How Venture Capital Funds Track Their Performance: Key Metrics Explained

In venture capital, tracking fund performance is critical for General Partners (GPs) to measure the success of their investments and for Limited Partners (LPs) to evaluate returns. 

While many different metrics exist, the most commonly used in VC funds include multiples on invested capital and internal rates of return (IRR). These metrics help VC funds assess performance throughout a fund’s lifecycle, offering insights into both realized returns and unrealized value.

Let’s dive into the key performance indicators used by VC funds.

Multiples on Invested Capital (MOIC)

Multiple on Invested Capital (MOIC) is one of the most fundamental metrics for GPs. It measures the ratio of the total value of an investment (both realized and unrealized) to the amount invested. It is calculated as:

• Best metric for gauging a GP’s raw investment acumen.
• Measures a GP's ability to invest in big winners, as though the GP invested their own dollars.

Always clarify whether “gross multiple” refers to MOIC or Gross TVPI, as the two represent different aspects of a fund’s performance. Additionally, remember that MOIC doesn't account for the time value of money, so the speed of returns is also critical.

Gross Total Value to Paid-In Capital (Gross TVPI)

Gross TVPI measures the value of a fund’s investments relative to the amount of capital contributed by LPs. It considers both distributed capital and the remaining value of investments. The formula is:

• Measures a GP’s ability to turn LPs’ dollars into big winners (as opposed to the GP’s own investment).
• Represents the fund’s total value relative to the LP’s investment.

Often, “TVPI” is quoted as Gross TVPI, but it is important to clarify, as TVPI typically refers to Net TVPI when it comes to LP returns.

Net Total Value to Paid-In Capital (Net TVPI)

Net TVPI is similar to Gross TVPI but considers the net value after fees, expenses, and carry. It is especially critical for LPs as it reflects the net return they receive from the fund.

• Commonly quoted by GPs, but second in importance to DPI for LPs.

Residual Value to Paid-In Capital (RVPI)

RVPI shows the ratio of remaining unrealized investments to the paid-in capital, providing insight into the “paper value” of the fund:

• Paper value of the fund, often impressive early in a fund’s lifecycle.
• Important metric, but what truly matters is how or whether RVPI converts into DPI as the fund matures.

Distributions per Paid-In Capital (DPI)

DPI measures the realized returns to LPs relative to their paid-in capital. It’s the metric that LPs often care about the most, as it reflects the actual return of capital:

• Most important metric for LPs, as it indicates the capital that has been returned to them.

DPI provides the clearest indication of realized returns and is a critical measure for LPs when evaluating a fund's success.

Internal Rate of Return (IRR)

IRR is another essential metric that venture capital funds use to track performance. Unlike multiples, IRR factors in the timing of cash flows, offering a time-sensitive perspective on fund performance.

Gross IRR

Gross IRR measures the rate of return on invested capital before considering fees, expenses, or carry. It is calculated by evaluating the inflows and outflows related to investments:

• Key metric for measuring GPs’ ability to generate returns on invested capital.

Always clarify whether invested capital (PIC) or contributed capital is used in gross IRR calculations, as this can substantially affect the interpretation.

Gross Realized IRR

Gross Realized IRR focuses on returns from fully realized investments (those that have exited). It’s a valuable metric for assessing actual performance.

• Best metric for measuring GPs’ raw investment acumen, as it accounts only for actual returns.

Net IRR

Net IRR takes into account the net cash flows after fees, expenses, and carry. It is often the most important IRR metric for LPs, as it gives a clearer picture of net returns:

• The second most quoted metric by GPs but is of primary importance for LPs.
• Reflects the GP's ability to generate returns after all deductions.

Net Realized IRR

Net Realized IRR measures the return on fully realized investments, accounting for fees, carry, and expenses:

• Most important IRR metric for LPs at the end of a fund’s lifecycle.
• Gives rise to the all-important J-curve.

At the fund level, Net Realized IRR is the most reliable indicator of the fund’s ultimate performance after deducting all associated costs.