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How to Build a VC Fund Model

Even quantitatively-minded first-time GPs can find modeling a challenge because venture capital models are often quite different from the models you may be familiar with. There are also some similarities and basic differences that we can leverage to get a running start.

Build Overall Forecast

Start with a simple budget including total capital, expenses, investments, proceeds and distributions. At the same time, factor in assumptions for management fees and carry that most closely relate to your situation. Once you have this framework in place, you can apply an assumption of gross return multiple on your invested capital to estimate returns. 

Building this model may seem simplistic, but it’s essential for closing your first round of capital. Not only does it give you a basic understanding of your business and the size of investments you can make from your fund, but a well-designed forecast shows prospective LPs that you know what you’re doing.

Forecast Cash Flows Over Time

It’s imperative that you understand the long commitment you’re making into this fund, and how/when you’ll make investment decisions. A cash flow forecast provides the foundation for that analysis. 

Once you have an overall budget, you should estimate how you’ll deploy capital. Here are the basic steps:

  1. Create a budget for your expected management fees and fund expenses over time. 
  2. Build a forecast of new investments over your new investment timeframe. Optionally, create a forecast of follow-ons based on your initial investments, follow-on reserve strategy and expected timing between rounds. 
  3. Add your forecast of expenses to your forecast of investments to create a capital call schedule. 
  4. Then, to fully understand and calculate performance metrics, build a forecast of proceeds from those investments and the resulting distributions from the fund to investors. 

This process will take your overall budget into an annual or quarterly budget of cash flows.

Once you have this framework, you should estimate how you’ll deploy capital. This means when and how much you’re putting into companies at the first check, and potential follow-ons. If you then layer on a fees estimate, you’ll be able to forecast capital calls and net out the proceeds and distributions.

Create a Portfolio Model By Detailing your Investment Strategy

Portfolio construction is the process of creating your portfolio strategy, check sizes, follow on reserves, and expectations around valuations, ownership, and dilution over time. To wrap your head around the portfolio model for your firm, you need to make some key assumptions about the companies you’re going to be investing in. For example:

  1. How big are the initial and follow-on checks? 
  2. How much do you expect them to grow over time? 
  3. When is the expected exit and at what multiples? 


Obviously, if this is your first fund it may be difficult to estimate these inputs, and you should only put the level of detail into the portfolio modeling that’s appropriate to your stage. For example, if you’re at the idea stage, a hypothetical may work best to test your assumptions. Therefore, you should keep your model as simple as possible. Conversely if you’re further along, you may need more detail, several different company scenarios, and example companies.  Whenever possible, you can base this model on either your direct experience or comps if you have the data. 

Create Scenarios And Model Power Laws That Affect Performance

There are two basic ways to scenario-plan your fund’s performance: using discrete scenarios or probabilistic models. In both cases, the goal is to understand the power laws and events that most affect your performance. That is: what X-Factors can change the trajectory of your fund the most. 

In discrete scenario planning you’ll develop a base, best and worst case expectation. Choose several inputs as the starting point, and make intuitive assumptions about their application to your performance. 

If you’re comfortable with them, probabilistic models provide an added level of insight when assessing scenarios. By creating simulated timelines on a probabilistic basis, you can arrive at a range of possible results, and assign a degree of confidence to each. Though this produces less specific outcomes, it may provide a more realistic view. 

Sanity Checks

Before sharing your model with prospective investors, it’s critical that you sanity (and gut) check your expectations, performance and assumptions. Venture accelerators – like VC Lab’s free program (n.b. Enrollment for the next cohort ends soon, apply now) – provide an excellent way to acquire and share benchmarks and insights from emerging managers and mentors. 

In particular, we suggest you pay close attention to a few “gotchas” that often bedevil first time managers. First, check that your strategy makes sense. That is, do other people think it’s logical that you can get the kind of deals you seek at your check size? What about the team – can you handle the volume you’re looking for with the people you’ve allocated? Comparisons can be really helpful here. 

Secondly, check to make sure you’re not forgetting crucial expenses. Doing so will leave your invested capital too high, and distort your returns. At the same time, ensure your follow on strategy makes sense. For example, will you get many pro-rata opportunities and will you have the capital necessary to make those follow-on calls?

Lastly, ensure your returns assumptions are as realistic as possible without succumbing to overly conservative thought. That is, you’re looking for a targeted return that most LPs will consider reasonable and exciting. Go too far into the black, and you’ll trigger their disbelief engine. But if you undershoot, they may not get excited at all. Again, it’s helpful to check this with others who’ve been through the same time.
VC Lab’s venture accelerator is an unparalleled opportunity to do just that. Applications for the next cohort close soon, so be sure to apply today.

