise The Most Overlooked and Overrated Deck Slides Stay up to date with the Thrive Through Connection Podcast by subscribing wherever you listen to your podcast. You can find links to your favorite podcast platforms below: YouTube Spotify Apple

On the first episode of the Thrive Through Connection Podcast, we welcome Laurel Hess, the CEO and Founder of hampr. Hampr is an on-demand laundry service that will pick up your laundry and return it fresh and folded, right to your front door, within 24 hours. Laurel has raised over $10M for hampr across multiple rounds. She joins us to share her journey and the importance of building genuine relationships with investors. About Laurel Before founding hampr, Laurel built a career in marketing, where she launched and ran a profitable marketing agency. Since starting hampr in 2019, she has experienced the ebbs and flows of venture capital, from COVID-19 to low interest rates to the SVB crash. Laurel has had a front-row seat to how the market evolves and why building strong relationships is key to weathering turbulent times. Mike, the CEO and Founder of Visible, had an opportunity to sit down and chat with Laurel. You can give the full episode a listen below: Spotify Link Apple Link Google Link What You Can Expect to Learn from Laurel Why having the right people on your cap table matters Tactics for backchanneling and finding warm investor intros The key questions she asks during investor conversations How she nurtures investors who initially say “no” Her approach to managing and interpreting investor feedback Stay up to date with the Thrive Through Connection Podcast by subscribing wherever you listen to your podcast. You can find links to your favorite podcast hosts below: YouTube Spotify Apple

Tear sheets are an important component of the venture capital industry. If you’re new to VC, it's crucial to understand what a tear sheet is and how to create a valuable and effective one for your fund. What is a Tear Sheet? A tear sheet is a single-page summary of an individual company. A tear sheet is a critical term to understand in the venture capital world. Beyond a simple understanding of what a tear sheet is, it’s important to learn how a tear sheet is best used and how to create one. The term “tear sheet” originated from pre-internet business when S&P would produce summary sheets for public companies on one page. All of these single-page summaries could be torn out of a larger book containing all of the summary sheets. This act of tearing out the relevant page stuck around. Even though the physical act of tearing a sheet is gone, the single-page summary, the tear sheet, has withstood the test of time and is an extremely important piece of collateral for anyone working in VC to understand. A tear sheet should contain overview information about a company. This should include the total investment amount, gains/losses, sector, and a summary of company performance. Essentially, anything that will allow the reader to get a quick snapshot of the business and give them an understanding of earning potential that is possible should be included on the tear sheet. The LPs (limited partners) or investors at a VC firm are a key audience that will be viewing the tear sheet. You want to make a good impression when presenting information to LPs. Therefore, when thinking about putting together tear sheets for your portfolio companies, it’s important to make them look professional and use them to effectively communicate concise updates about your companies. Well-put-together tear sheets can go a long way in impressing LPs. View Tear Sheet examples from Visible. Tear Sheet Templates When building out tear sheets for your portfolio companies, make sure to include both metrics and qualitative data about your companies. If you’re looking for a tear sheet template (read on to learn more about tear sheet templates in Visible!) make sure to find a template that includes both of these categories. Start with metrics, or quantitative data about the company. A few metrics to consider including*: Revenue – Revenue and revenue growth over time is an easy way to understand the health status of a company. While not an accurate portrayal of the company as a whole, it gives LPs a sense of the stage of the company. FTE Headcount & New Hires – This is typically considered non-sensitive data from portfolio companies but again gives LPs an idea of the stage of the company and how they’re growing over time. It also is an indicator of how a company is using their cash. True North KPIs – Depending on the type of company, this might differ. The true north KPIs in a tear sheet template should be the key performance indicators that are guiding the business every single day. Beyond revenue goals, examples of other KPIs could be active users, a customer net promoter score, active customers, or average contract value. *Note: It’s important to maintain privacy for portfolio companies and receive permission to share information with LPs. It’s also a best practice to share the same level of detail across all companies. Another important section to include on a tear sheet is an investment overview. Some items to include are: Total Invested – It’s helpful to remind LPs about the total invested in a company and how it compares to others in the portfolio. Date of Initial Investment – This gives a sense of how long it has been since the initial investment and gives context on when to expect a return. Investment Multiple – This provides LPs with an idea of the expected return in the future. Shifting from the metrics on your tear sheet template, consider the following qualitative points to include in your tear sheet: Company Tagline – This is an easy and concise way to orient or remind an LP about what the company does. Sector – This simple static property again helps provide context to LP’s who have invested in several funds. HQ Location – Helps everyone stay on top of where the portfolio is located. Narrative Update – This section is a commentary on recent highlights from the portfolio company. As always, it’s important not to disclose sensitive information about a portfolio company. Asks – Depending on your relationship with your companies and LPs, it may be appropriate to share ‘Asks’ from portfolio companies with LPs. For example: Company A is looking to hire a Head of Engineering based in Berlin and is seeking candidate referrals. Tear Sheet Examples A great place to start when creating your portfolio tear sheets and looking for tear sheet examples is to ask your network. Talk to experienced funds in your network. If they’ve raised several funds and have close relationships with their LPs, they probably have a great idea of what LPs like to see when receiving updates about portfolio companies. You can also check out Visible’s Tear Sheet Examples here. Using Visible for Portfolio Tear Sheets Visible is an incredibly useful tool for funds to report to the LPs on a consistent basis. You can take the quantitative data and qualitative information suggested above and turn it into a template right in Visible. Check out a tear sheet example in Visible below. How Visible Automatically Builds Tear Sheets Visible is the perfect tool to build tear sheets for all your companies in just a few clicks. Visible automatically builds tear sheets by: Equipping investors to automatically collect structured data from portfolio companies on a regular basis. As an investor, you can decide what data is most relevant to request from each company. Creating tear sheet templates that automatically pull in metric data, investment data, and qualitative properties that already exist within Visible. Interested in exploring how to build Tear Sheets in Visible?

In the world of fundraising, effective communication and transparency can set a business apart. Visible provides founders with powerful tools to keep investors informed, engaged, and confident in their vision. But what happens once you've shared an update, data room, pitch deck, fundraising pipeline, or dashboard? How do investors interact with this content? In this article, we'll explore how each Visible feature functions from the investor's perspective, highlighting the value each solution provides and offering insights into the investor experience. Investor Updates: Keeping Stakeholders Informed How It Works for Investors Once an update is shared, investors receive an email notification or an in-app alert (if they are a Visible customer). These updates are designed for founders to keep investors informed about key business metrics, growth milestones, challenges, and ask for help. Why It Matters Transparency builds trust – Investors appreciate regular insights into company performance. Encourages engagement – Investors can reply to updates, ask questions, and provide feedback. Saves time – Instead of investors chasing founders for information, they receive structured, digestible updates directly in their inbox. Data Rooms: Secure and Streamlined Due Diligence How It Works for Investors When a founder shares a data room with a Visible contact, the investors will receive a secure link via email to access the data room. When a founder shares a data room via a link, there are additional security settings that they can optionally add, so investors may need a password or be restricted by domain access if a founder designates this. Once investors have access, they can explore financials, legal agreements, pitch decks, and more in an organized manner. Why It Matters Simplifies due diligence – All necessary documents are centralized, making it easier for investors to assess an opportunity. Flexible access controls – Founders can enable or restrict downloads, add watermarks, and control document permissions. Professional presentation – Custom branding options ensure the data room looks polished and credible. Pitch Decks: Delivering Your Story with Impact How It Works for Investors When a pitch deck is shared from Visible, founders will provide a link to investors to view the deck. The deck is displayed in an easy-to-navigate format, and founders can track how investors are engaging with the deck content. Why It Matters First impressions count – A well-structured pitch deck can capture an investor’s interest quickly. Engagement tracking – Founders can see which slides investors view and how much time they’ve spent viewing to help refine future presentations. Seamless access – No need for file downloads or cumbersome attachments; investors access the deck instantly. Fundraising Pipelines: Visibility into Your Process How It Works for Investors Founders can share their fundraising pipeline with existing investors, providing visibility into the status of conversations, committed funds, active discussions, and broker introductions to their investor network. Why It Matters Encourages follow-ups – Investors can see where they stand in the process and take action if needed. Demonstrates momentum – Seeing other investors in the pipeline can create urgency. Provides context – Investors get a clear picture of who else is involved and can help introduce founders for warm conversations. Dashboards: A Data-Driven View of Progress How It Works for Investors Founders can share links to real-time dashboards that showcase key performance metrics, financials, and other important data points. Why It Matters Data-driven decision-making – Investors can quickly assess traction and performance. Live updates – Instead of static reports, investors see real-time data changes. Visual clarity – Custom charts and graphs help present complex information in an easily digestible format. Conclusion: Enhance the Investor Experience By leveraging Visible’s suite of tools, founders ensure investors remain engaged, informed, and confident in their decision-making. Whether it's an investor update, a detailed data room, or a dynamic dashboard, every interaction is designed to build stronger investor relationships and streamline the fundraising journey. By providing seamless, secure, and insightful access to critical information, Visible helps founders maximize investor engagement and accelerate fundraising success. Sign up for a free trial today!

Raise capital, update investors and engage your team from Visible. Use the YC Investment Memo Template to get started. Memos are a clear and concise document to lay out strategic vision, rationale, and expectations (in case you missed it, we wrote about the importance of memos earlier this week). We found the Y Combinator Investment Memo to be particularly interesting. The YC Investment Memo Memos have been something that most of us likely associate with VC funds writing for a prospective investment. The YC memo flips this idea on its head. In the YC Series A Guide, they share an investment memo template aimed towards founders. YC suggests sending your memo to investors in advance of a meeting to set the tone for the conversation. The idea is that by articulating your own memo, you can: “Clarify your own company’s pitch and story” “Incept your vision of the memo into their (potential VCs) brains.” To give you an idea of what a memo may look like, we turned it into a Visible Update Template. Pitch Deck vs. Memo Using a memo to power a fundraise is an interesting idea. As YC suggests, founders that are strong writers may benefit from using a memo. The pitch deck has always been the go-to form for sharing data but Billy Gallagher of Rippling makes the case for using a memo in tandem. Billy Gallagher shares a few key advantages to a memo that we’ve summarized below: It is standalone — By sending a memo in advance you do not have to worry about the investors missing any context. Investors will be able to read and digest the memo on their own. Opposed to a pitch deck that may require a pitch and narrative around different components. Less time — A memo will allow investors to quickly pass or take the next meeting. This way you can spend time on the firms that are truly interested. Helps GP Pitch — At the end of a process a GP will have to pitch their other partners on why their fund should make an investment. By writing your own memo, it will make sure that the GP is properly presenting your company and idea to their peers. We are not suggesting that every company suddenly start sending memos to kickoff an investor meeting. However, there are clear advantages and an interesting tool that more founders should study. If a memo sounds like a good fit for you and your company, give it a shot! If you’re interested in learning more fundraising tips, be sure to subscribe to our weekly Founders Forward Newsletter.

