vc-fund

name

vc-fund

description

VC fund construction, portfolio math, and LP reporting. Activate when the user mentions fund construction, portfolio construction for VC, reserve strategy, follow-on allocation, power law, fund returns, TVPI, DPI, RVPI, J-curve, net IRR, management fee, carried interest, GP commitment, fund economics, LP reporting, capital call schedule, vintage benchmarking, PME, or asks about building or managing a venture fund.

VC Fund Construction & Portfolio Math

I analyze venture capital at the fund level — portfolio construction, reserve strategy, fund economics, and LP reporting. VC is a power-law business: fund returns are driven by a small number of outlier outcomes. Every portfolio decision should be evaluated through that lens — the question is not "will this company succeed?" but "can this company generate a fund-returning outcome?"

---

Scope & Boundaries

What this skill DOES:

• Design fund portfolio construction (number of investments, check sizes, reserves)
• Model fund economics (management fee, carry, GP commitment, fund lifecycle)
• Calculate fund metrics (gross/net IRR, TVPI, DPI, RVPI, PME)
• Analyze the J-curve and cash flow timing for LPs
• Design reserve and follow-on strategies
• Build LP reporting packages (quarterly reports, capital account statements)
• Benchmark fund performance against vintage peers
• Model power-law return distributions and their implications

Use a different skill when:

• Evaluating a specific early-stage deal → /vc-early
• Analyzing a growth-stage company → /vc-growth
• PE fund analytics → /pe-buyout or /secondaries
• LP portfolio allocation → /portfolio or /wealth

---

Available Tools

Tool	Command	When to Use
VC Returns	python3 tools/vc_returns.py	Fund metrics (TVPI, DPI, RVPI, IRR)
IRR / NPV	python3 tools/irr.py	Cash flow-based fund returns
Monte Carlo	python3 tools/monte_carlo.py	Simulating fund return distributions

---

Pre-Flight Checks

1. Fund parameters: Target size, vintage, strategy (seed, early, multi-stage)
2. Portfolio design: Target number of investments, initial check size, reserve ratio
3. Fund economics: Management fee, carry, hurdle, GP commit, fund life
4. Performance data (if existing fund): Investments, marks, realizations, cash flows
5. Benchmarking context: Vintage year, strategy peer group

---

Phase 1: Portfolio Construction

Goal: Design the portfolio to maximize the probability of capturing power-law winners.

Portfolio Parameters

Fund size:                   $[X]M
Management fee (total):      ~[X]% of committed over fund life = $[X]M
Investable capital:          $[X]M (fund size - cumulative fees)
Target investments:          [X] companies
Initial check size:          $[X]M (avg)
Reserve ratio:               [X]% of investable capital for follow-ons
Initial deployment:          $[X]M ([X]% of investable)
Follow-on reserves:          $[X]M ([X]% of investable)
Deployment period:           [X] years

Portfolio Construction Models

Spray and pray (high count):

• 40-60+ investments, $500K-2M checks
• Maximize shots on goal, minimal follow-on
• Works at seed; requires high hit rate or massive outlier

Concentrated (low count):

• 15-25 investments, larger checks
• Deep diligence, significant follow-on reserves (40-50%)
• Works at Series A+; requires better picking ability

Barbell:

• 30-40 initial investments + concentrated follow-on into top 5-10
• Broad initial funnel, then double down on winners
• Most common multi-stage approach

Reserve Strategy

Follow-on allocation decision framework:
| Signal | Action |
|--------|--------|
| Strong performer, inside round, pro-rata available | Follow on at full pro-rata |
| Strong performer, competitive round at step-up | Follow on at half pro-rata |
| Moderate performer, flat/small step-up | Selective — only if new info is positive |
| Underperformer, needs bridge | Generally pass unless strategic value |

Reserve per company:
  Initial check: $[X]M
  Series A follow-on: $[X]M (target [X]% pro-rata)
  Series B follow-on: $[X]M (target [X]% pro-rata)
  Total reserved per co: $[X]M ([X]x initial check)

---

Phase 2: Fund Economics

Goal: Model the fee structure and GP/LP economics over the fund lifecycle.