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Venture Capital Fund Pitch Decks

Specialized pitch decks are required for venture capital funds that are in process of raising and closing on capital from limited partners.

The pitch decks have certain requirements, like proper legal disclaimers, and they also must comply with standards that limited partners have come to expect. Today, limited partners look at slides for less than a minute on average, so the purpose of each slide needs to be clear and the main points per slide need to tell a narrative.

Here are five hacks to help your venture capital fund presentation stand out with limited partners.

1. Reinforce Your Thesis

Write a one sentence Thesis, and then ensure that every point and every graphic on every slide reinforces that Thesis.

The point of the presentation is to explain how the fund is uniquely qualified to execute your fund Thesis. Tangential information can dilute or confuse the message. As a tactic, paste your one sentence Thesis in a small font at the top of every slide in your presentation, and then read or review everything on each slide to ensure that it matches the Thesis. For example, if your Thesis is for a deep tech fund, it does not make sense to put your high school lacrosse experience as a bullet on the Team slide.

2. Use Simple Slide Titles

Use common one, two or three word titles for every slide, and avoid being funny or creative with slide titles. 

Limited partners often look for specific information to confirm interest in a fund, since most LPs have investment criteria that they are looking to fulfill. By keeping the slide titles simple, it allows limited partners to find and focus on the information that they need. Common slide titles include Thesis, Team, Track Record, Portfolio, Market and Economics. Avoid slide titles that resemble phrases or sentences like, “how we have the best portfolio” or “our unique market knowledge,” since this can be confusing to limited partners about what is contained on the slide. For a full list of common slide titles and content, read on.

3. Keep the Slides Short

Avoid using more than 50 words per slide, using diagrams, pictures, charts or numbers to replace words.

The average limited partner spends less than one minute per slide, and our data shows that limited partners spend less time on slides with more words. Overwhelming a limited partner with a lot of information can cause them to skip the slide. Our experience shows that there should be one major takeaway point per slide that is reinforced with the content. For example, on a Team slide, if you have three Partners and you want to make the point about deep tech expertise, use bullets under the team members that show they are leaders in deep tech. For example, “Ph.D. Physics, Carnegie Mellon” is a good bullet, or “12 Patents in Robotics” is another good bullet. See how they are short?

4. Include Disclaimers

Add a legal disclaimer for the whole presentation in the front or the back, and disclaim and forecasting slides about forward-looking statements.

Short and appropriate legal disclaimers are normally required and help the general partner look more professional as a money manager to limited partners. The absence of disclaimers may make a credible limited partner suspicious. Most venture capital decks have one overall legal disclaimer for the jurisdiction that you are in, often placed in the back, and the forecasting slides normally have a footnoted disclaimer about forward-looking statements. These are usually secured by your attorneys to comply with local and regional fundraising laws. You can read some sample disclaimers below.

5. Test the Narrative

Read the whole presentation out loud in less than two minutes by stating the main point of each slide to refine the narrative flow.

Venture capital fundraising decks have a narrative flow that emphasizes why the fund is uniquely qualified to execute on the Thesis. This story can be told in many different ways depending on the strengths (and weaknesses) of the team and strategy. For example, a moderately talented team launching a fund in a market with little funding will likely find the best deals, so they can focus on describing how the “Market” is strong and growing. Quickly say out loud the main point of each slide to evaluate the narrative effectiveness of your presentation. Try moving the order of slides around to see if you can build a stronger narrative and create a better presentation flow.

These five tips will help to make a much more effective presentation for a venture capital fund. Remember that many limited partners still print out presentations, so avoid having color backdrops and avoid a lot of photos. Put your contact information on the title slide, version each release and include page numbers.

It is not uncommon for general partners to edit the fund presentation multiple times per week during the fundraising process. As the versions improve, the closing rate increases. Good luck!


Bonus: VC Slide Titles & Content

Below is a list of the most common slide titles and content in venture capital fund pitch decks.