As more capital flows into venture as an asset class, investors are increasingly competing for LP dollars and space on the cap table from the best founders they work with. Gone are the days when capital is enough of a differentiator for a VC fund to get on a hot startup’s cap table. Considering the average VC + Founder relationship is 8-10 years (longer than the average marriage in the US) — founders are beginning to look for a true partner out of a VC fund. In order for a VC fund or emerging fund manager to stand out among other funds, they need to have the data and systems in place. LPs have increasingly higher expectations for fund performance while founders have increasingly higher expectations for VC funds. About this Report The goal of this report is to break down the best practices we see hundreds of VC use to collect and share their portfolio data. We outline best practices related to: Market Data Overview Timing of Data Requests Number of Metrics to Collect Most Common Metrics The Founder Experience Qualitative Questions Minimum Viable Data Request Company Success = Fund Success Venture capital funds are only as successful as their portfolio companies. There are few people who have been in a founder’s shoes and can help them navigate the challenges they are facing. However, investors are in a unique position as they’ve likely seen many portfolio companies and potential investments face the same challenges. In order to best help portfolio companies, investors need to have a strategy in place to collect both qualitative and quantitative data from their portfolio companies. Collecting a few KPIs and company asks is a great place to start (more on this later in the report). At the same time, there is a balance between helping and being a burden on a portfolio company. Download our report to learn some simple best practices so you can collect the data you need without burdening your portfolio companies

As a venture capital investor, you know that clear, actionable portfolio insights can mean the difference between informed decisions and missed opportunities. That’s why we created Our Guide to Portfolio Reports in Visible — a comprehensive resource to help you streamline how you visualize, analyze, and communicate insights about your portfolio companies. In this guide, you’ll discover: Common metrics that top VC firms track, such as Revenue, Cash Balance, and Runway. Segmentation strategies that enable deeper analysis by Fund, Market, or Partner. How to use Visible Portfolio Reports to consolidate portfolio data into one view. Examples of portfolio reports showcasing real-world insights from leading firms. Join 590+ venture capital funds already using Visible to uncover insights, fill reporting gaps, and make data-driven decisions faster. Are you ready to take your portfolio reporting to the next level? Download the guide below:

A well-maintained cap table is one of the most critical tools for startup founders navigating the complex world of equity and ownership. As a startup grows, managing and understanding equity distribution becomes essential for making informed decisions, attracting investors, and maintaining transparency. A clear cap table can help founders visualize ownership, anticipate dilution, and ensure accurate fundraising. Whether you’re preparing for investment rounds, employee stock options, or future exits, having a reliable cap table is crucial for your startup’s financial health and long-term success. What Is a Cap Table (i.e., Capitalization Table)? A cap table, or capitalization table, is a detailed spreadsheet or document that outlines a startup's equity ownership. It provides a breakdown of all the company’s securities, including common and preferred shares, options, warrants, and convertible instruments. Each entry typically includes details such as the type of security, the number of shares issued, the names of shareholders or stakeholders, and their ownership percentage. Cap tables also help illustrate how ownership evolves over time, especially after significant events like fundraising rounds, employee stock option grants, or equity transfers. A comprehensive cap table allows founders, investors, and employees to understand who owns what portion of the company and how that ownership could be diluted in future scenarios. Related resource: Emerging Fund Managers You Want on Your Cap Table What Is the Difference Between a Cap Table and a Term Sheet? While both a cap table and a term sheet play crucial roles in a startup’s equity management and fundraising, they serve distinct functions and provide different types of information. Cap Table:A cap table is a current snapshot of a company’s ownership structure. It details all the securities issued, such as shares, options, warrants, and convertible notes, and specifies who owns them. The cap table evolves with each new investment, equity issuance, or employee stock grant. It helps founders and investors understand who owns what percentage of the company, track dilution, and plan for future fundraising. Term Sheet:A term sheet is a forward-looking proposal provided by an investor during a funding round. It outlines the terms and conditions of a potential investment, such as the amount of capital being invested, the company’s valuation, equity percentage, liquidation preferences, voting rights, and other key terms. A term sheet is non-binding (except for certain confidentiality or exclusivity clauses) and serves as the basis for negotiating and drafting the final investment agreement. In summary: The cap table is a snapshot of the company’s current equity structure. The term sheet sets the groundwork for future changes to the cap table based on agreed-upon investment terms. Both documents are critical during fundraising, but they address different aspects of the process- one tracks equity, and the other negotiates terms. Related resources: 6 Components of a VC Startup Term Sheet (Template Included) Navigating Your Series A Term Sheet Why Is a Cap Table Important for Startups? A cap table is essential for maintaining transparency, managing equity, and making informed business decisions as your startup scales. It provides a clear view of who owns what, how ownership changes over time, and the potential impact of future investments or stock option grants. For founders, a cap table helps protect against excessive dilution and ensures strategic equity allocation. It offers investors insight into the company’s ownership structure and potential risks. Without an accurate and up-to-date cap table, startups can face challenges during fundraising, audits, or key financial decisions, making it a foundational tool for growth and sustainability. Understanding the Ownership Breakdown of Founders, Investors, and Employees Founders must always be aware of what their cap table means for ownership of their company. Understanding ownership is critical as the company grows and develops. Cap tables tell investors who owns what part of a company. Current investors want to see who has control. They also want the ability to forecast potential payouts and dilution under specific scenarios based on the ownership split. The breakdown of ownership in a startup can affect the company's overall value for future fundraising rounds, as well as who needs to be at the table for certain critical company decisions. Related Resources: How to Fairly Split Startup Equity with Founders Understanding Contributed Equity: A Key to Startup Financing Monitoring Equity Value and Tracking Company Valuation Monitoring equity value and tracking company valuation are crucial for both employees and investors. An up-to-date cap table provides a transparent view of how much the company is worth and how each stakeholder’s equity is affected by funding rounds, option grants, or changes in ownership. A well-maintained cap table helps all stakeholders understand how ownership changes, ensuring alignment and confidence in the company’s growth trajectory. By consistently monitoring equity value, startups can facilitate fair and transparent equity management, essential for long-term success. For Employees: Employees who hold equity, such as stock options, need to understand the potential value of their shares. A detailed cap table helps them see how their ownership stake evolves over time, providing clarity on the potential value of their equity and how it may be diluted with new investments. This transparency can also increase motivation and align their interests with the company’s growth. For Investors: Investors rely on the cap table to evaluate their ownership percentage, potential returns, and dilution risk. By tracking the company’s valuation over time, investors can assess whether their investment is growing in value and determine how future funding rounds will impact their stake. Accurate valuation data also informs strategic decisions during follow-on investments or exit planning. Facilitating Fundraising Rounds with Transparency and Accuracy In addition to current investors utilizing a cap table for forecasting and dilution predictions for different investment outcomes, potential investors and future fundraising can also be affected by cap tables. By viewing a cap table, potential investors can evaluate how much control and leverage could be maintained during negotiations. Historical insight provided in a cap table can affect negotiating current valuation for new funding raises. Additionally, an existing shareholder can easily determine what percentage of the company to give to the new investors in exchange for the capital contributed. Preparing for Financial Audits and Regulatory Compliance Maintaining an accurate and up-to-date cap table is essential for startups to ensure compliance with legal and regulatory requirements. Regulatory authorities and auditors often require companies to present their cap tables annually, ensuring adherence to legal standards and facilitating processes such as capital rounds and ownership changes. A well-maintained cap table provides a transparent record of the company's equity structure, which is crucial for: Regulatory Filings: Accurate cap tables are necessary for filings with regulatory bodies, such as the Securities and Exchange Commission (SEC), to comply with securities laws and regulations. Tax Reporting: Proper documentation of equity ownership and transactions ensures compliance with tax obligations and helps avoid penalties and legal issues. Investor Relations: Transparency in equity distribution builds trust with investors, demonstrating responsible management and adherence to legal standards. Why Do Investors Want to See the Cap Table? Investors want to review a startup’s cap table because it offers a comprehensive snapshot of the company’s ownership structure. This transparency is crucial for assessing risk, understanding equity dynamics, and making informed investment decisions. A well-maintained cap table helps investors evaluate several key aspects: Equity Distribution: Investors can see how ownership is split between founders, employees, and previous investors. This helps them gauge how much control the founding team retains and identify any potential risks related to future decision-making authority. Dilution Risk: The cap table reveals how new investments might dilute existing ownership. Investors need to understand how their stake may change in future funding rounds and whether the current equity structure leaves room for sustainable growth. Investor Rights and Preferences: A detailed cap table shows who holds preferred shares, warrants, or convertible instruments. This helps investors understand potential liquidation preferences and voting rights, which can affect exit strategies and return on investment. Potential Red Flags: A cap table can highlight any irregularities, such as over-diluted founders or complicated equity structures that might hinder future fundraising. What Does a Cap Table Look Like? A cap table typically takes the form of a spreadsheet or specialized software-generated table that organizes the company's equity information clearly and structured. It generally includes stakeholders in rows and types of equity details in columns, making it easy to see who owns what and how much. For more complex startups, the cap table can include additional details like option pools, convertible notes, and transaction history. Key components of a cap table often include: Shareholder Names: Lists founders, employees, investors, and other stakeholders who hold equity in the company. Number of Shares: The total number of shares each stakeholder owns. Type of Security: Categories like common shares, preferred shares, stock options, warrants, or convertible instruments. Ownership Percentage: Each stakeholder's proportional ownership of the company based on their share count. Investment Date: The date each stakeholder acquired their shares or invested in the company. Valuation Details: Information on the price per share and company valuation at each investment round. Image source Does a Cap Table Show Debt? A cap table does not typically show debt. Rather, it is specifically designed to track a company's equity ownership structure, detailing shares, options, warrants, and other equity instruments. Its primary function is to outline who owns portions of the company and how ownership is distributed among stakeholders like founders, employees, and investors. However, while debt is not shown on a cap table, certain debt-related instruments might be included if they have the potential to convert into equity. For example: Convertible Notes: These are debt instruments that convert into equity at a later stage, often during a future funding round. Convertible notes are generally tracked on the cap table because they will eventually affect ownership percentages once converted. SAFEs (Simple Agreements for Future Equity): Similar to convertible notes, SAFEs are agreements where investors provide funding in exchange for the right to future equity, and they typically appear on the cap table before conversion. Traditional loans or other forms of debt (e.g., bank loans, lines of credit) are tracked separately in the company’s financial statements, such as balance sheets, rather than on the cap table. This separation helps maintain clarity between the company’s equity structure and its liabilities. Related resources: The Startup's Handbook to SAFE: Simplifying Future Equity Agreements SAFE Fundraising: When to Consider & Benefits Information to Include in a Cap Table There is no fixed format for a cap table, but a comprehensive cap table should include key components that provide a clear picture of the company's equity structure. These components ensure transparency for