What's the best way to determine your VC fund size? (2024)

The first factor to consider is your target returns, which depend on your fund's stage, focus, and track record. Generally, early-stage funds aim for higher returns than later-stage funds, as they take more risk and have more potential upside. However, you also need to be realistic and align your expectations with the market and your investors. A common benchmark is to aim for a 3x net multiple on invested capital (MOIC) or a 20% net internal rate of return (IRR) over a 10-year period.

The second factor to consider is your portfolio construction, which determines how many and what types of companies you invest in. You need to decide how many deals you want to do per year, how much ownership you want to have in each company, and how much follow-on capital you want to reserve for later rounds. A typical early-stage fund might do 10-15 deals per year, with an average initial check size of $1-2 million, and a target ownership of 10-15%. A typical later-stage fund might do 5-10 deals per year, with an average initial check size of $10-20 million, and a target ownership of 20-25%.

The third factor to consider is your fund economics, which determine how much capital you need to raise and how much you can earn from your investments. You need to account for your fund's fees, expenses, and carried interest, as well as the expected distribution waterfall and hurdle rate. A typical VC fund charges a 2% annual management fee on the committed capital for the first 5 years, and a 20% carried interest on the profits above a 8% hurdle rate. The management fee covers the fund's operating costs, while the carried interest is the fund's incentive fee.

You can use a simple formula to estimate your fund size. The formula is: Fund size = (Target returns x Portfolio size) / (1 - Fees - Carried interest). Target returns is the net MOIC or IRR you want to achieve, portfolio size is the total amount of capital you want to invest in your portfolio companies, fees is the percentage of committed capital that goes to management fees, and carried interest is the percentage of profits that goes to the fund. For example, if you want to achieve a 3x net MOIC, invest $100 million in your portfolio, charge a 2% annual management fee, and take a 20% carried interest, your fund size would be $500 million. However, this formula is only a rough guide and other factors must be taken into consideration, such as the market size, competitive landscape, and fundraising environment. Ultimately, your fund size should reflect your vision, value proposition, and differentiation as a VC.

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

Venture Capital

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