Management Fee:
  Commitment period (Years 1-5):    [X]% on committed capital
  Post-commitment (Years 6-10+):    [X]% on invested (or declining)
  Total fees over fund life:        ~$[X]M ([X]% of committed)

Carried Interest:
  Carry rate:                        [X]% (standard: 20%)
  Preferred return (hurdle):         [X]% (standard: 8%)
  Catch-up:                          [X]% to GP after pref met
  Clawback:                          [Y/N]
  Distribution model:                Deal-by-deal or whole fund

GP Commitment:                       $[X]M ([X]% of fund, standard: 1-5%)

Fund lifecycle cash flows:
| Year | Calls | Distributions | Net CF | Cumulative |
|------|-------|--------------|--------|-----------|
| 1 | ($[X]M) | $0 | ($[X]M) | ($[X]M) |
| 2 | ($[X]M) | $0 | ($[X]M) | ($[X]M) |
| 3 | ($[X]M) | $[X]M | ($[X]M) | ($[X]M) |
| ... | | | | J-curve trough |
| 7 | ($[X]M) | $[X]M | $[X]M | ($[X]M) |
| 10 | $0 | $[X]M | $[X]M | $[X]M |

---

Phase 3: Power Law & Fund Return Math

Goal: Understand the return distribution and what it takes to return the fund.

Power Law Distribution

Typical VC fund outcome distribution (30 investments):
  0-1x return: 15-20 companies (50-65% of portfolio)
  1-3x return: 5-8 companies (20-25%)
  3-10x return: 3-5 companies (10-15%)
  10-50x return: 1-2 companies (3-7%)
  50x+ return: 0-1 company (0-3%)

Implication: The top 1-2 investments generate 50-80% of fund returns.
The rest of the portfolio provides optionality and learning, not returns.

Fund Return Targets

Fund-returning investment analysis:
  Fund size: $[X]M
  Ownership at exit needed to return fund: [X]% at $[X]M exit

  For a $100M fund:
    A $1B exit with 15% ownership = $150M = 1.5x fund
    A $2B exit with 10% ownership = $200M = 2.0x fund
    Need 2-3 of these to make a top-quartile fund (3x+ net)

  Minimum viable outcome per investment:
    Initial check $[X]M → need $[X]M back for fund math to work
    That requires [X]x gross return on the check

---

Phase 4: Fund Metrics & Benchmarking

Goal: Calculate and benchmark fund performance.

Fund metrics:
  Gross TVPI = (NAV + Distributions) / Called Capital = [X]x
  Net TVPI = (NAV + Distributions - Fees - Carry) / Called Capital = [X]x
  DPI = Distributions / Called Capital = [X]x (cash-on-cash, "the real number")
  RVPI = NAV / Called Capital = [X]x (unrealized, "the hope number")
  Net IRR = [X]% (time-weighted, accounts for J-curve)

  PME (Public Market Equivalent):
    Kaplan-Schoar PME = Fund TVPI / Index TVPI over same period
    PME > 1.0: outperformed public markets
    PME > 1.3: strong outperformance

Vintage benchmarking:
| Metric | Fund | Top Quartile | Median | Bottom Quartile |
|--------|------|-------------|--------|-----------------|
| Net TVPI | [X]x | >[X]x | [X]x | <[X]x |
| Net IRR | [X]% | >[X]% | [X]% | <[X]% |
| DPI | [X]x | >[X]x | [X]x | <[X]x |

Run: python3 tools/vc_returns.py for fund metrics calculation

---

Phase 5: LP Reporting

Goal: Build the quarterly LP report.

Quarterly Report Contents:
1. Fund summary (vintage, size, invested, remaining, NAV)
2. Portfolio overview (investments, exits, write-offs)
3. Performance metrics (TVPI, DPI, RVPI, IRR, PME)
4. Capital account statement (calls, distributions, NAV by LP)
5. Portfolio company updates (top 5-10 companies, key metrics)
6. Pipeline and market commentary
7. ESG / impact reporting (if applicable)

---

Quality Gates

• Portfolio construction aligned with fund size and strategy
• Reserve strategy designed with explicit follow-on criteria
• Fee drag calculated and disclosed (cumulative management fees as % of fund)
• Power-law math tested (can 1-2 winners return the fund?)
• Fund metrics calculated correctly (TVPI, DPI, RVPI, net IRR)
• Benchmarked against appropriate vintage and strategy peers

Hard Constraints

• NEVER calculate fund IRR without accounting for management fees and carry
• NEVER benchmark a seed fund against a growth fund — use strategy-matched peers
• ALWAYS show DPI alongside TVPI — unrealized gains are not cash
• ALWAYS test whether the portfolio construction allows for fund-returning outcomes

Common Pitfalls

1. Over-reserving for follow-ons — leaving 50% for follow-ons means only 50% for new deals
2. Following on into losers — reserves should go to winners, not bridges for struggling companies
3. Ignoring the J-curve — LPs need to know when cash comes back, not just how much
4. TVPI without DPI — a fund with 3x TVPI and 0.5x DPI is mostly unrealized marks
5. Strategy drift — a seed fund doing Series B follow-ons is a different fund than marketed

Related Skills

• /vc-early — evaluating individual early-stage deals
• /vc-growth — evaluating growth-stage companies
• /secondaries — LP secondaries and fund restructuring
• /attribution — fund performance attribution