founders, investors, and employees, helping to avoid misunderstandings and potential errors during fundraising, audits, and strategic planning. Here are the essential elements to include: Shareholders and Stakeholders: A list of all individuals and entities that hold equity in the company, including founders, employees, angel investors, venture capital firms, and advisors. This helps identify who owns portions of the company and their respective roles. Equity Details: Information on the type of equity held, such as common shares, preferred shares, stock options, warrants, and restricted stock units (RSUs). Each entry should specify the number of shares issued and any associated terms. Valuation and Ownership: Details on the company's valuation at different stages (e.g., pre-money and post-money valuations) and the percentage of ownership each stakeholder holds. This helps illustrate how equity is distributed and how ownership changes with new investments. Option Pool: The number of shares allocated for current and future employees as part of an equity incentive plan. The option pool is important for understanding potential dilution and planning for new hires. Related resource: The Essential Guide to Option Pools: Definition, Purposes, and Benefits for Startups Convertible Instruments: Any convertible notes, SAFEs (Simple Agreements for Future Equity), or other instruments that may convert into equity in the future. These should include details such as the conversion terms, amounts, and potential dilution impact. Transaction History: A record of all equity-related transactions, including issuance dates, purchase prices, investment rounds, and transfers. This historical data is crucial for maintaining accuracy and demonstrating compliance during audits. Restrictions and Agreements: Information on any restrictions or agreements related to equity, such as vesting schedules, buyback rights, or shareholder agreements. This helps stakeholders understand the conditions attached to their equity and any limitations on transferring shares. How Do You Make a Cap Table? Cap tables can be created and managed in a variety of ways. Typically, it is common for new startup founders to build their initial cap table in a spreadsheet. However, as your startup grows and the valuation and stakeholders get more involved and complex, a simple cap table design in a program like Excel won’t work. Some companies will use tools like CapShare or Carta, to build and manage their cap tables. These tools are typically more dynamic and less manual than managing via Excel. They can be easier to utilize to share out and circulate with employees and investors. In other scenarios, it might make the most sense to outsource the production and management of a cap table. When founders choose to self-manage their own cap table, they are susceptible to risks. Some of these risks include miscalculating valuations, which can lead to giving up too much equity and over-diluting shares in new investment rounds. Additionally, there might be tax consequences or legal issues arising from the mismanagement of a cap table. By outsourcing the production and management of a cap table. Typically, this management is outsourced to a legal team to ensure accuracy and compliance. Outsourcing is more expensive than managing with a software but can be much less expensive at the cost of major mistakes or miscalculation of value. How to Use a Cap Table? When using a cap table, it’s important to understand the following formulas: Post-Money Valuation = Pre-Money Valuation + Total Investment Amount Price-Per-Share = Pre-Money Valuation / Pre-Money Shares Post-Money Shares = Post Money Valuation/ Price-Per-Share Investor Percent Ownership = Investor Shares / Post-Money Shares These formulas are essentially what will be laid out in a cap table so understanding them is crucial. These formulas can also be used to update the cap table as it grows more complex via different significant financial rounds. The more investment rounds or other significant financial changes on the table, the more complex the cap table gets. This breakdown essentially showcases the additional steps and participants who are stakeholders in the startup. Founders round – this is the simplest version of the cap table and will typically showcase the simple split of equity between the founders of the company. Seed round – this introduces investors to the table who now own a portion of the company along with the founders and have given cash to the startup altering the overall value. Options pool round – when options are provided for new employees, this changes the value and breakdown of the company as represented by the cap table. Overtime, as more employees are hired and more options are granted, the more complex the cap table gets. VC round(s) – With any additional funding rounds taken on by the startup, the valuation drastically changes as does the list of stakeholders on the cap table. All of these events or rounds are significant and will change the breakdown and complexity of the cap table. How Do You Keep a Cap Table Updated? With the array of cap table management tools on the market, updating and keeping tabs on your cap table is easier than ever before. Generally, founders need to stay on top of their cap table management. If you raise a new round, offer new employee grants, terminate an employee, etc., you need to make the changes as soon as possible to avoid future headaches. If you put off updating your cap table in real-time, it could end up being a costly mistake as you need a lawyer to update and correct the table. To make your life as easy as possible, we recommend using software to manage and update your cap table. There are countless options, but we recommend Pulley. You can learn more about cap table management (and Pulley) in our Founders Forward Podcast with Pulley CEO and Founder Yin Wu here. Cap Table Examples/Templates Instead of starting from scratch, many founders will use a template to build out a cap table. Check out these templates below: 1. S3 Ventures Template S3 Ventures offers a template in Excel that they recommend for their portfolio companies. 2. Eqvista Template Eqvista's template includes ownership structure and the capital committed. 3. Cap Board Template Cap Board's template is a basic cap table on Google Spreadsheet, with formulas included, that can be used for any early-stage startup. 4. CFI Template CFI’s has many free excel templates. The spreadsheet below contains two sections – valuation and ownership. All numbers in blue are hard-coded assumptions and all numbers in black are formulas. Manage Your Stakeholders Effectively with Visible Effectively managing your cap table is essential for maintaining transparency, building investor confidence, and making informed decisions. With Visible, you can streamline your stakeholder communication by centralizing key data, sharing investor updates, and tracking interactions- all in one platform. Visible makes it easy to keep investors informed and engaged while helping you stay organized and focused on growth. Ready to simplify stakeholder management? Give it a free try for 14 days here.

Every startup founder eventually faces the critical decision of how to fund their business. Once you’ve determined that raising capital is the right path, the next step is deciding which type of investor best fits your needs: venture capitalists or angel investors. Both offer unique advantages and challenges depending on your growth stage, funding goals, and long-term vision. Whether you're a first-time founder or new to fundraising, understanding the differences between these two funding sources is key to making an informed decision. In this guide, we’ll explore the distinctions between venture capital and angel investors and provide practical advice on when and how to approach each. What Are Venture Capitalists? Venture capitalists (VCs) are investors who provide funding to early-stage, high-potential startups in exchange for equity, or ownership shares, in the company. They typically operate through venture capital firms that pool money from various sources to create a managed fund. These sources include high-net-worth individuals, institutional investors, corporations, and other entities known as limited partners (LPs). LPs provide the capital but leave the investment decisions to the general partners (GPs), who are the venture capitalists managing the fund. LPs expect a return on their investment, while GPs use their expertise to identify and invest in startups that show the potential for rapid growth and high returns. How Venture Capital Works Venture capital funding follows a structured process, typically broken down into different stages, known as funding rounds. Startups generally progress from seed funding to Series A, B, C, and beyond, with each round representing increased capital raised and expectations for growth. In the early stages, startups may receive seed funding from venture capital firms to help develop their product and prove the concept. As the business gains traction, it moves into larger rounds, such as Series A, which is used to scale the company, grow its team, and expand into new markets. Later rounds, like Series B and C, focus on further growth and scaling, often leading to an eventual exit via an IPO or acquisition. Venture capitalists conduct due diligence before investing, analyzing the startup’s market opportunity, product potential, and founding team’s expertise. In exchange for their investment, VCs receive equity in the company and often take an active role in guiding its growth, such as by joining the board of directors. VCs expect startups to have high growth potential and scalability, with the ability to disrupt existing markets or create entirely new ones. In return, they seek significant returns on their investment, typically aiming for 10x or more. This expectation drives VCs to focus on companies that can scale quickly and potentially become “unicorns”—startups valued at over $1 billion. Related resource: What to Include in a Data Room for Investors: Essential Guide for Startups Advantages of Venture Capital Venture capital offers several advantages for startups looking to grow rapidly and achieve significant market impact: Access to large capital: One of the primary benefits of venture capital is the ability to raise substantial amounts of funding. This is especially valuable for startups in capital-intensive industries like technology, biotech, or hardware, where scaling requires significant resources. Strategic support: Beyond providing funding, VCs often offer strategic guidance and mentorship. With their deep industry knowledge and extensive networks, venture capitalists can help startups refine their business models, access key markets, and connect with potential partners, customers, or even future investors. Opportunities for rapid scaling: With large capital infusions, startups can accelerate their growth by hiring top talent, expanding into new markets, and investing in product development. Venture capital funding enables companies to pursue aggressive growth strategies that might otherwise be out of reach with smaller funding sources. Credibility and visibility: Securing venture capital from a well-known firm can serve as a strong endorsement for a startup, boosting its credibility with customers, potential employees, and future investors. Increased visibility can help open doors and attract additional opportunities. Disadvantages of Venture Capital While venture capital can offer substantial benefits, there are also significant downsides that founders should carefully consider: Dilution of ownership: In exchange for large sums of capital, VCs take equity in the company. As a result, founders often see their ownership stake reduced, especially after multiple funding rounds. This dilution can leave founders with a smaller percentage of the company over time, even if the valuation increases. Loss of control: Venture capitalists frequently require a seat on the board and may have a say in key decisions, such as company strategy, hiring, and exit planning. This can limit the founder’s autonomy and introduce differing priorities, especially if the VC’s goals do not fully align with the founder’s vision for the company. Pressure for quick exits: VCs typically seek a return on their investment within 5-10 years, often through an acquisition or IPO. This pressures startups to grow and scale rapidly, potentially leading to decisions focused on short-term gains rather than long-term stability. Founders may feel pushed toward an exit strategy earlier than they are comfortable with. High expectations: Because VCs are looking for significant returns, they expect startups to achieve rapid growth. This can lead to increased stress and pressure on founders to hit aggressive milestones, often at the cost of the company's culture or long-term sustainability. Related resource: Our Guide to Building a Seed Round Pitch Deck: Tips & Templates Key Differences Between Angel Investors and Venture Capital While both angel investors and venture capitalists provide funding to startups, they operate in distinct ways and cater to different stages of growth. Angel investors tend to invest earlier, often with a more personal and flexible approach, whereas venture capitalists come in during later stages, offering larger sums of capital and more structured involvement. Understanding these key differences is crucial for founders as they decide which type of funding is best suited for their startup’s needs, growth goals, and long-term vision. 1. Investment Stage Angel investors typically enter the picture at the earliest stages of a startup’s development. They often provide funding during the seed stage, when a company is just starting out and may not yet have a fully developed product, steady revenue, or proven market fit. Angels are often willing to take on higher risks and support startups in their infancy, helping founders turn ideas into viable businesses. On the other hand, venture capitalists usually invest during later stages of growth. Startups that seek VC funding have typically moved beyond the idea phase and are beginning to scale, with some level of market validation and revenue generation. VC funding often comes into play in Series A rounds and beyond, when larger sums of capital are required to fuel rapid expansion, hire additional talent, or enter new markets. 