VC funds are usually evaluated and compared to other VC funds of the same vintage or the year where each of the VC funds began investing.
With each of the VC fund return metrics funds are ranked and sorted into data published by independent organizations into quartiles, with the top quartile capturing the top 25% performing fund managers.
All of the metrics we've looked at, TVPI, MOIC, DPI, and IRR are relevant metrics over the long term where all or most of the VC funds committed capital has been invested and exit opportunities for their portfolio investments are being created.
However, in the short term, the performance of a VC fund does not include its long-term potential.
The TVPI and MOIC can be used in the earlier years as the returns in their calculations use potential exit valuations.
However, the DPI and IRR are better metrics over the long term where we have actual distributions being returned to the underlying investors and the IRR can be calculated using actual cash flows.
It's really important for any junior working within a VC fund to understand the combination of these ratios and what they mean.
The goal of a VC fund is to identify investment companies, which will deliver a high IRR and high TVPI early on.
Since these investments will grow at a fast rate and generate those returns for long enough for the returns to compound.
Most VC funds are happy to invest in companies with a potentially high IRR, but low TVPI and then hold onto that investment for the slightly longer term.
Since the investment will have grown quickly at first to generate the high IRR, but then we need to hold it for longer so that it generates the higher absolute TVPI.
VC funds will tend to stay away from low IRR low TVPI businesses since the investment is not gonna grow quickly or long enough for returns to compound.
However, if you see a high TVPI but a low IRR business, then you'll be able to tell that the investment has grown at a relatively slow rate over a long time period.
