This post was co-authored by Oper8r and Carta. Oper8r empowers the next generation of great VC fund managers. Carta helps new VCs build enduring venture capital franchises. Carta and Oper8r are collaborating to build resources to support new venture fund managers. For our first collaborative resource, we are focusing on the investment track record.
Standardize your track record
Track records are a key part of every LP due diligence process; and many times they are required for LPs to invest into your VC fund. How to share your track record with an LP can be learned, which is important because LPs may pass quickly on your fund if you don’t clearly present important pieces of information in your track record. Your track record can show LPs what portfolio you have built to date and how those companies are performing, which may move fundraising conversations forward.
We are providing an overview of the track record that VCs can use as a framework for sharing portfolio information with LPs. We present a simple version and a more complex expanded version.
While a track record can get even more complex than the expanded version, we seek to provide and describe a framework for how to think about expanding the track record on your own, because you can never fully predict everything an LP will ask. To this end, we describe how LPs evaluate the track record and why the information you are sharing is important for the LP’s decision-making process.
Lastly, we touch on developing a narrative for your track record. There are a few aspects of the track record we will not address. In a next post, we will address an expanded track record to discuss attribution, board governance, and other important aspects of sharing your track record.
LPs care about your investment experience
It’s no surprise that LPs care about your track record. However, it’s not always obvious what LPs actually want to see. Or how much information you should be sharing. Or how LPs are evaluating your investment experience.
In this article, we walk through the investment track record with LPs. Typically, this spreadsheet will be displayed in your data room.
A good track record clearly shows what you invested in, and is an essential part of your track record
To get to an investment decision, an LP needs to evaluate your track record. The LP wants to see all of your investments in one place. If you put an LP in the position of spending extra time to track down your various investments, there’s a good chance you’ll never convert that LP into an investor in your fund, or even get a first meeting.
Two versions of the track record
We will walk through two versions of the track record. The first is a simple track record, intended to communicate an overview of your investment portfolio. The second version is expanded to provide your prospective limited partners with a deeper view of your investment history.
The simple track record
A good track record is formatted to clearly present what you invested in, such as the name of the company, when you initially invested, and other characteristics about your investments, in particular, the performance.
What should be included in a simple track record?
The following are definitions and related thoughts around disclosing information on your portfolio companies:
- Company: the name of the company you invested in (include corporate name, DBA, and also former names if necessary — early-stage startups can rebrand which may confuse LPs who are following your portfolio progress)
- Investment Date: the date of your initial investment into the company
- Initial Stage of Investment: the initial stage (or series) of your investment
- Total Capital Invested: how much capital in total you have invested into the company
- Realized Capital: how much capital have you realized from your portfolio company (in VC, given you are less likely to have dividends or partial sales like in private equity, this arguably could be removed if you are early in your track record development)
- Fair Market Value: this is the value of the invested capital
- Multiple of Capital: this is a calculation of Fair Market Value (FMV) divided by the Capital Invested
- Internal Rate of Return (IRR): this is also a calculation; while outside of the scope of this article, IRR would be calculated from a related cash flow sheet that tracks invested capital, realizations, and current value of the company
How should you show fund-level returns?
While it is important to show the performance of your individual investments, it is also important to show the performance of your fund by adding up all your investments (outlined in red below). This is especially important if you are an angel investor “rolling” up your track record; this fund-level view will allow an LP to get a full picture of your investment portfolio and gain deeper insight into the types of companies you invest in and your investment strategy.
The following are definitions and related thoughts around summing up the individual investments in your track record to show fund-level performance.
- Capital Invested (Total Fund): this sums up all of your invested capital, and indicates how much money you have “put to work” as an investor
- Realized Capital (Total Fund): this sums up how much money you have been able to “get back” from your investments; for early-stage investors, this may be zero if you have not yet sold any companies
- Fair Market Value (Total Fund): this sums up the value of all of your investments
- Gross performance (Total Fund): the Multiple of Capital is a calculation that divides the the Fair Market Value (sum of individual companies) by Capital Invested (sum of individual companies); the IRR is a calculation driven by the aggregated cash flows (outflows and inflows) from all of your investments (note: this is a separate worksheet calculation and is not a sum of individual company IRRs)
- Net performance (Total Fund): this is also a calculation that shows your performance after subtracting or “netting out” expenses and fees. Some early-stage managers, especially if you are pulling together an angel portfolio, may find it difficult to calculate net performance since they do not yet have fund fees and expenses (if this is the case, you can estimate the net performance based on the fee structure of your next fund and how this fee structure would have affected a portfolio of all your prior investments)
Practically, pulling together a track record means you as the VC will have to spend time organizing your investments, for example, understanding how much you invested into each company, at what stage, and getting the valuation of your investments. For earlier stage funds, sometimes getting the valuation may be difficult. If you do not have access to all of your companies’ valuation data, make sure to clearly state what are approximations. It is also important to note your valuation methodology, whether your valuations are based on third-party financings or revenue multiples.