  • Title has a tag line, versioning and contact information for the key people pitching.
  • Thesis just has your one-sentence Thesis.
  • Team has up to three Partners per slide, plus additional slides for Venture Partners, Advisors or other key individuals involved in fund decision making.
  • Track Record highlights one, two or three relevant deals that you and your Partners have invested in or helped to grow, including a logo of the company
  • Value Add describes the value your fund will provide portfolio companies or investments, possibly with a diagram
  • Warehouse highlights any deals that you have done or are planning to do with a logo of the company
  • Allocation shows in a table the number of deals that you will do organized by stage with the estimated investment, valuation and ownership.
  • Returns shows the type of returns that you anticipate from hypothetical portfolio companies organized by small, medium or large exits across three columns.
  • Liquidity shows up to three projected fund outcome scenarios as a multiple or as IRR,
  • Market provides a simple chart or table to demonstrate the attractiveness of currently investing in your target market segment
  • Economics has the fund size and stage at the top and that provides a table with the fund economic terms, such as the Minimum Investment Amount, Management Fees and Carried Interest, with the name of the term on the left and the economic term on the right
  • Disclaimer has acceptable legal language for your home country to avoid liability for any statements
  • Thank You has the tagline of the fund, the target closing date, and the contact information for all of the General Partners,
Optional VC Slides
  • Strategy – what deals that you target
  • Operations – how you close and service deals
  • Competition – notable funds doing similar things
  • Partners – any strategic corporate or funding partners
  • Advantages – key selling points to target investments
Bonus: Sample VC Disclaimer Language

Below are a couple sample disclaimers for reference purposes. Please consult with an attorney before using.

Standard Fund Disclaimer

“The information herein is strictly confidential and is intended for authorized recipients only. The content of this presentation is shown for information purposes only and is not intended as investment advice, or an offer or solicitation with respect to the purchase or sale of any security. The strategy presented herein represents the strategy of the General Partner of the Fund as of the aforementioned date and may vary at the discretion of the General Partner. There is no guarantee that any investment objective will be achieved. Past performance is not indicative of future results. Actual results may differ materially from those expressed or implied. Recipients should not assume that any companies identified in this presentation, are or will be, investments held by the Fund. Any projected returns presented herein are shown for illustrative purposes only. There can be no guarantee the Fund will achieve these results. Venture investing is risky and you could lose some or all of your investment.”

Forward Looking Statement Disclaimer

“The information contained herein constitutes forward-looking statements. We assume no obligation to update, and you should not unduly rely on such statements.”


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Resources Insights Legal Templates Venture Share

New Venture Partner Template

Overview

Venture Share is a template agreement for venture capital firms to quickly engage top Venture Partners worldwide. The following is an outline of the topics covered:

Venture Partners
  • Venture Partners are part-time members of a venture capital team.
Model
  • Venture Partners are compensated with carried interest in a fund.
Activities
  • Venture Partners help with 5 types of activities at a fund: executive functions, fundraising, strategic, operating and portfolio assistance.
Compensation
  • Venture Partner compensation ranges based on the type of activity and the seniority of the individual.
Venture Partner Compensation 1
Venture Partner Compensation Ranges
Negotiation
  • There are 4 steps to negotiate a Venture Partner engagement using Venture Share.
Agreement
  • Download the Venture Share Agreement to engage and compensate Venture Partners.

Thousands of new Venture Partners are needed to fill the ranks of emerging venture capital firms worldwide.

Adeo Ressi, CEO of VC Lab

A Venture Partner is a part-time team member of a venture capital firm, providing strategic, operating and portfolio support. Venture Partners are experts in a field, and they are compensated with a share in the upside from venture capital firms, called carried interest.

VC Lab has developed a free Venture Share Agreement (see below) that is designed to be used by venture capital firms and Venture Partners alike to quickly start working together. The template agreement is designed to specify the duties and compensation of a Venture Partner by checking boxes.

Venture Partners can apply for roles at hundreds of funds worldwide with one application at a new VC Lab job portal. Candidates submit a resume and cover letter (apply here), and the next batch of placements will begin in April of 2022.

Venture Partner Model

Venture Partners are normally compensated with carried interest, versus receiving a salary. Carried interest or carry is generated from the fund performance, and it aligns incentives well, since Venture Partners only get compensated when the fund has positive returns. Here is an example to explain how it works.

In this hypothetical situation, there is a Venture Partner with 5% carry in a $10 MM fund. The fund has 20% carry from the limited partners, which are the investors. The fund returns $30 MM, and all returns over $10 MM have the carry of 20% deducted. So, we take 20% of the $20 MM, which is $4 MM, and we then take 5% of $4 MM for the Venture Partner, which is $200,000. In this hypothetical, a 5% Venture Partner position will earn $200,000. 

Fund models commonly project between 5x and 7x, which is greater than the 3x above. A Venture Partner will normally put in a few hours per week over a couple of years, and then get paid over ten years as portfolio companies exit in the fund.

