How do I measure performance?
In simplest terms you could just compare the price at which you bought shares in the start-up and compare it to the price of the shares in the last fund raise. i.e. You bought shares at £2 each in the seed round and at Series B they went for £5 a share. So you have made 2.5x on your investment.
However this does not take into account if you return is real cash (distributions) or on paper and how long it took to make the return (opportunity cost). As such, there are a number of different metrics that can be used to measure performance and take in these nuances.
Internal Rate of Return (IRR): This is the most widely used metric. It measures the annualized rate of return on an investment, taking into account the time value of money. A higher IRR generally indicates better performance.
Total Value to Paid-In Capital (TVPI): This metric shows the total value of the fund's investments (realized and unrealized) relative to the amount of capital invested. A TVPI greater than 1 indicates that the fund has generated positive returns.
Distributions to Paid-In Capital (DPI): This metric measures the amount of money distributed to investors (through dividends or the sale of portfolio companies) relative to the amount of capital invested. A DPI greater than 1 indicates that the fund has returned more money to investors than they invested.
Multiple on Invested Capital (MOIC): This metric measures the total return on the fund's investments relative to the amount of capital invested. It is calculated by dividing the total value of the fund's investments by the amount of capital invested. An MOIC greater than 1 indicates that the fund has generated positive returns.
Why doesn’t everyone use the same metric?
If you decide to become a LP and invest directly in funds, you’ll notice that immature funds will be measure paper value using TVPI as it can take a very long time for actual cash exits (IPOs, Acqusitions, etc) and they don’t want to be penalised for being only 3 years into a 12 year timeline.
You’ll also see them advertising non-financial metrics likes how many companies in their portfolio have become unicorns (worth £1bn), how many exits they have had in the portfolio, or inane stats likes “5 of our portfolio are features in Sifted’s 50 fastest growing companies in Europe”.
As an investor you should ultimately only care about DPI i.e. cash out to cash in and the IRR, i.e. how long it took. But you should acknwoledge that unless you have got lucky with a big early exit, the stats will look terrible and only TVPI will make you feel like you haven’t wasted your money!
Note: Image generated using DeepAI with the text “preference shares”