If this is your first fund, while the track record represents a “fund portfolio” this view of your track record is a “synthetic fund” meaning that you probably did not put together these investments thinking about portfolio construction theory. That’s not a problem, and is expected before you raise a dedicated fund.
The expanded track record
Expand your track record if it helps LPs better evaluate your investment ability. While we will not dive into every permutation of how you as a VC can expand your simple track record, the key point is that LPs are trying to understand how good of an investor you are, which includes understanding how good of a “picker” you are, what role you played in making the investment, and building confidence around whether you understand investment management and can repeat the process of finding and making great investments.
Providing an expanded track record helps LPs determine how strong of an investor you are. For example, the table below is almost exactly the same as the simple track record outlined above, but it breaks out initial invested capital and follow-on invested capital into two separate columns.
Why is this important? This is important because LPs are trying to understand whether you appropriately manage your reserves and invest follow-on capital into your best performing companies. By breaking it out in the expanded version, you may demonstrate to the LP that you are not only a good picker, but maintain discretion over time and have the influence to invest capital into your best performing portfolio companies.
Expand your track record to provide each LP with what’s specifically important to them
LPs will analyze your track record. Providing them with additional information that helps them conduct this analysis benefits you. This is not comprehensive by any means, but does provide more information on the individual companies, which gives the LPs more insight into your investment strategy.
For example, in this case, the LP may glean you are investing outside of Silicon Valley in financial technology at relatively low entry valuations. By taking this perspective, that is, thinking about what information could move the conversation forward with the LP, this could help you build out the columns in your own track record that suits your targeted LP.
The analysis by the LP on your track record can and will get more complex, especially the longer you have been investing
Given the importance of evaluating a track record, LPs may request even more information about your companies and analyze your track record even further. For example, they may seek information that gives them higher confidence that you are investing in a high-value network, or fitting a particular ESG or DE&I mandate, or understanding how the individual companies are performing from an operating perspective, or determining what types of securities you are holding, e.g. SAFE, preferred equity, etc.
In these cases when you are asked to disclose more information, it is essential to understand why the LP is asking for this information, how it improves your standing in the fundraising process, and whether it is too time-consuming for you to track down that information (without a high chance of conversion).
A framework for sharing your track record
What’s the right amount of portfolio company information to disclose?
In both versions, simple and expanded, your investment data should be treated as sensitive. It is important for a VC to build trust with prospective LPs, and it is also important to maintain trust and preserve your relationship with founders and other stakeholders in the VC ecosystem. For this reason, you should be careful how much and when you disclose information to LPs.
Also, you should know whether you have permission to share portfolio company information. You do not want to get in trouble with a founder for disclosing information that may jeopardize the founder’s company in some way. This is a big reason why you may want to start your outreach with LPs with the simple version.
As the relationship progresses between the LP and VC, and you begin to build more trust with the LP, you may choose to share additional information on the underlying companies to give this prospective investor a deeper understanding of the individual portfolio companies and deeper insight into your investment strategy.
When is the best time to share a track record and how will it be perceived by an LP?
A simple version of a track record, like the one shown above, can be shared early in the fundraising process. It is meant to show the length and breadth of your investment experience, providing an LP with quick insight into how mature your track record is. For example, if you have been investing since 2007, and have nine companies that are valued over 10x multiples, and two of those are realized, that would be considered a mature track record.
However, on the other hand, if you have been investing since 2019, and have invested in nine companies, but they are all still held at cost, that would be less appealing to LPs who are looking for positive signals from the companies you invested into, such as securing follow-on capital from a top tier VC.
Crafting the narrative of your track record
A well-designed narrative around your track record can bring your investment portfolio to life. In a future post, we will address other ways to illustrate your track record that makes it easier for LPs to understand the performance of your underlying portfolio companies. In particular, we will discuss how an LP will want to understand your point-of-view on your investment portfolio. After all, they are hiring you to manage their money. They want to know you are the expert and understand your portfolio companies very, very well.
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