Venture Partner Activities

There are five major types of activities for Venture Partners defined in the Venture Share Agreement:

EXECUTIVE

Executive Venture Partner assists with the management of General Partner:

  • Complete due diligence on potential investment opportunities.
  • Expand branding on social media and help with the overall exposure of the fund.
  • Help complete investments into target portfolio companies.
  • Serve as a director or advisor to target portfolio companies.
  • Source deals from pre-agreed networks and channels.
FUNDRAISING

Fundraising Venture Partner assists General Partner with fundraising activities:

  • Coordinate follow-up between interested investors and General Partner.
  • Create awareness of the Fund among desired target audiences.
  • Identify contacts that are suitable for the Fund’s fundraising pipeline.
STRATEGIC 

Strategic Venture Partner provides General Partner with credibility by providing their knowledge and expertise in an industry or subject matter:

  • Advise General Partner on strategic matters in the Venture Partner’s area of expertise.
  • Identify publicly they work with General Partner.
  • Share news and information with their relevant networks to help General Partner.
OPERATING

Operating Venture Partner provides day-to-day assistance with activities related to the management and operations of the Fund, which may include marketing, accounting, finance, legal, diligence or other back office support:

  • Assisting General Partner to increase the value of the Fund and support any stakeholders.
  • Provide back office support.
  • Respond to inquiries from General Partner.
PORTFOLIO

A Portfolio Venture Partner works on one or more deals where they are actively involved in the management of the investment. 

  • Support the onboarding and growth of a portfolio company in the Fund.
Venture Partner Compensation

Venture capital firms have a range of compensation for the different types of activities performed by Venture Partners. VC Lab surveyed a few hundred venture capitalists to identify the generally accepted ranges, which is used in the Venture Share Agreement:

Venture Partner Compensation with the Venture Share Agreement

Base CarryMiddle CarryAdvanced Carry
Help MonthlyHelp WeeklyHelp Daily
Executive3%5%10%
Fundraising2%4%6%
Strategic1%2%4%
Operating1%2%4%
Portfolio 0.1%0.5%1%

The base, middle and advanced carry levels relate to the time commitment of the Venture Partner, as well as their seniority. 

Venture Partner Negotiation

The Venture Capital Firm and the Venture Partner can quickly agree on core economic terms using the Venture Share Agreement. There are four steps.

  • First, select the relevant activities that a Venture Partner will perform (like above). 
  • Next,  look at the “Venture Partner Compensation Guidelines” table for the highest category of any activity, such as Operating or Executive. 
  • Then, determine if the Venture Partner is helping monthly (Base Carry), weekly (Middle Carry) or daily (Advanced Carry).
  • Lastly, decide on the years of vesting for the carry, the duration of the vesting cliff and whether expenses will be reimbursed.
Venture Share Agreement

The Venture Share Agreement is a free template to quickly structure a Venture Partner relationship. It can not be signed until all of the entities are formed. It can be used for negotiation before forming the entities.

Version 1 of the template focused on a United States domiciled fund in Delaware is available below: 

NOTE: In the Venture Share Agreement, Venture Partners are shareholders in the General Partner entity for compliance with U.S. 409a tax regulations

Post questions on the Venture Share Agreement in the comments.

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Venture Trends Update

2022 has been an intense year.

Venture capital continues to outperform other asset classes. VC Lab wants to hear what you think are the biggest trends in venture capital for Q2 of 2022.

First, choose 3 trends in the survey below.

Then, discuss the trends on March 17th, 2022.

VC Lab is hosting an exclusive online forum for General Partners and Limited Partners on March 17th, 2022. Each of the top voted topics will have a table at this event, where peers from around the world share their views for a global perspective in the topics.

What do you think?

Results are completely anonymous with no registration.


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Tips to Avoid General Solicitation for VCs

One of the essential tools in the arsenal of aspiring fund managers looking to launch an enduring VC firm is networking. When launching a fund, it is vital to activate your network correctly. A common mistake made by new fund managers is ‘general solicitation,’ such as that described in Regulation D of the Securities Act of 1933 in the US. Regulations against general solicitation are prominent in most jurisdictions, and fund managers should seek to understand their local decrees. 

Fund managers can activate their networks without general solicitation and advertising in private offerings and attract Limited Partners to invest in their funds. This article can serve as a guide to help you avoid breaking regulations within your jurisdiction and run an efficient fundraising campaign. 

What is general solicitation?

The Securities Act of 1933 in the US requires all offerings or sales of securities to be registered with the SEC unless the issuer of the securities can claim an exemption from registration. US venture capital funds either rely on Rule 506(b) or Rule 506(c) under Regulation D as an exemption from registration.

