Measuring the Performance of Venture Capital Investments

Once a venture capital investor invests in a new venture, he will evaluate the performance of his investment at the time of liquidation, and also during the life of the investment.

The performance is generally measured by calculating the internal rate of return (IRR) on:

• Cash flows since the beginning of the investment
• Unliquidated remaining holdings

Many associations such as European Private Equity and Venture Capital Association (www.evca.com) have published detailed guidelines for performance evaluation. Another such organization is the British Private Equity and Venture Capital Association (www.bvca.co.uk). The guidelines can be downloaded from their websites.

EVCA's IRR Measure of Performance

The EVCA advocates that the performance be measured at three levels:

1. The Gross Return on Realized Investments

This return takes account of the cash outflows (investments) and inflows (divestments, including realization values, dividend and interest payments, repayments of the principal of loans, etc.), which take place between the Fund and its realized investments.

2. The Gross Return on all Investments

This return takes account of all of the following:

• The cash outflows (investments) and inflows which take place between the Fund and:

• Its wholly realized investments

• Its partially realized investments

• Its wholly unrealized investments

• The valuation of the unrealized portfolio (consisting of wholly unrealized investments and the unrealized portions of partially realized investments but excluding cash and other assets held in the portfolio).

3. The Net Return to the Funder

This measures the return earned by the Funders in the Fund, and takes account of:

• The cash flows which take place between the Fund and the Funders, net, by definition, of all of the following: