Fred Wilson has an interesting article on VC cash flows and returns on his blog. I have taken his numbers and included the costs to show cash flows and returns from an LP, VC and entrepreneur perspective.
Please click on the picture to see a larger version (UPDATE: I have updated the graph with some additional assumptions based on Fred Wilson’s second article. The previous picture can be found here):
Number of comments:
Capital called and distributions: I have copied these numbers from Fred Wilson’s article for consistency.
Management fee: the management fee that I show in the calculation is, strictly speaking, not correct. However, in total, management fees make up some 20% of capital called (2% per year for 10 years or so). In order to keep Fred Wilson’s cash-flow numbers intact, I have assumed a 20% cost to each capital call. Update: I have taken the management fees from Fred Wilson’s second article. In order to keep the capital call figures from his first article, I have deducted the management fees from returns.
Fees associated with exit: can vary substantially, 2.5% sounds like a reasonable average value
Spread between founders & management vs. VC: If you raise two rounds of VC funding and sell a third of your company each time, then founders and management hold some 45% of the equity (67% * 67% = 45%).
Carried interest: I have assumed 20% carried interest which is the industry standard. Update: I have assumed that carry is only paid out once 1.00 capital has been distributed to LPs.
Please feel free to correct me on the above, should you find any mistakes or oversights. I would be very interested to see a correct model that includes correct management fees, by the way.
UPDATE: While I was writing my article, Fred followed-up his earlier article with a newer one.
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