The existing approach to benchmarking a venture capital fund is to measure its returns quartile relative to its peers in a vintage year.1 This approach can be arbitrary and ambiguous. For instance, a fund that is at the 76th percentile can advertise being in the top quartile, the highest distinction, while a fund at the 74th percentile, which may have marginally lower returns, will have to settle for the “second quartile” distinction. Moreover, within a vintage year funds will invest at different rates; our research has found funds that invest faster will tend to have lower IRRs but higher TVPIs than their slower-investing peers, creating ambiguity for investors.
AngelList Venture hosts hundreds of funds on our world-class administration and fundraising platform. We combined data from these funds, AngelList syndicate leads that have made at least 10 investments but don’t operate a fund, and external sources like PitchBook and Cambridge Associates to build the first-ever fund performance percentile calculator that functions across vintage years. All you need to do is enter a VC fund’s net IRR and net TVPI figures to get back a 0-to-100 percentile score that we believe accurately reflects the performance of that fund in a broader context.
How did we improve on industry-standard measures to create an apples-to-apples way of comparing venture funds across vintage years?
First, we put all funds onto the same footing by focusing on a fund’s effective duration, which measures the capital-weighted time that the fund has been investing.2 Effective duration is an extension to the concept of a fund’s vintage year that adapts to how quickly that fund invests its money. Imagine you had a 2016 vintage fund and a 2017 vintage fund that both called the bulk of their capital in 2018. A vintage year approach would benchmark these funds against different peer groups because they are different vintage years. However, these funds would have similar effective durations and so their performance would be more closely compared in our calculator. We believe this accurately reflects that the two funds’ capital has had roughly the same time to appreciate within its investments.
Second, to maintain accuracy we enforced two properties for our percentile scores: (1) At a fixed effective duration, percentiles increase as TVPI increases, and (2) At a fixed TVPI, percentiles decrease as effective duration increases. We picked these dimensions and conditions since they make it possible to accurately and flexibly model the behavior of venture funds, where our research has found that the IRR—but not the TVPI—of a top-quartile fund tends to fall over time.
A fund’s percentile score is not intended to be a normative measure of what a “good” or “bad” venture fund returns. Many funds that individual LPs would be satisfied with will find themselves at the 30th percentile, and many funds an LP would be absolutely delighted with could find themselves around the 65th percentile.
It’s also important to recognize that our calculator isn’t intended for every use case in venture capital. Neither newly established funds with an effective duration of less than a year nor funds with an effective duration of more than six years—typically corresponding to 2010 vintage or earlier funds—will be able to get reliable results with our calculator. Our calculator is intended only for early-stage or generalist venture capital funds. Growth capital or other private equity funds have a different profile. We don’t intend for this tool to be used to assess individual venture investments; it should only be used for portfolios of at least 10 investments, and as we note on the calculator page, a single markup can dramatically affect the IRR and percentile score for funds with short effective durations. At the same time, it is also does not use data from and may not produce meaningful results for strategies like fund-of-funds that simultaneously invest in many venture funds.
1 Returns are typically either expressed in terms of internal rate of return, or IRR, or the funds return multiple aka the total value to paid in capital, or TVPI.
2 Formally, effective duration is the time t that balances a portfolio’s TVPI v with its IRR r: v = (1 + r)t.