2. Investment Amount One of the most notable differences between angel investors and venture capitalists is the amount of money they typically invest. Angel investors usually provide smaller sums, often ranging from $25,000 to $100,000 per deal, though in some cases, they may invest up to $500,000. Their investments are generally sufficient for startups in the early stages, such as covering product development, initial hiring, or early marketing efforts. Venture capitalists, on the other hand, invest much larger amounts. For example, in a Series A round, VC firms may invest anywhere from $1 million to $10 million or more, depending on the company’s potential and the firm’s investment thesis. As a startup progresses to later rounds (Series B, C, etc.), the investment amounts can increase significantly, often reaching tens or even hundreds of millions. This capital is geared toward aggressive scaling, including market expansion, large-scale hiring, and product development. 3. Level of Involvement Angel investors often take a hands-on, personal approach to the startups they fund. Since many angels invest their own money, they tend to be more emotionally invested in the company's success. Angels frequently provide personalized mentorship and guidance, leveraging their experience to help founders navigate early challenges. In some cases, angel investors might even have direct relationships with the founders, allowing for a more informal, collaborative dynamic. This personal involvement can be highly beneficial for early-stage startups that need both financial support and hands-on advice. Venture capitalists, by contrast, tend to have a more structured and strategic role. While VCs may offer mentorship and strategic guidance, their involvement is often more formalized, especially in later stages. VCs usually sit on the board of directors and participate in high-level decision-making, helping shape the company’s long-term strategy, product direction, and scaling efforts. However, VCs are often less involved in day-to-day operations, leaving the founders and executive team to manage the company’s execution. 4. Risk Tolerance Angel investors tend to have a higher risk tolerance compared to venture capitalists. Since angels often invest in the earliest stages of a startup, they are accustomed to backing unproven business models, nascent products, and founders who may not have extensive experience. For angel investors, the potential for high returns justifies the risk, and they are often willing to take a chance on innovative ideas or disruptive technologies that might not yet have market validation. This willingness to take on higher risk makes angel investors particularly valuable for startups still in the idea or prototype phase. On the other hand, venture capitalists typically seek more proven business models. While VCs are still taking significant risks, they generally prefer startups that have already demonstrated product-market fit, some level of revenue, and the ability to scale. By the time a venture capital firm invests, the company’s risks are more related to execution and growth rather than proving the core viability of the business. VCs conduct extensive due diligence to mitigate these risks and look for startups with a clear path to substantial returns. 5. Decision-Making Process The decision-making process for angel investors is typically quicker and more informal than venture capitalists. Since angels often invest their own money, they can make independent decisions based on their judgment and intuition. This can result in faster funding decisions, especially if the angel investor has a personal connection with the founder or is passionate about the industry. Angel investors may rely less on extensive due diligence, instead placing greater trust in the founder's vision and potential. Venture capitalists, on the other hand, follow a more formal and rigorous decision-making process. Since VCs manage funds from limited partners, they must ensure each investment aligns with the fund’s strategy and risk tolerance. VCs typically conduct thorough due diligence, which involves analyzing the startup’s financials, market opportunity, product, and team. This process can take several weeks or months as VCs carefully vet the company to minimize risk. Additionally, decisions are often made by an investment committee, further adding to the complexity and formality of the process. 6. Exit Strategy The exit strategies of angel investors and venture capitalists differ significantly in terms of flexibility and expectations for returns. Angel investors generally have more flexible exit strategies because they are often motivated by factors beyond financial returns, such as a personal passion for the business or a desire to support entrepreneurs. Angels may be satisfied with smaller exits, such as when the company is acquired or returns a modest profit. They are often open to longer timelines and may not push for an aggressive exit, allowing the startup more room to grow at its own pace. Venture capitalists, however, typically have more specific and ambitious exit goals. Since VCs are responsible for delivering high returns to their limited partners, they often aim for significant exits through initial public offerings (IPOs) or large acquisitions. VCs usually operate on a timeline of 5-10 years to realize their returns, and they push for scaling and growth that align with these exit strategies. As a result, venture capital-backed companies are more likely to pursue aggressive growth plans to meet the high return expectations of their investors. When to Pitch Venture Capitalists When considering venture capital, it’s essential to understand the structure of a VC firm. Venture capital firms are typically divided into general partners (GPs), who manage the firm and make investment decisions, and limited partners (LPs), who provide the capital but don’t participate in the decision-making. Limited partners may include wealthy individuals, insurance companies, pension funds, and foundations. VCs are looking to invest in startups that have the potential to deliver outsized returns. They aim to secure a spot on the Power Law Curve, where a small percentage of companies generate most industry returns. For this reason, VCs are often searching for unicorns- startups with a valuation over $1 billion- that can provide exponential returns on investment. When pitching to VCs, it’s important to know what they are looking for: a strong combination of product, market, and team. Product: VCs want to see a product that stands out and has the potential to dominate its market. Your product should be a "need to have," not just a "nice to have." Market: A large market opportunity is crucial. The larger and less saturated the market, the better. However, being too early in an untapped market can also pose risks for VCs. Team: A talented and experienced founding team can be a key differentiator. VCs are more likely to take a risk on a startup led by seasoned industry veterans or entrepreneurs with a proven track record of success. If you’re confident in your product, the market you’re entering, and the team you’ve built, pitching to venture capitalists could be the right move for your startup. When to Pitch Angel Investors While VCs are looking for that perfect mix of Market, Product, and Team and always searching for the elusive unicorn to double or triple their money, Angels may be a better bet if you’re extremely small and looking to get started vs. scale rapidly. Typically, angels offer better terms for investment. Angels of course still look for returns. However, they may also invest because they are passionate about the space, and because it’s their money directly, are more open to investing in an idea that will potentially just make them their money back in order to help a new entrepreneur get off the ground. Funding rounds with angel investors are often called “friends and family” rounds because its much more common for individuals to invest in those they care about and believe in vs. the biggest and best ideas. Angel investors are better to pitch to when your company is extremely early stage. When starting the company look to close friends, family, and professionals that can make a small investment and when you’re ready to scale quickly and take more risk after you’ve proven your concept a bit more, turn to VCs. Recommended Reading: The Understandable Guide to Startup Funding Stages Manage Investor Relationships Effectively with Visible Choosing between angel investors and venture capitalists depends on your startup’s stage, funding needs, and long-term goals. Angels typically invest early and offer flexible terms, while VCs provide larger sums for rapid scaling but expect high returns and growth. Understanding the key differences—such as investment size, risk tolerance, and exit strategies—will help you make informed decisions about which type of funding best suits your business. As you prepare for your startup’s next steps, ensure you stay connected with potential investors using Visible. Find investors at the top of your funnel with our free investor database, Visible Connect Track your conversations and move them through your funnel with our Fundraising CRM Share your pitch deck and monthly updates with potential investors Organize and share your most vital fundraising documents with data rooms Manage your fundraise from start to finish with Visible. Give it a free try for 14 days here. Related Resource: Top 6 Angel Investors in Miami

Best-in-class founders use investor updates to help with hiring, fundraising, strategy, and more. To help understand what is included in their Updates, we took a look at our own data. The Most Common Content Blocks We recently launched Content Blocks for Updates. Content Blocks allow you to pick different text sections to build out an investor update template. The following have been the most commonly used Content Blocks: 81% of Updates include “Highlights” 47% of Updates include a “Team” section 42% of Updates include “Product Launches” 42% of Updates include a “KPIs” section 39% of Updates include a “Fundraising” section At the end of the day, sending investor updates on a regular basis is what matters most. Every business is different so be sure to use the content and data that is most relevant to your business. Send an Update with Visible Start crafting your investor update using content blocks below:

Understanding pro rata rights is essential for startup founders navigating the complex world of venture capital. These rights, often included in SAFE (Simple Agreement for Future Equity) agreements, allow investors to maintain their proportional ownership as the company raises more capital. Pro rata rights help prevent dilution of investor shares, ensuring their initial investment value is preserved. For founders, comprehending these rights is crucial as they influence funding strategies, investor relations, and equity distribution, ultimately impacting the company's growth and stability. What Are Pro Rata Rights? Pro rata rights are provisions that allow investors to purchase additional shares in a company during future funding rounds to maintain their proportional ownership. These rights are crucial in preventing dilution, which occurs when new shares are issued, reducing the percentage ownership of existing investors. By exercising pro rata rights, investors can avoid a decrease in their ownership stake due to subsequent investments by new or existing investors. For startup founders, understanding pro rata rights is essential as they play a significant role in attracting and retaining investors, ensuring fair equity distribution, and supporting the company's growth trajectory. Related resource: Pre-money vs Post-money: Essential Startup Knowledge How Do Pro Rata Rights Work? Pro rata rights are negotiated and agreed upon during the initial funding rounds of a startup. They grant investors the option—but not the obligation—to participate in future funding rounds by purchasing additional shares. This allows investors to maintain their initial ownership percentage as the company raises more capital. When a startup plans a new funding round, it notifies investors with pro rata rights about the opportunity to invest. These investors can then decide to buy enough new shares to keep their ownership stake proportional to their original investment. Pro rata rights are especially common in early-stage investments, providing a mechanism for investors to support the company's growth while protecting their equity stake. Shareholder Dilution Shareholder dilution occurs when a company issues new shares, reducing the ownership percentage of existing shareholders. Pro rata rights directly address this issue by giving investors the ability to buy additional shares and maintain their proportional ownership. Without these rights, existing investors would see their ownership diluted as new investors come on board and additional shares are issued. For founders, managing dilution is critical as it affects the company's equity structure and investor relations. Pro rata rights help ensure that early investors, who took on initial risks, are not disproportionately disadvantaged in future funding rounds. Pro Rata Rights Example Pro rata rights are generally calculated on a percentage basis (example below) but there are rare circumstances where they can be calculated on a dollar basis. Investor ABC invested $100,000 at a $1,000,000 valuation (with pro rata rights) into Startup XYZ and owns 10% of the company. Startup XYZ is raising a future round at $2,000,000 valuation. Because of dilution, Investor ABC will now own less than 10% of the company. If Investor ABC exercises their pro rata rights, they will have the option to buy enough shares to maintain 10% ownership in Startup XYZ. Related resource: Deal Flow: Understanding the Process in Venture Capital Legal and Financial Implications Understanding the legal and financial implications of pro rata rights is crucial for startup founders. These rights can significantly impact your company's equity structure and future funding strategies. Legal Aspects of Pro Rata Rights in Investment Agreements Pro rata rights are typically outlined in investment agreements during the early stages of fundraising. These agreements legally bind the startup to offer existing investors the option to purchase additional shares in subsequent funding rounds. It is essential for founders to clearly define the terms and conditions of pro rata rights in these agreements to avoid any future disputes. Consulting with a legal expert to draft and review these terms is a best practice to ensure that all parties understand their rights and obligations. Financial Implications for the Startup’s Equity and Capital Structure The exercise of pro rata rights impacts the startup's equity and capital structure. When investors exercise these rights, they inject additional capital into the company, which can be beneficial