Rule 506(b)

A fund relying on Rule 506(b) can sell its securities to accredited investors, as defined by Rule 501 of Regulation D. However, they cannot engage in general solicitation or general advertising of the fund offering. In practice, this means fund managers of 506(b) funds can only solicit investments from investors with whom they have a pre-existing relationship.

Rule 506(c)

Suppose a fund manager engages in activities deemed as general solicitation. In that case, the fund may rely on 506(c). However, the fund can consist of only accredited investors, and the issuer must take reasonable steps to verify the accreditation status of those solicited to invest in the fund. The SEC did not explicitly state what constitutes “reasonable steps” in Rule 506(c); however, the SEC subsequently published guidance on verification here.   

Regulation D does not define what constitutes general solicitation however, in Rule 502(c), the SEC did specify that general solicitation includes “any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio” or “any seminar or meeting whose attendees have been invited by general solicitation.” The SEC later expanded this definition to include activities undertaken on the internet. 

Summary:

Simply put, this means that publicly announcing your fundraising status while your fund offering is ongoing constitutes general solicitation, and you should take “reasonable steps” to verify your investors’ accredited investor status as per your local regulators guidance regarding general solicitation rules. This introduces an additional barrier when fundraising, and typically fund managers want to avoid obstacles that can hinder fundraising efforts.

How to avoid general solicitation?

Typically, you cannot make public references in most jurisdictions and solicit investments when fundraising. Posting statements such as “We are fundraising for fund” is a big red flag and should be avoided since it may be deemed as ‘general advertisement‘ by regulators such as the SEC. Therefore, try to be careful of your activities concerning your fundraising status on publicly available domains such as the web. This includes tweets, publications, and other forms of communication available to the general public. Though a fund adviser may use publications to discuss its advisory business, said publications should not mention the fund or indicate they are seeking investors for a fund.

It would be best to approach public forums such as conferences with a similar provident strategy. Fund managers should act with care to not offer or sell securities when appearing on a panel, presenting, or distributing printed material within events that the general public can access.

Guidelines

In instances where you have sensitive information regarding your fundraising campaign, for example, within your website, it is advised that you take measures to safeguard this information. This may be accomplished by password protecting such areas and meticulously controlling access to said information and data. Furthermore, fund managers should act with care when publicizing their theses and take necessary steps to ensure that publicly available statements cannot be construed as an advertisement.
Statements regarding your venture firm should avoid mentioning fund activities. For example, you may make remarks on what sectors and technologies you focus on and invest in without citing broader information about the fund’s activities.

How can I engage LPs? 

When engaging with LPs, you should aim for targeted communication with individuals in your personal network rather than general contact with the masses. It would be best if you refrained from openly discussing fundraising activities with individuals or groups with whom you have negligible prior relationships. An easy way to avoid this is to develop meaningful relationships with potential limited partners prior to soliciting investment for your funds. 

Instead of unsolicited emails to a large group of individuals, utilize other proven means to run a successful fundraising campaign. Targeted communications directed by a fund adviser to persons with a substantive pre-existing relationship will not be deemed as general solicitation or general advertisement. Fund managers may discuss a prospective investment in fund securities without violating Regulation 506(b). Refer to VC Lab’s “Utilizing Connectors” guide to master the art of getting warm introductions to limited partners without general solicitation.

This content is provided by VC Lab, the venture capital accelerator. 

The free 16 week VC Lab program provides guidance, structure and a network to complete a fund closing in 6 months or less. Since mid 2020, VC Lab has helped launch over 100 venture capital firms around the world.

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Venture Trends for 2022

VC Lab is working with hundreds of venture capitalists to share insights on the defining trends in venture capital for 2022. For the last three years, venture capital has been the top-performing asset class, and the industry is continuing to experience momentous change. These developments are set to induce further major transformations in 2022 and consequently impact venture capital as a whole.

  • Will there be more limited partners entering the asset class?
  • Will valuations rise further beyond the historically high levels?
  • Will more Solo GPs launch funds to compete with the heavyweights?

On December 23rd, 2021 we are hosting Inside VC, discussing the investment trends that will define 2022. General partners and limited partners worldwide will partake in this forum to share their insights into the trends that are defining the industry.

If you are working in venture capital or are involved in the venture capital ecosystem, take a few moments to choose three trends that you feel are inevitable in 2022. VC Lab will make the poll results public and provide analysis on the results. Get started by sharing your insights below:


Inside VC

December 23rd, 2021, at 10:00 AM Pacific

An exclusive online forum for fund managers and limited partners to discuss the top VC trends in 2022.

