By Jahn Karsybaev, Co-Founder and Managing Partner at Big Sky Capital.

At Big Sky Capital, we use various metrics to measure and track our fund performance. There is no single most important metric for VCs to track their fund performance, as different metrics provide different insights into the fund’s performance.

The choice of metric depends on the investment strategy of the fund and the stage of the companies in which the fund invests. For example, a seed-stage fund may prioritize metrics such as the number of investments made or the percentage of companies that reach their next funding round, while a later-stage fund may focus more on metrics such as IRR or MOIC.

That being said, internal rate of return (IRR) is one of the most commonly used metrics for tracking the performance of a VC fund. IRR takes into account the timing of cash flows and provides an estimate of the rate of return earned on the fund’s investments. It is a useful metric for comparing the performance of different funds or different vintage years of the same fund.

Another important metric is the multiple of invested capital (MOIC), which measures the ratio of the total value of the fund’s portfolio to the amount of capital invested. MOIC provides a measure of the fund’s ability to generate returns for its investors.

Ultimately, the most important metric for a VC to track their fund performance will depend on the specific investment strategy of the fund and the goals of the investors.

Let’s explore further some of the fund performance metrics that we track:

1. Internal rate of return (IRR): IRR is a common metric used by VCs to track the performance of their investments. It calculates the rate of return on an investment over a period of time, taking into account both cash inflows and outflows. However, historically, top-performing VC funds have achieved Internal Rate of Return (IRR) in the range of 20% to 30% or more, although the actual IRR can vary depending on several factors, including the fund’s investment strategy, vintage year, and the stage of companies invested in.

2. Multiple of invested capital (MOIC): MOIC measures the ratio of the total value of the fund’s portfolio to the amount of capital invested. It is a measure of the fund’s ability to generate returns for its investors. According to industry data, the top-performing VC funds historically have achieved MOICs ranging from 3x to 10x or more, depending on the investment strategy and the vintage year of the fund.

3. Net present value (NPV): NPV measures the present value of future cash flows discounted to the present day. It takes into account the time value of money and is used to determine the value of an investment in today’s dollars.

4. Total value to paid-in (TVPI): TVPI measures the total value of the fund’s portfolio to the amount of capital invested, taking into account both realized and unrealized gains. Historically, top-performing VC funds have achieved Total Value to Paid-in Capital (TVPI) ratios in the range of 2x to 5x or more, depending on the fund’s investment strategy, portfolio composition, and vintage year.

5. Cash-on-cash return: Cash-on-cash return measures the amount of cash returned to investors compared to the amount of capital invested. It is a measure of the fund’s ability to generate cash returns for its investors. Furthermore, top-performing VC funds have achieved Cash-on-Cash (CoC) returns in the range of 2x to 4x or more, depending on the fund’s investment strategy, portfolio composition, and vintage year.

VCs typically use a combination of these metrics to track their fund performance. They may also track other metrics such as the number of investments made, the size of investments, and the stage of companies invested in. Additionally, VCs may benchmark their performance against industry averages or other comparable funds to evaluate their performance relative to their peers.