TLDR:
Key Points:
- Financial metrics for early stage VC firms may not provide a complete picture of performance
- ITD IRR and investment multiples can be misleading metrics when assessing VC funds
Why looking at financial metrics for early stage VC firms isn’t as revealing as you might expect
By Allie Garfinkle
When assessing the performance of early stage venture capital firms, financial metrics can be misleading. Despite having access to numbers through the Freedom of Information Act, such as inception-to-date internal rate of return (ITD IRR), it can be challenging to assess the true performance of these firms. For example, while a 14% IRR for a 2005 vintage fund may appear low compared to expectations, it can actually be considered high-performing within the context of that specific vintage.
However, metrics like investment multiples can be ambiguous, as they may not differentiate between total value to paid-in (TVPI) and distributed to paid-in capital (DPI), leading to potential misinterpretations. Additionally, IRR may not be a reliable metric for comparing funds that are less than ten years old, as it may not accurately reflect their true performance.
Overall, while some funds may show impressive initial IRR figures, it is essential to remember that the venture capital game is a long-term journey. As more data is collected, it becomes clear that assessing the success of VC firms based solely on financial metrics is a complex and ongoing process.