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Venture Capital Deal Memo

What is a Deal Memo?

Deal Memorandum documents are an important part of the investment process within venture capital firms. Deal Memos document the key facts of the company, deal, and at times make an investment suggestion to the investment committee

What is it used for?

i) Structure Thinking 

Deal Memos allow VCs to structure their thinking and find alignment between the company in question and the firm’s thesis. They enable you to capture your assumptions pertaining to the deal at genesis while systematically validating/invalidating said assumptions. Consequently, they allow VCs to map out their hypotheses while documenting and weighing the rationale to invest in a company. VCs are able to look at the Deal Memo and quickly find alignment or lack thereof and come to a decision. 

That decision can often be to engage further and meet the founders in the early stage. Later on, it can be to conduct further due diligence on the facts as stated in the companies pitch. Deal Memos alone seldom lead to investment and there is a process each firm takes to get to a decision to invest. 

ii) Collect Diligence

This also allows the firm to look at the various aspects of the business and collect diligence. As part of the VC’s fiduciary duties, fund managers should conduct diligence and take necessary steps to ensure all investments are in accordance with both the firm’s thesis and what was marketed to LPs when fundraising. 

Therefore, Deal Memos are central to the due diligence phase. Having this information readily available in a document allows decision-makers to make informed choices during the investment process and fulfill their fiduciary responsibilities.

iii) Share Facts

Importantly, Deal Memos are a medium on which venture capitalists share and document the facts of a deal. They are used to summarise the deal in a concise manner and enable others to quickly catch up on the key facts and evaluate the company.

These documents are circulated around the stakeholders and the key decision-makers both internally, as well as with vendors and venture partners to deliberate. Typically the partners who sit on the ‘Investment Committee’ are those who vote on deals that come into the firm. This is outlined in depth in our VC Roles Article.

iv)  Memorialize Assumptions

These documents also memorialize the thinking of the VC and allow the firm to evaluate and analyze the assumptions that are made at the time of making a ruling. This is very important as it enables the firm to go back and re-evaluate the reasons behind their decision. 

It is essential for a venture capital firm to continually reassess its thesis and assumptions from first principles. Consequently, revisiting your past hypotheses and deductive reasoning is crucial to refining your decision-making process. This enables you to isolate assumptions and determine whether they were accurate. Therefore it is advised that VCs revisit both successful investments as well as their anti-portfolio to take learnings from and adapt to the market.

Who writes them?

The author of the Deal Memo can depend on the situation. Though partners are the ones to vote on a deal and write checks, in large established VC firms this task can fall on more junior members such as Associates and Analysts

A pivotal point to take note of is the source of the deal. Typically, said junior members screen incoming deals into the fund and produce Deal Memos for the top percentile of incoming deals. On the other hand, a partner may also choose to write a Deal Memo for a deal they’ve sourced and are championing to the committee

What makes a good Deal Memo?

We believe that central to a good Deal Memo is information regarding the founder / team, market size, company growth metrics, and the deal momentum / dynamics.

Note that Deal Memos are not standardized across stage, firm, or geography. Each firm has its own set of preferences and there is an overall lack of transparency in the industry. The contents and complexity of the Deal Memo can therefore depend on a plethora of factors.

Typically, Deal Memos need to be concise and informative in the early stages of consideration and a simple one-pager will suffice in screening. In the later stages of consideration, they need to be more comprehensive and metric-driven and the analysis should be in-depth and backed by data.

Consequently, the venture capitalists can collect information over time and continue to evaluate the deal while providing guidance and assistance to the founders of the company

An example, you can refer to is Roelof Botha’s Seed Stage YouTube Deal Memo for Sequoia. Here you can see the increase in detail and analysis as the deal moves along the investment process. 

VC Lab’s Deal Memo Template

The venture capital industry lacks transparency /openness and VC firms typically tend not to share internal resources into their investment process.

At VC Lab we are committed to democratizing information and access to the venture capital industry. As such, we invite you to share your opinion and give feedback on our open resources

Find below our Deal Memo template and join us in creating an open and transparent set of resources for both venture capitalists and founders by sharing your feedback and suggestions in our live document below. 

Deal Memo V1.0

Additionally, we welcome your thoughts on what makes a good Deal Memo as well as this article. You can also share your insights by commenting below.

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Venture Capital Deal Warehousing

Successfully launching your enduring venture capital firm is a challenging but incredibly rewarding task. Fund Managers raising their first venture capital fund will have to familiarize themselves with the concept of ‘deal warehousing’ to get to a close. This process involves many tricky intricacies which we will guide you through in this article. 

