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Great time to start a venture fund?

August 12, 2008

Yesterday a couple of friends stopped by to tell us about their plans to launch a $100MM fund.  Ironically, this might be the perfect time to do so (at least for people with a track record of excellent returns).  During our conversation we began talking about venture fund economics and I recalled a couple of posts Fred Wilson wrote that give a great insight into the process (I have mentioned them before).  In any event I am reposting the links here (for my friends benefit and hopefully yours).

Post #1: Venture Fund Economics

Post #2: Gross and Net Returns for Venture Funds

Fred’s point about returns are quite interesting.  He explains how a fund could return annual returns of over 40% and only return 2x on committed capital (2x means investing one dollar and getting two back).  How is that possible?  Read the post.  Fred also included the original model for Union Square Ventures original fund:

Assumptions

Basically, they estimated a 4x mulitple on invested dollars (i.e. invest one dollar and the fund would generate four).  Fred is pointing out that an investor would only see 2.56x on their money despite the percieved 4x return the fund ‘grossed’ (i.e. one dollar would return $2.56 to the investor).  For those of you interested in IRR the fund would generate almost 40% GROSS IRR, but return around 28% NET IRR.  Fred also cited an article by Paul Margolis with a similar explaination in a post titled, “VCs are happy again, but are they making any money?“

Written by Alexander Muse · Filed Under Blog, Venture Capital 

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