• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
  • Skip to footer
Finance Train

Finance Train

High Quality tutorials for finance, risk, data science

  • Home
  • Data Science
  • CFA® Exam
  • PRM Exam
  • Tutorials
  • Careers
  • Products
  • Login

Measuring the Performance of Venture Capital Investments

CFA® Exam, CFA® Exam Level 1, Investment Management

This lesson is part 6 of 7 in the course Private Equity

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:
    • The Venture Capital Company’s carried interest;
    • The management fees paid to the Private Equity/Venture Capital Company by the Funders;
    • All other applicable professional and ancillary charges which are paid out by the Venture Capital Company in the course of investing, managing and divesting from its investment portfolio.
  • The valuation of the unrealized portfolio (consisting of the unrealized portions of partially realized investments, wholly unrealized investments and also including cash and other assets), after deducting the implied carried interest.

When the portfolio is fully realized/fully distributed, the Net Return is the ‘cash-on-cash’ return to the Funders.

Challenges

There are several challenges in measuring the performance of venture capital projects:

  1. It is difficult to arrive at detailed valuations, as they have very limited information.
  2. There is no meaningful benchmark against which the performance can be measured.
  3. Any reliable performance feedback is of long-term nature.
Previous Lesson

‹ Valuation and Risks in Venture Capital Investing

Next Lesson

Exit Strategies for Private Equity Investors ›

Join Our Facebook Group - Finance, Risk and Data Science

Posts You May Like

How to Improve your Financial Health

CFA® Exam Overview and Guidelines (Updated for 2021)

Changing Themes (Look and Feel) in ggplot2 in R

Coordinates in ggplot2 in R

Facets for ggplot2 Charts in R (Faceting Layer)

Reader Interactions

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.

Primary Sidebar

In this Course

  • Overview of Private Equity
  • Stages of Venture Capital Funding
  • Characteristics of Venture Capital Funding
  • Exit Strategies for Venture Capital Funds
  • Valuation and Risks in Venture Capital Investing
  • Measuring the Performance of Venture Capital Investments
  • Exit Strategies for Private Equity Investors

Latest Tutorials

    • Data Visualization with R
    • Derivatives with R
    • Machine Learning in Finance Using Python
    • Credit Risk Modelling in R
    • Quantitative Trading Strategies in R
    • Financial Time Series Analysis in R
    • VaR Mapping
    • Option Valuation
    • Financial Reporting Standards
    • Fraud
Facebook Group

Membership

Unlock full access to Finance Train and see the entire library of member-only content and resources.

Subscribe

Footer

Recent Posts

  • How to Improve your Financial Health
  • CFA® Exam Overview and Guidelines (Updated for 2021)
  • Changing Themes (Look and Feel) in ggplot2 in R
  • Coordinates in ggplot2 in R
  • Facets for ggplot2 Charts in R (Faceting Layer)

Products

  • Level I Authority for CFA® Exam
  • CFA Level I Practice Questions
  • CFA Level I Mock Exam
  • Level II Question Bank for CFA® Exam
  • PRM Exam 1 Practice Question Bank
  • All Products

Quick Links

  • Privacy Policy
  • Contact Us

CFA Institute does not endorse, promote or warrant the accuracy or quality of Finance Train. CFA® and Chartered Financial Analyst® are registered trademarks owned by CFA Institute.

Copyright © 2021 Finance Train. All rights reserved.

  • About Us
  • Privacy Policy
  • Contact Us