What is Deal Warehousing? 

So, what is deal warehousing, you may be asking yourself. Simply put by Richard Gora, Attorney at Gora LLC:

Warehousing is an investment interest that you acquire before forming the fund

Richard Gora

It can be beneficial to warehouse a portfolio of deals and have them in storage when launching a VC fund.

There are essentially two categories of warehouse deals:

(i) The primary type of warehoused deals are companies in which you personally have equity, whether as an angel investor or advisor. You typically incorporate these deals at the stage of fund formation and their value can be used as part of your capital contributions

(ii) The second are deals that you plan to invest in as a venture capital fund, provided the founder has agreed to hold an allocation for the firm. These deals are done post-closing of the fund after LPs have met their capital contributions.

Benefits of a Deal Warehouse

The primary benefit of warehousing deals is to de-risk the fund by enabling LPs to participate in marked-up deals at lower valuations. Typically, when your personal angel investments (which you’ve moved into the fund) get marked up in future rounds, LPs will reap the benefits of the markup as members of the fund. This in turn de-risks investments into your fund from the LP’s perspective.

Furthermore, warehoused deals are a great signal to LPs of the caliber of your deal-flow and enable you to demonstrate congruence to your pitch and thesis. Having warehoused deals that have been marked up valuations in later rounds which also fit your thesis is an exhibition of your ability to perform as a fund manager.

When speaking with VC LabCourt Lorenzini, co-founder and ex CEO of DocuSign and an LP in over 15 venture capital firms said…

In evaluating a manager in the early stage, I firstly look at their deal warehouse, if they have any.

Court Lorenzini

Court continues to explain the benefits of a deal warehouse from the LPs perspective and says…

“I look at what those companies look like and talk with a few founders to see what really attracted them to this particular manager. I want to see if they have access to deal-flow that I want and but am currently not exposed to.”

Best Practices

Under the Investment Advisers Act of 1940, venture capital fund managers are bound by duties of care and loyalty to the individuals whose money they are managing called “fiduciary duties”. In short, complications can arise when transferring personally held assets into the fund, as it can form conflicts with a fund manager’s Duty of Loyalty, which states that “fund managers must not subordinate their clients’ interests to their own.” 

To avoid such complications, it is advised that fund managers do not “cherry-pick” investments from their portfolios when choosing which companies to transfer into the fund. Instead, fund managers should transfer companies based upon the fund thesis which was marketed to limited partners whilst additionally disclosing said risks and conflicts

Finally, when adding companies into the fund,  it is advised that fund managers do not “mark-up” valuations of said companies and instead place them into the fund at cost

This content is provided by VC Lab, the venture capital accelerator. 

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Why Invest In Venture Capital?

Today, venture capital is the global driving force of technological innovation and change.

Venture capital has long been considered as an ‘alternative investment’, due to the perceived high risk by investors and the inherent nature of the power-law that is within VC. However, historic backers of VC such as university endowments are enjoying unprecedented levels of returns thanks to the growth of technology, which is encompassing every facet of a companies operations and the economy.

We will explore some of the reasons why now is the perfect time to invest in the VC asset class and why becoming a limited partner in a VC fund is a very compelling and prudent choice, especially for angel investors. 

1. Historically High Returns

Venture capital is seeing incredible levels of growth accompanied by historic levels of liquidity and the asset class is performing well compared to public market indices. This year, Harvard Endowment recorded a 34% gain and swelled to its AUM to $53.2bn, while MIT’s endowment grew to $27.4 bn after a 56% return so far in this year and VC outperformed every major asset class over the last several years.  

Early-stage funds, particularly new fund managers in the pre-seed to seed stage, are enjoying high returns as the VC market is thriving. Exits in US VC-backed startups have already doubled in 2021, compared to levels seen in the previous two years and there is more liquidity in venture capital than ever before. We are seeing the atomization of venture firms, where founders are opting for either elite firms or specialist small fund managers. 

Historically, new fund managers typically outperform more experienced managers across the board. Recently the upper quartile of new fund managers attained 27.1% IRR on average while non-first time managers in the same bracket have achieved 19.6% IRR. New fund managers on average also attained a Total Value to Paid-In (TVPI) ratio of 1.85 while more experienced managers scored 1.75 in the upper quartile.

2. Reduced risk by a portfolio approach

Angel investors, in particular, should note that the diversified portfolio approach taken by VC funds reduces risk. However, due to the inherent power law in VC, a portfolio of startups also has the potential to generate very high returns. New fund managers typically outperform new angel investors in the long run and the tried and tested VC model offers LPs more time to engage in other activities.

