Venture Capital Fund Modelling II : Masterclass
Part II: How VC Calculate the Target Ownership in Startup | VC Remote Job Opportunity
If you're on the lookout for an irresistible opportunity to level up your venture capital game, we've got something special for you. Our newsletter has been abuzz with the first article in our groundbreaking series: "Venture Capital Fund Modelling I: Masterclass." Trust us, it's a must-read! And here's the best part – we're back with the highly anticipated second part that's bound to blow your mind.
Get ready to dive deep into the intricate world of VC fund modelling and uncover the secrets behind how these funds calculate their target ownership in startups. Whether you're a driven founder or a die-hard VC enthusiast, this masterclass will grant you invaluable insights into the investor's mindset.
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Let's deep dive into how VC calculate the target ownership stake in a startup.
Consider an Example -
VC Fund Size = $20 M and 10 years of tenure (Life of fund). But $20M is not the investment capital that VC going to invest in the startups. There are other costs that be deducted from this amount to come up with the investment capital.
So, let’s first look into the cost associated with the VC Business.
Investment Capital = Fund Size - Organizational Fees (One-time fee) - Operational Fees (Annual) - Management Fees (Annual)
Organizational Fees (One-time fee) - Fees required to set up the fund (Legal or administrative activity)
Operational Fees (Annual) - Required to manage day-to-day fund activity.
Management Fees (Annual) - Annual 2-2.5% of fund size.
Continuing with the example -
The fund takes Management fees of 2% annually mean for 10 years. And operational fees are $50K per year. As und tenure is 10 years then the total operational fees for 10 years is $500K. And let’s consider the organizational fee is $50K.
Hence, the Investment Capital = Fund Size - Organizational Fees (One-time fee) - Operational Fees (Annual) - Management Fees (Annual)
Investment Capital: $20M - $50K - $500K - (2% * size * 10) = $20M - $50K - $500K - $4M
Investment Capital = $15.45 M
So - $15.45 M is the total investment capital that the VC fund will invest in the startups. But before that, they will decide on the investment capital into the initial investment funds and follow on investment funds.
Let’s assume the fund decided to keep the 30% of investment capital for the follow-on investment. hence- Follow on capital = $5M.
Hence Initial Investment Capital = $15.45M - $5M = $10.45M
And the fund will invest in 20 startups initially.
Hence the Initial Check Size for A Startup = $10.45 M / 20 = $522.5K.
This is the average check size that the fund planned to invest in a startup.
Now, we have the average check size that the fund is going to invest in any company.
So let’s move to calculate the ownership percentage of VC in any startup.
Assume the post-money valuation of the company = $5M.
Hence Ownership percentage = Investment Amount / Post Money Valuation
Ownership Percentage = $522.5 K / $5 M = 10.4%
Hence the ownership of VC funds in the startup is 10.4% at this funding round.
Most founders and aspiring venture capitalists are not aware of these things and always wondered how this average cheque-size works.
I hope this article helped you understand this.
In “Venture Capital Fund Modelling III: Masterclass”, we will explore how the venture capital fund cycle works. Till then stay tuned and subscribed to the newsletter!
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