for funding growth and operations. However, allowing investors to maintain their ownership percentage can limit the availability of shares for new investors, potentially affecting the valuation and attractiveness of the startup to future investors. Founders must carefully balance the need for new capital with the rights of existing investors to maintain a healthy and appealing equity structure. Best Practices for Compliance and Transparency By following these best practices, founders can foster trust with their investors, ensure legal compliance, and maintain a balanced capital structure that supports the startup's growth. Clear Documentation: Ensure all terms related to pro rata rights are explicitly stated in investment agreements. Regular Communication: Keep investors informed about upcoming funding rounds and their pro rata rights well in advance. Legal Review: Periodically review investment agreements with legal counsel to ensure they comply with current laws and regulations. Equity Management: Use reliable equity management tools to track ownership stakes and the exercise of pro rata rights accurately. Related resource: Seed Funding for Startups: Our Complete Guide Alternatives to Pro Rata Rights While pro rata rights are a popular mechanism for protecting investors' ownership stakes in startups, there are several alternative strategies that founders can consider. These alternatives offer various benefits and protections for investors, and can sometimes be more appealing depending on the specific circumstances of the startup and its funding strategy. Here are some key alternatives to pro rata rights: 1. Pre-emption Rights Pre-emption rights provide investors with the first opportunity to purchase new shares before they are offered to other investors. This mechanism ensures that existing investors can maintain their ownership percentage in the company if they choose to invest additional capital. These rights are particularly valuable for early investors who have a vested interest in the company's growth and success. By exercising pre-emption rights, these investors can increase their stake and continue to play an influential role in the company's development. This not only secures their investment but also strengthens their commitment to the company's long-term vision. For founders, offering pre-emption rights can be an attractive proposition to early investors, as it demonstrates a commitment to protecting their interests and encouraging their ongoing participation. This can help build strong, supportive relationships with investors who are more likely to provide additional funding, guidance, and resources as the company grows. 2. Drag-Along and Tag-Along Rights Drag-along and tag-along rights are provisions that give investors the ability to sell their shares alongside existing investors during specific events, such as an acquisition or an initial public offering (IPO). Drag-Along Rights: These rights allow majority shareholders to compel minority shareholders to join in the sale of the company under the same terms and conditions. This ensures that the sale can proceed smoothly without minority shareholders blocking the transaction, which can be crucial for achieving favorable terms in a sale. Tag-Along Rights: These rights enable minority shareholders to join a sale initiated by majority shareholders. This means that if a significant shareholder sells their stake, minority shareholders can sell their shares on the same terms, ensuring they are not left behind in a potentially lucrative deal. Both drag-along and tag-along rights offer significant security and liquidity for investors. They protect minority investors by ensuring they can participate in major liquidity events, thereby aligning their interests with those of majority shareholders. This alignment can incentivize investors to remain committed to the company over the long term, as they have assurances that they will not be excluded from important financial opportunities. For founders, offering these rights can make the company more attractive to investors by providing clear exit strategies and promoting investor confidence in the company's governance and future prospects. 3. Participation Rights Participation rights are similar to pro rata rights but come with a key difference: they allow investors to invest a specific amount in future funding rounds, rather than an amount proportional to their current stake. This predetermined amount can be beneficial for both startups and investors in several ways. For startups, participation rights offer greater flexibility in managing their capital structure and equity distribution. By agreeing on a fixed investment amount in advance, founders can better plan for future funding needs and avoid unexpected dilution. This also simplifies the process of raising new capital, as the terms of additional investments are clearly defined from the outset. For investors, participation rights provide the opportunity to continue supporting the company without the need to maintain a proportional ownership percentage. This can be particularly appealing for investors who want to stay involved and benefit from the company's growth but may not have the resources or desire to increase their investment significantly in later rounds. Participation rights balance the interests of startups and investors, offering a structured yet flexible approach to future investments. They help ensure ongoing support and involvement from early investors while allowing the company to navigate its funding strategy more effectively. 4. Discounted Future Rounds Offering discounted future rounds is another strategy startups can use to attract and retain investors. This approach involves providing investors with a discount on the share price in subsequent funding rounds, serving as an incentive for them to participate. For investors, discounted future rounds present an attractive opportunity to secure additional value from their investment. By purchasing shares at a reduced price, investors can potentially enhance their returns if the company continues to grow and increase in value. This incentive can be particularly appealing to those looking to maximize their investment gains and maintain their support for the company over the long term. For startups, offering discounted share prices in future rounds can be an effective way to secure necessary funding more easily. This approach can make the investment more appealing, especially in competitive markets where multiple startups are vying for capital. Additionally, by incentivizing existing investors to continue their support, startups can foster strong, ongoing relationships with their investor base, which can be beneficial for future fundraising efforts and overall growth. 5. Convertible Notes with Liquidation Preference Convertible notes with liquidation preference are an effective fundraising tool for startups, offering a blend of flexibility and investor protection. These financial instruments convert into equity based on specific terms during a future funding round or other triggering events, such as an acquisition. Convertible Notes: The primary advantage of convertible notes is that they allow startups to raise capital without setting an upfront valuation. This is particularly beneficial in the early stages when accurately valuing the company can be difficult. The notes typically convert into equity at a later date, often at a discount to the future share price or with a valuation cap, ensuring early investors receive favorable terms. Liquidation Preference: Adding a liquidation preference to convertible notes provides additional security for investors. In the event of an exit, such as a sale or liquidation of the company, investors with liquidation preference are prioritized for repayment before common shareholders. This helps protect their investment if the company's exit value is lower than expected or if the company faces financial challenges. Benefits for Startups: Fundraising Flexibility: Startups can secure needed funds quickly without the pressure of determining a valuation prematurely. This flexibility can be crucial in fast-paced or uncertain market conditions. Investor Attraction: The combination of potential equity upside and downside protection through liquidation preference makes these notes attractive to investors, increasing the likelihood of securing capital. Aligned Interests: Offering favorable conversion terms and repayment priorities helps align the interests of investors and startups, fostering strong and supportive investor relationships. 6. No Dilution Protection Some startups choose not to offer any dilution protection to their investors. This approach can streamline the negotiation process and expedite fundraising, as it removes the need to discuss and agree upon complex terms related to ownership percentage maintenance and future share purchases. Advantages for Startups: Speed and Simplicity: Without dilution protection, the fundraising process can be faster and less complicated. This simplicity can be beneficial for startups needing to secure capital quickly or wanting to avoid lengthy negotiations. Flexible Capital Structure: By not committing to dilution protection, startups maintain greater flexibility in managing their equity and capital structure. This can be advantageous when navigating multiple funding rounds and dealing with various investor demands. Disadvantages for Investors: Less Attractive in Competitive Markets: In markets where startups are vying for investor attention, the lack of dilution protection can be a significant drawback. Investors may prefer opportunities that offer safeguards for their investment, such as pro rata rights or other dilution protections. Increased Risk: Investors without dilution protection face the risk of their ownership percentage being significantly reduced in future funding rounds. This potential dilution can diminish their influence and the value of their investment, making the opportunity less appealing. For founders, the decision to forego dilution protection should be weighed carefully. While it can simplify and accelerate the fundraising process, it may also limit the pool of interested investors, particularly those seeking more security for their investment. Balancing the need for speed and simplicity with investor expectations and competitive market conditions is crucial for successful fundraising and long-term growth. Why Are Pro Rata Rights Important to Investors? Pro rata rights are often seen as a main advantage for early-stage venture firms and investors. The ability to follow on and maintain their ownership percentage is vital to the firm’s ability to make an exponential return on their investment. Investors often have different views about extending their pro rata rights. For example, Point Nine Capital guarantees they’ll invest in any of their portfolio companies’ Series A round. As Christoph Janz, Managing Partner at Point Nine, explains: In ~ 80–90% of cases, we want to do our pro-rata anyway. In ~ 5-10% of cases, we don’t want to but kind of have to, to prevent harm from the portfolio company due to bad signaling. Committing to our pro-rata in the remaining ~ 10% might lead to some sub-optimal capital allocation, but this will be far offset by all the other advantages. On the flip side, angel investors or smaller firms may not have the capital to continue to invest and choose to waive their rights. However, firms like Point Nine may not have the option to continue to invest, even if they would like to. According to Fred Wilson, Founder of Union Square Ventures, “In the last ten or so years, companies, lawyers, boards, management teams, founders, and in particular late-stage investors have been disrespecting the pro rata right by asking early-stage VCs to cut back or waive their pro rata rights in later stage financings.” When a company sets out to raise a later round, the company is likely doing well, so allocations get tighter. The only way for these later firms to get their desired piece of the pie is to ask early-stage investors to hold back from investing. Understandably, this can be a major point of disappointment and frustration for early-stage firms, as they’ve taken the risk of investing early, which helped make it possible for the company to grow. Ultimately, a pro rata right is a legal obligation and is seen as an agreement a founder is expected to live up to. When Would an Investor Waive Their Pro Rata Rights? As mentioned earlier, there are instances where an investor might waive pro rata rights: Lack of Capital: If raising at a later stage or high valuation, some early-stage investors with pro rata rights simply might not have enough capital to invest. Poor Data: If an investor does not believe in the company or its investment ability, they might pass. Against Thesis: Sometimes a fund has an investment thesis that might keep capital or ownership constrained, so they might waive their rights. Build Meaningful Relationships with Your Investors Founders can leverage monthly investor updates to tap into their investor’s network, capital, and experience to move their business forward. Raise capital, update investors and engage your team from a single platform. Try Visible free for 14 days. Understandably, pro rata can be a tough conversation for both founders and VCs. On one hand, a pro rata right is a legal contract and something investors should expect to be honored when the time comes. While on the other hand, founders are getting pulled in every direction and are obliged to make the right decision for their company. As Mark Suster puts it, “Make sure you have an open conversation with your early investors about their interest in participating in subsequent rounds as those fundraisings become imminent and that might range from ‘Are you willing to show some support in the next round, which might be important to incoming investors?’ to, ‘Are you willing to step back a small amount from pro rata to make room for new investors if need be?’ Knowing how your investors are thinking is critical as is open communication.” The simplest way to keep all parties happy? Form a relationship and have the difficult conversations before you’re put in a tough spot under the wire. Founders, don’t be afraid to have open and difficult conversations with your investors. They are invested in what is best for your company as well. If investors are not aware of a portfolio company raising funds and the potential for a new investor taking a larger percentage, there is clearly something broken in the communication process by both parties. A simple way to up your communication skills? A monthly investor update. Try Visible free for 14 days.