Angel investors who are looking to make below 30 investments should be wary of the risks associated with an undiversified portfolio. Angels often need to manage their own portfolios and implement their own strategies. To make around 30 investments, an angel investor can usually meet with anywhere from hundreds to thousands of startup teams and conduct lengthy due diligence.

Below you can find an example of a venture capital portfolio. This example below is for demonstration purposes only. Please note that investing in a VC fund still has risks of a total loss, however, the probability is much lower.  Under a low scenario, a portfolio still has the potential to generate a positive return despite the fact that the majority of investments failed. Also, in the high scenario, one unicorn-level company can help the portfolio generate a massive return depending on the stage.

VC diversification for Angels

3. Focus on a thesis through a professional manager / expert

Early-stage fund managers are typically highly qualified specialists in a domain of expertise and have theses for achieving outsized returns. A fund manager is typically is a well-connected expert in a particular market, meaning that they have a well-thought-out strategy to capture value and have access to high-quality deals through their vast networks. 

The majority of high-quality deals rarely become public knowledge. Such deals are typically accessible via a large private network of entrepreneurs and venture capitalists and are often oversubscribed. It’s also important to note that the inbound deal volume of a VC firm is often an order of magnitude greater than that of the typical angel investor. Funds typically diligence 1,000s of companies per year and usually have systems in place for analyzing such opportunities at scale. They tend to also have larger teams with a broader set of domain expertise to help with diligence.

4. Opportunities to invest directly in portfolio companies

Becoming an LP in a VC fund does not necessarily mean the end of one’s angel investing career. In fact, being an LP in a VC fund will at times offer investors co-investing opportunities, giving LPs exclusive access to high growth opportunities at later stages which are often reserved to large growth funds. As Court Lorenzini, co-founder of DocuSign, LP in 15 funds and investor in over 60 companies, shared in an interview with VC Lab, at times he invests alongside the funds of which he is a LP.

Additionally, becoming an LP will give you more deal-flow opportunities in other areas as well. Since most new managers have small fund sizes, they often will need to syndicate their pro-rata stake to their LPs. Since funds usually have more deal-flow than individuals, your fund manager may often refer high-quality deals that do not fit the fund’s thesis, but you may be interested in. This will consequently lead to you expanding your inner VC network and building an array of founders and entrepreneurs who will also refer deals to you.

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The Basics of VC Funds

The venture capital industry is the driving force behind technology companies that are changing the world. Many new investors are now rushing into the asset class to get exposure to the companies producing unprecedented levels of growth and returns. Find out what a venture capital fund is and how it really works. 

The Venture Capital Fund

A Venture Capital fund is a pooled investment fund by which the Venture Firm allocates capital to startups in exchange for equity. Typically, VCs are focused on technology startups with characteristics that enable them to scale and grow quickly. These companies are regarded as highly risky, however have the chance delivering high returns. Note that a VC firm may have more than one fund at any given time with varying areas of focus and strategy.

The Stakeholders

It’s important to note the distinction between a venture fund and a venture firm. While a venture fund is an entity upon which investments are made into startups, the venture firm is the overarching entity that encapsulates all of the funds and management company.

  1. Limited Partner

Limited Partners (LPs), are the investors in a venture fund and contribute most of the capital. They invest directly into the fund and receive earnings once / if the fund produces returns. Typically, once returns are actualized, LPs receive their entire investment into the fund after which the remainder of the profits is split 80:20 between the LPs and GPs respectively, depending on the fund.

LPs are often endowments, pension funds, institutional investors, family offices and HNWIs.

  1. Managing Partners

Managing Partners are in charge of the operations of the Venture Firm, and the particular fund’s long-term strategy. They make investment decisions and distribute the capital they’ve raised from LPs and typically put up 1-2% of the fund’s capital.

Fund managers are often VCs / investors with experience, entrepreneurs and domain experts.

To learn more on the other roles in venture capital click here.

The Structure

To invest in a startup in venture capital, several entities must be formed. The venture firm is a construct of all of these entities combined. These structures can become very complex, below is a representation of the most popular structure.

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Source: VCpreneur, Ahmad Takatkah
  1. The Limited Partnership

Investors into the fund will put money into a limited partnership entity, which will then distribute capital to portfolio companies. This entity is where the capital is held and distributed.  

  1. General Partnership

The General Partnership is made up of the partners in the fund and this entity receives carried interest.

  1. Management Company

The management company is used to manage the fund’s expenses such as salaries and rent. Managing Partners are owners of the management company and thus control the venture firm.