Portfolio construction is the process of creating your portfolio strategy, check sizes, follow on reserves, and expectations around valuations, ownership, and dilution over time. Create a Portfolio Model By Detailing your Investment Strategy If you then layer on a fees estimate, you’ll be able to forecast capital calls and net out the proceeds and distributions. This means when and how much you’re putting into companies at the first check, and potential follow-ons. Once you have this framework, you should estimate how you’ll deploy capital. This process will take your overall budget into an annual or quarterly budget of cash flows. Then, to fully understand and calculate performance metrics, build a forecast of proceeds from those investments and the resulting distributions from the fund to investors.Add your forecast of expenses to your forecast of investments to create a capital call schedule.Optionally, create a forecast of follow-ons based on your initial investments, follow-on reserve strategy and expected timing between rounds. Build a forecast of new investments over your new investment timeframe.Create a budget for your expected management fees and fund expenses over time.Once you have an overall budget, you should estimate how you’ll deploy capital. A cash flow forecast provides the foundation for that analysis. It’s imperative that you understand the long commitment you’re making into this fund, and how/when you’ll make investment decisions. Not only does it give you a basic understanding of your business and the size of investments you can make from your fund, but a well-designed forecast shows prospective LPs that you know what you’re doing. Once you have this framework in place, you can apply an assumption of gross return multiple on your invested capital to estimate returns.īuilding this model may seem simplistic, but it’s essential for closing your first round of capital. At the same time, factor in assumptions for management fees and carry that most closely relate to your situation. Start with a simple budget including total capital, expenses, investments, proceeds and distributions. There are also some similarities and basic differences that we can leverage to get a running start. Even quantitatively-minded first-time GPs can find modeling a challenge because venture capital models are often quite different from the models you may be familiar with.
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