Venture Capital investors expect their portfolio company founders to be on top of their key financial metrics at all times. Why? Because it fosters confidence in investors when CEOs demonstrate they’re making data-informed decisions about the way their company is operating. On the flip side, Venture Capital investors should be just as familiar with their own key performance indicators, aka fund metrics. A great way to impress Limited Partners is to demonstrate you have a deep understanding of both how fund metrics are calculated and why they matter to LPs. In this article, we define the key fund metrics every fund manager should always have at the ready, why they are important, how they are calculated, and why they matter to LPs. Related resource: Venture Capital Why Limited Partners (LPs) Need to Understand VC Fund Performance Understanding VC fund performance metrics is crucial for LPs because it goes beyond mere numbers—these metrics serve as vital indicators of a fund’s health, growth potential, and long-term value. By grasping these concepts, LPs can make more informed decisions, manage their portfolios effectively, ensure transparency, meet regulatory requirements, and plan for the future. Here's why these metrics are essential: Investment Decision-Making For LPs, investment decisions are about more than just selecting promising funds; they’re about strategically allocating capital to maximize returns and manage risk. By understanding key performance metrics, LPs can evaluate how well a fund is performing compared to others, identify trends, and make data-driven decisions on where to invest. Metrics like Internal Rate of Return (IRR) and Total Value to Paid-in-Capital (TVPI) help LPs assess the potential return and growth of their investments, ensuring that they are putting their money in the right places. Portfolio Management Effective portfolio management requires continuous monitoring and adjustment. LPs use performance metrics to track the progress of their investments and decide when to rebalance their portfolio. For instance, the Multiple on Invested Capital (MOIC) can help LPs determine the overall value generated by a fund, while the Residual Value to Paid-in-Capital (RVPI) provides insights into the unrealized potential of current investments. These metrics enable LPs to identify underperforming funds early and make necessary adjustments to optimize their portfolio’s performance. Related resource: Portfolio Management Reporting and Transparency Transparency is key in maintaining trust between fund managers and LPs. Regular and accurate reporting of performance metrics ensures that LPs are fully informed about the status of their investments. Metrics like Distributions to Paid-in-Capital (DPI) offer a clear view of the returns that have been realized, fostering confidence and trust. Transparent reporting also allows LPs to hold fund managers accountable, ensuring that their investment strategies align with the agreed-upon goals and timelines. Regulatory and Compliance Requirements VC funds operate under stringent regulatory frameworks that require meticulous reporting and compliance. Understanding and accurately calculating performance metrics help LPs ensure that their investments adhere to these regulations. For example, IRR calculations provide a comprehensive view of an investment’s performance over time, including the time value of money, which is often required in regulatory filings. Compliance with these standards not only mitigates legal risks but also enhances the credibility and reliability of the fund. Long-Term Planning Long-term financial planning is essential for LPs to meet their future capital needs and investment goals. By analyzing metrics like TVPI and IRR, LPs can project future returns and plan accordingly. These projections help in setting realistic expectations and strategies for reinvestment, cash flow management, and eventual exits. Understanding the long-term implications of their current investments enables LPs to build a robust and sustainable investment portfolio that can withstand market fluctuations and deliver consistent returns. Related resource: LP Reporting VC Performance Fund Metrics to Track Tracking the right performance metrics is essential for understanding the health and potential of a VC fund. These metrics offer insights into various aspects of fund performance, from immediate returns to long-term value. By knowing which metrics to track and when to use them, LPs and fund managers can make more informed decisions and better manage their investments. In this section, we’ll introduce the fundamental metrics used to evaluate VC fund performance: Multiple on Invested Capital (MOIC), Gross Total Value to Paid-in-Capital (TVPI), Residual Value to Paid-in-Capital (RVPI), Distributions to Paid-in-Capital (DPI), and Internal Rate of Return (IRR). Each of these metrics serves a specific purpose and is relevant in different stages of the investment lifecycle. Related resource: Portfolio Support for VCs Multiple on Invested Capital (MOIC) Definition: MOIC is considered the most common fund metric and is used to determine the value of a fund relative to the cost of its investments. In other words, it measures the amount gained on investments. Anything above a 1.0x is considered profitable. MOIC can be an effective way for LPs to compare the performance of the Venture Capital funds they’ve invested in; however, because it includes both unrealized and realized value, it’s not a true indicator of fund performance. How It’s calculated: (Unrealized Value + Realized Value) / Total Invested into the Fund Why it matters to LPs: MOIC is a straightforward metric that measures how much value the fund as a whole is generating over time. Related resource: Multiple on Invested Capital (MOIC): What It Is and How to Calculate It Gross Total Value to Paid-in-Capital (TVPI) Definition: TVPI demonstrates the overall performance of the fund relative to the total amount of capital paid into the fund to date. A TVPI of 1.5x means for every $1 an LP invested, they’re projected to get $1.5 in value back as a return. How It’s calculated: (Total Distributions + Residual Value) / Paid-in-capital = TVPI OR DPI + RVPI = TVPI Why it matters to LPs: This is an important metric for LPs because it demonstrates how much money they’ve (individually) received back to date from the fund as well as how much they are predicted to receive (residual value) after all the all assets (companies) have been sold as it relates to their (individual) investment. LPs like to use TVPI because it’s straightforward to calculate and hard to manipulate. LPs will be ok with TVPI’s lower than 1 for the first few years but then will start expecting to see an TVPI of 1 or higher as your company’s hopefully get marked up in value and you start distributing fund back to LPs. Related Resource: TVPI for VC — definition and why it matters Residual Value per Paid-in-Capital (RVPI) Definition: RVPI is the ratio of the current value of all remaining investments (after the GPs have done their mark up and mark downs) within a fund compared to the total contributions of LP’s to date. It essentially tells LPs the value of companies that hasn’t been returned (yet!) compared to how much has been invested. How It’s calculated: Residual Value / Paid in Capital = RVPI Why it matters to LPs: LPs want to know the likely upside of investments that haven’t been realized yet. For this reason, LPs are likely comparing your RVPI against funds with the same vintage. Distributions per Paid-in-Capital (DPI) Definition: DPI is the ratio of money distributed (returned) to LP’s by the fund, relative to the amount of capital LP’s have given to the fund. How It’s Calculated: Distributions / Paid-in-capital = DPI Why it matters to LPs: LPs will be comparing your RVPI and DPI numbers to understand where your portfolio is at in terms of maturity. A high DPI means you’re portfolio is more mature because you’ve already been able to start making distributions back to your LPs as opposed to just have a high residual (potential payout) value. Internal Rate of Return (IRR) Definition: IRR is the second runner-up for the most common fund metric. IRR shows the annualized percent return that’s realized (or has the potential to be realized) over the life of an investment or fund. A high IRR means the investment is performing well (or is expected to perform well). If you’re a seed stage investor you should be targeting at least a 30% IRR according to Industry Ventures. How It’s Calculated: Because of the advanced nature of this formula it’s best to use an excel based calculator to calculate IRR or a platform like Visible.vc which automatically calculates IRR for you. Related Resource –> What is Internal Rate of Return (IRR) for VCs Why it matters to LPs: IRR gives LPs a way to measure the performance (or predicted performance) of their investments before other profitability metrics are available. This metric, unlike the others listed above, takes into account the time value of money, which gives LPs another perspective to evaluate your fund performance and compare it to other asset classes. Check out the week from Revere VC below to get a better understanding of when each fund metric is relevant. Venture fund metrics can get confusing. MOIC, TVPI, DPI, IRR … ???? Beyond formulas, we teach our analysts about when to use them ⬇️ Fund still deploying? MOIC. Investment window closed? TVPI. Fund starts harvesting? DPI. Historical performance when fund is complete? IRR. — Revere VC (@Revere_VC) February 17, 2023 Tracking and Visualizing Fund Metrics in Visible It’s important to make sure you understand not only how to calculate your key fund metrics but also why they matter to LPs; this way you can add an insightful narrative about your fund performance in your LP Updates. Visible equips investors with automatically calculated fund metrics and gives GPs the tools they need to visualize their fund data in flexible dashboards. Dashboards can be shared via email, link, and through your LP Updates. Visible supports the tracking and visualizing of all the key fund metrics including: MOIC TVPI RVPI DPI IRR and more. Visible lets investors track and visualize over 30+ investment metrics in custom dashboards. Over 400+ Venture Capital investors are using Visible to streamline their portfolio monitoring and reporting. Learn more.

Internal rate of return (IRR) for VCs is the expected annualized return a fund will generate based on a series of cash flows over the duration of the fund, which is typically ten years. Unlike fund metrics such as RVPI, TVPI, and DPI, which are based on multiples, IRR takes into account the time value of money. IRR can be used to measure both fund performance and the performance of an individual investment. Related Resource → VC Fund Metrics 101 What makes IRR hard to predict in a fund context is cash flows happen at irregular periods because capital calls are made by funds on an as-needed How Is IRR Used by LPs IRR is a critical metric for Limited Partners (LPs) in venture capital, helping them make informed investment decisions by benchmarking a fund’s performance against its peers. By considering the time since the initial cash outflow and comparing it against similar funds in the same asset class, LPs can assess the efficiency and profitability of their investments. IRR's significance lies in its ability to account for the time value of money, providing a more nuanced view of an investment's potential returns over time. This makes it an invaluable tool for evaluating both short-term and long-term fund performance. For example, an LP might use IRR data to compare the performance of different funds launched in the same year, helping to identify which fund managers consistently deliver higher returns. Cambridge Associates is a well-known resource that publishes quarterly benchmarks and statistics, compiling data from thousands of fund managers and their funds. These benchmarks allow LPs to compare their fund’s IRR against a broad spectrum of data, ensuring they have a comprehensive understanding of their fund's performance relative to the market. You can check out their reports here on the Cambridge Associates website. In practical terms, an LP might look at the IRR of a prospective fund to decide whether to commit capital, comparing it against the IRRs of existing funds in their portfolio and the broader market. For instance, if a new fund has an IRR significantly above the median benchmark provided by Cambridge Associates, it might be seen as a more attractive investment opportunity. How Is IRR Calculated for Venture Capital Funds? Wrapping your head around the IRR formula can quickly put your brain in a pretzel so it’s recommended to use Excel, Google Sheets, or a platform like Visible to calculate IRR. In the IRR equation below, we’re solving for the discount rate (or the expected compound annual rate of return) that makes the net present value of an investment zero. IRR is calculated by solving for the rate of return (“r”) of a series of cashflows (“C”) over a period of time (“n” to the total number of periods “N”): Accurate cash flow data is crucial in calculating IRR because even small errors can significantly affect the result. For venture capital funds, it’s essential to meticulously track all cash inflows and outflows. This includes capital calls, management fees, expenses, and distributions to LPs. Using platforms like Visible can streamline this process by providing tools to automate and track these cash flows accurately. Check out this article for an example calculation of IRR within the fund context. IRR vs. CAGR While IRR and CAGR (Compound Annual Growth Rate) are both metrics used to evaluate the performance of investments, they serve different purposes and are calculated differently. Understanding these differences is crucial for investors when analyzing investment returns. What is CAGR? CAGR stands for Compound Annual Growth Rate and measures the mean annual growth rate of an investment over a specified period longer than one year. It provides a smoothed annual rate of return, assuming that the investment grows at a consistent rate each year. CAGR is particularly useful for comparing the historical performance of investments over time, as it neutralizes the effects of volatility and provides a straightforward percentage growth rate. Key Differences Between IRR and CAGR: 1. Consideration of Cash Flows: CAGR assumes a single investment and does not account for intermediate cash flows. It provides a geometric mean return over the period. IRR, on the other hand, takes into account the timing and magnitude of all cash flows, including intermediate inflows and outflows, providing a more detailed picture of the investment's performance. 2. Calculation Complexity: CAGR is simpler to calculate as it only requires the beginning value, ending value, and the number of periods. IRR is more complex, involving iterative calculations to find the rate that sets the NPV of all cash flows to zero. 3. Reinvestment Assumption: CAGR does not make any assumptions about reinvestment rates. It purely reflects the compounded annual growth rate. IRR assumes that interim cash flows are reinvested at the same rate as the IRR, which can sometimes be unrealistic. 4. Application Context: CAGR is often used to compare the performance of investments, funds, or portfolios over time, providing a clear picture of historical growth. IRR is widely used in capital budgeting and private equity/venture capital to evaluate the profitability of individual projects or investments, considering the specific timing of cash flows. IRR vs. ROI While IRR and ROI (Return on Investment) are both crucial metrics for evaluating the performance of investments, they serve distinct purposes and are calculated differently. Understanding these differences is key for investors when analyzing their investments. What is ROI? ROI stands for Return on Investment and measures the gain or loss generated on an investment relative to its initial cost. It is a straightforward metric that indicates the efficiency and profitability of an investment. Key Differences Between IRR and ROI: 1. Consideration of Time: ROI does not account for the time value of money. It provides a snapshot of profitability without considering how long the investment was held. IRR incorporates the time value of money, giving a more accurate reflection of an investment's performance over time by considering the timing of cash flows. 2. Calculation Complexity: ROI is easy to calculate and understand, making it a popular choice for quick assessments of investment performance. IRR is more complex, requiring iterative calculations to find the rate that sets the net present value of all cash flows to zero. 3. Reinvestment Assumptions: ROI does not make any assumptions about reinvestment of returns. IRR assumes that interim cash flows are reinvested at the same rate as the IRR, which can sometimes be unrealistic. 4. Application Context: ROI is often used for short-term investments and simple comparisons. It is particularly useful for evaluating the overall profitability of different investments without delving into the timing of returns. IRR is widely used in capital budgeting and private equity/venture capital to evaluate the profitability of projects or investments with multiple cash flows over time. Defining VC Fund Cash Flows Understanding the cash flows of a VC fund is crucial for accurately calculating metrics like IRR. The timing and magnitude of these cash flows significantly impact the fund's overall performance. Let’s delve into the types of cash flows in VC funds, their timing, and their implications for IRR. Cash Outflow Examples Capital Calls: These are requests by the VC fund to its LPs to provide a portion of the committed capital for specific investments. For example, if a fund decides to invest $1 million in a startup, it might issue a capital call for $1 million from its LPs. The timing of these calls is crucial; delaying capital calls can enhance IRR by reducing the time period over which the capital is invested. Management Fees: Typically, VC funds charge annual management fees, often around 2% of the committed capital. For instance, a $100 million fund might charge $2 million annually to cover salaries, operational costs, and other expenses. These fees reduce the net returns to LPs, impacting the net IRR​​​​. Fund Expenses: These include legal fees, administrative costs, and technology expenses. For example, a fund might incur $100,000 annually in legal and administrative fees, which also affect net returns. These expenses are necessary for the day-to-day operations of the fund but reduce the overall returns available to LPs. Cash Inflows Examples Distributions: These are returns to LPs from the fund's investments, usually following a liquidity event such as an acquisition, merger, or IPO. For example, if a portfolio company is acquired for $10 million, the proceeds distributed to LPs constitute a cash inflow. Early and large distributions can significantly boost IRR. Dividends and Interest: Occasionally, portfolio companies might pay dividends or interest on convertible notes. For example, a company might distribute $50,000 in dividends annually to the VC fund, contributing to cash inflows. These payments can provide a steady stream of returns, enhancing the IRR by providing earlier cash flows. Impact of Timing on Cash Flows: The timing of cash flows is critical in calculating IRR. Here’s why: Early Distributions: Receiving returns early in the fund's life can significantly enhance IRR because it reduces the period over which the capital is at risk and increases the annualized return. For instance, an early exit that returns capital within the first three years can result in a much higher IRR compared to a similar exit occurring in year seven. Delayed Capital Calls: By calling capital only when necessary, funds can avoid having large sums of uninvested capital, which would otherwise result in a lower IRR due to what is known as "cash drag." For example, if a fund delays a $1 million capital call by two years, it improves IRR by reducing the period the capital is deployed. Lumpy Cash Flows: Venture capital investments often result in irregular, or lumpy, cash flows. Large inflows from a significant exit can cause IRR to spike, while periods with no inflows might show a temporary decline in IRR. Managing these irregularities is a key challenge for fund managers. Examples and Implications for IRR: Example 1: A VC fund invests $2 million in a startup and exits three years later with a $10 million return. The IRR calculation will consider the initial $2 million outflow and the $10 million inflow three years later, likely resulting in a high IRR due to the substantial gain over a relatively short period. Example 2: Another fund might make smaller, incremental investments over time, leading to multiple capital calls and varied exit timings. If these exits are delayed, the IRR might be lower compared to a fund with early, significant exits. Want to learn more about tracking key fund metrics in Visible? Gross vs Net IRR When evaluating a venture capital fund's performance, it's essential to understand the difference between Gross IRR and Net IRR. Both metrics provide insights into the fund's returns, but they account for different factors and expenses, offering distinct perspectives on performance. Gross IRR: Gross IRR represents the annualized rate of return on an investment before deducting any fees or expenses. This metric focuses solely on the performance of the fund's investments, providing a measure of the raw investment skill of the fund managers. For example, if a fund invests $1 million and it grows to $2 million over three years, the Gross IRR calculation would not consider management fees, carried interest, or any other expenses incurred by the fund. This gives an unfiltered view of the investment returns generated by the fund's portfolio. Net IRR: Net IRR, on the other hand, accounts for the deductions of all management fees, fund expenses, and carried interest. This metric reflects the actual return the LPs receive after all fund management costs are considered. For instance, if the same $1 million investment grows to $2 million but incurs $200,000 in management fees and $100,000 in carried interest, the Net IRR would be lower than the Gross IRR. This adjusted figure provides a more accurate reflection of the returns that LPs can expect to receive. Key Differences and Implications: 1. Fee Consideration: Gross IRR does not include management fees, fund expenses, or carried interest. Net IRR includes these fees, providing a realistic view of the returns to LPs. 2. Performance Benchmarking: Gross IRR can be useful for comparing the investment performance across different funds without the influence of varying fee structures. Net IRR is crucial for LPs as it reflects the actual profitability of their investment after all costs are accounted for. 3. Decision Making: Gross IRR helps in assessing the raw investment skills of fund managers. Net IRR aids LPs in making informed decisions about where to allocate their capital based on the net returns they can expect to receive. By understanding Gross and Net IRR, investors can gain a comprehensive view of a fund's performance, ensuring they make well-informed investment decisions. Unrealized vs. Realized IRR When analyzing a venture capital fund's performance, it is crucial to distinguish between Unrealized IRR and Realized IRR. These metrics reflect different stages of the investment process and provide insights into both current valuations and actual returns. Unrealized IRR: Unrealized IRR includes both actual profits and theoretical gains based on the current valuations of the portfolio companies that have not yet been liquidated. This metric is forward-looking and speculative, as it assumes that the current valuations of the investments will be realized upon exit. For example, if a fund holds equity in a startup currently valued at $10 million but has not yet sold its stake, the unrealized gains contribute to the Unrealized IRR. This provides an optimistic view of the fund's potential returns but is subject to market fluctuations and the eventual success of the exits. Realized IRR: Realized IRR, on the other hand, only includes the actual cash flows that have been received from liquidated investments. This metric is based on historical data and provides a concrete measure of the returns that have been distributed to the LPs. For instance, if a fund invested $1 million in a company and later sold its stake for $5 million, the $4 million profit would be included in the Realized IRR. This figure gives a reliable measure of the fund's performance based on actual returns. Key Differences and Implications: 1. Valuation Basis: Unrealized IRR is based on current valuations and future projections. Realized IRR is based on actual, historical cash flows. 2. Reliability: Unrealized IRR can be speculative and subject to change based on market conditions and the success of future exits. Realized IRR provides a dependable measure of past performance. 3. Use Case: Unrealized IRR is useful for assessing the fund's potential future returns and the current value of its portfolio. Realized IRR is crucial for understanding the fund's actual profitability and historical performance. The IRR J-CURVE The IRR J-Curve describes the typical pattern of IRR over the lifespan of a venture capital fund. It illustrates how IRR typically decreases in the early years of a fund and then rises sharply in the later years as investments mature and exits occur. Understanding the J-Curve is essential for both fund managers and LPs as it has significant implications for investment strategy and expectations. Understanding the J-Curve: In the early stages of a venture capital fund, significant capital outflows occur as the fund invests in startups and incurs management fees and operational expenses. These outflows typically result in a negative IRR during the initial years, which is often called the "valley of death" in the J-Curve. As time progresses, some portfolio companies start to mature and achieve liquidity events such as acquisitions, mergers, or IPOs. These events generate cash inflows, which are distributed back to the LPs, causing the IRR to rise. Eventually, the IRR may surpass the initial negative values and reach a positive and often substantial rate of return as more successful exits occur. Implications for Fund Managers and LPs: 1. Expectation Management: Fund Managers: Need to communicate the J-Curve effect to LPs, explaining that early negative returns are typical and part of the investment process. This helps manage expectations and reduce concerns during the initial years. LPs: Should understand that initial negative returns do not necessarily indicate poor fund performance. Instead, they reflect the natural investment cycle in venture capital. 2. Investment Strategy: Fund Managers: Should strategically plan capital calls and investments to optimize the timing and magnitude of cash inflows. Delaying capital calls until necessary can minimize early outflows and improve the overall IRR. LPs: Need to be patient and maintain a long-term perspective, recognizing that the most significant returns typically occur later in the fund's lifecycle. 3. Performance Evaluation: Fund Managers and LPs: Both parties should use the J-CCurve as a benchmark for evaluating fund performance. Comparing the fund's IRR progression to the expected J-Curve can provide insights into whether the fund is on track or if adjustments are needed. Example: Consider a venture capital fund with a 10-year lifecycle. In the first three years, the fund experiences negative IRR due to capital outflows for investments and fees. By year five, one of the portfolio companies is acquired, generating a significant cash inflow. This event causes the IRR to rise sharply, marking the beginning of the upward curve. By the end of the fund's lifecycle, several successful exits have occurred, resulting in a high positive IRR that exceeds the initial negative values. Related resource: J-Curve and IRR Putting IRR into Vintage Context When evaluating the performance of VC funds, it's essential to consider the vintage year—the year in which the fund began deploying capital. Comparing funds within the same vintage year allows for a fair assessment, as these funds are subject to similar market conditions and economic cycles. Understanding the vintage year context can significantly impact the interpretation of a fund's RR. Relevance of Comparing Funds within the Same Vintage Year: 1. Consistent Market Conditions: Funds of the same vintage year are exposed to the same macroeconomic environment, including interest rates, inflation, and market sentiment. These factors heavily influence investment opportunities and outcomes. 2. Economic Cycles and Performance: Economic cycles, including periods of expansion and recession, affect the availability of capital, the number of viable startups, and exit opportunities. Funds started in an economic downturn may acquire investments at lower valuations but might struggle with exits if the downturn persists. Conversely, funds launched during economic booms might invest at higher valuations but benefit from more lucrative exit opportunities as the economy continues to grow. Impact of Market Conditions and Economic Cycles Market conditions and economic cycles play a critical role in determining the performance of VC funds. Funds launched during bullish markets typically experience different growth trajectories compared to those started in bearish markets. Bullish Market Example: A fund started in 2010, a period of economic recovery and growth, may benefit from a favorable market environment, leading to higher valuations and more exit opportunities. This can result in higher IRRs compared to funds from other vintage years. According to Cambridge Associates, funds from the 2010 vintage year have shown robust performance due to strong market conditions and increased IPO activities​​. Bearish Market Example: In contrast, a fund launched in 2001 during the dot-com bust faced a challenging environment with limited exit opportunities and lower valuations. Such funds might initially show lower IRRs, reflecting the tough economic conditions during their early years. A study by Preqin indicates that vintage 2001 funds had lower early IRRs but showed significant improvement as the market recovered and exit opportunities increased​​. Examples Illustrating Vintage Year Impact on IRR: 1. Vintage Year 2008: Funds started in 2008 faced the immediate aftermath of the financial crisis. Initial IRRs were likely low due to the challenging investment climate. However, those funds that managed to survive and deploy capital strategically during the downturn might have seen substantial IRR increases as the economy recovered in the following years. As per a report from PitchBook, vintage 2008 funds showed a notable uptick in IRR after 2012, correlating with the broader economic recovery and increased M&A activities. 2. Vintage Year 2015: Funds launched in 2015 benefited from a prolonged period of economic growth and technological innovation. High valuations and active IPO markets provided numerous exit opportunities, resulting in strong IRRs. Cambridge Associates' benchmark data shows that vintage 2015 funds had higher median IRRs compared to previous years, driven by successful exits in sectors like technology and healthcare. By placing IRR in the context of vintage years, investors can better understand the performance of their VC investments relative to market conditions and economic cycles. This contextual understanding helps in making more informed decisions and setting realistic expectations for future fund performance. Considerations of IRR The IRR is a valuable metric for assessing the performance of VC investments. However, it has several limitations and should be used cautiously. Understanding these flaws and the contexts in which IRR may be inappropriate can help investors make more informed decisions. 1. Sensitivity to Cash Flow Timing: Explanation: IRR is highly sensitive to the timing of cash flows. Even small changes in the timing of cash inflows or outflows can lead to significant variations in the IRR calculation. Implication: This sensitivity can sometimes provide a misleading picture of an investment's performance, especially if the cash flows are irregular or unpredictable, which is common in venture capital investments. Example: If a fund delays a significant cash inflow by just a few months, the IRR can change dramatically, potentially misrepresenting the true performance of the investment​​ . 2. Reinvestment Assumptions: Explanation: IRR assumes that interim cash flows are reinvested at the same rate as the IRR itself. This assumption can be unrealistic, particularly in volatile markets where finding equally profitable reinvestment opportunities is challenging. Implication: This can lead to an overestimation of the investment’s performance if the actual reinvestment rate is lower than the calculated IRR. Example: If a fund generates an IRR of 20% but can only reinvest interim returns at a rate of 5%, the actual performance will be lower than the IRR suggests . 3. Multiple IRRs: Explanation: In cases where an investment has alternating positive and negative cash flows, there can be multiple IRRs that satisfy the NPV equation. This can create confusion and ambiguity. Implication: Multiple IRRs make it difficult to determine the actual rate of return, complicating the decision-making process. Example: A project with cash flows that include significant inflows followed by large outflows might yield more than one IRR, making it unclear which rate accurately represents the investment's performance . 4. Lack of Scale Sensitivity: Explanation: IRR does not account for the scale of the investment. A small project with a high IRR might be less attractive than a larger project with a slightly lower IRR if the latter generates significantly higher absolute returns. Implication: Investors might prioritize projects with high IRRs without considering the overall size and absolute returns of the investment, potentially missing out on more lucrative opportunities. Example: A $1 million investment yielding a 30% IRR might seem attractive, but a $10 million investment with a 20% IRR could provide substantially greater total returns​​ . 5. Inappropriate for Short-Term Investments: Explanation: IRR is less meaningful for short-term investments because it annualizes the return, which can exaggerate the performance of short-duration projects. Implication: Using IRR for short-term investments can give a skewed perception of performance, making short-term gains appear disproportionately attractive. Example: An investment with a 50% return over six months might show an extremely high annualized IRR, but this does not reflect sustainable long-term performance . Situations Where IRR is Not Appropriate: Projects with Non-Standard Cash Flows: When investments have non-standard or erratic cash flows, IRR may not provide a reliable measure of performance. Comparing Different Sized Investments: When comparing investments of significantly different sizes, IRR can be misleading as it does not reflect the absolute value of returns. Short-Term Investments: IRR can exaggerate the perceived performance for short-term projects, making it less useful for accurate comparison. Tracking IRR in Visible Visible lets you track and visualize over 35+ key fund metrics including IRR in one place. Get started with calculating your IRR by leveraging Visible's investment data features. Track the round details for your direct investments and follow on rounds. By utilizing Visible, investors can better understand their fund’s performance, streamline data management, and improve decision-making processes, ultimately driving better investment outcomes. Related resource: Investor Update Dashboard Market Penetration Strategy Important Venture Capital Metrics Important Startup Financials