Why VCs need to master fund modeling
by David Cruz e Silva, an operator turned angel LP and founder of eu.vc
Let's be real! Venture capital can feel like a mystery even when you're in the thick of it.
Fund modeling? Well, it's one of those things that people love to nod along to but don't always fully grasp. And here's the kicker: it's essential to get it right. Whether running a $30M fund or eyeing that $250M raise, your venture capital financial model is the foundation of everything.
The decisions you make, the investments you chase, and even the exits you hope for are all tied back to the venture capital fund model Excel sheet you built on day one.
Why fund modeling is the backbone of a VC fund
Okay, first things first. Fund modeling is not some fancy extra; it's the blueprint for your fund's performance. Picture it as your VC GPS—without it, you're just driving blind.
The fundamentals of quantitative modeling help you forecast the performance of your portfolio, ensuring you make informed decisions. Yet, many funds out there are doing a mediocre job at it. You've got a lot of funds returning 1x or 2x at best. And if that's your goal, fine, but let's be honest, no one enters VC to barely double their money.
If you want to build a fund that delivers real returns, you've got to nail your model. It's not just about plugging numbers into a spreadsheet; it's about grasping the fundamentals of mathematical modeling to understand how your fund size, check sizes, and portfolio structure interconnect.
The size of your fund? It's the entire strategy in a nutshell.
You're running a $30 million fund? That's great.
However, remember that writing checks, building a portfolio, and looking for exits will be very different from a $250 million fund, and that's the point—your model needs to reflect this. It's not one-size-fits-all.
Timing matters — a lot
Fund modeling is also about timing. I've seen early-stage investors get all excited about companies like Gorillas, WeWork, or Tier, thinking they've found their unicorn.
But then what happens? Poor timing ruins it.
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The model needs to guide you on when to enter and exit. That's the beauty of it—you're not just winging it, hoping you hit it big. You're calculating your moves.
And let’s talk about outliers.
These are the big hits that define your fund’s success, and yes, you absolutely need them. But it’s not enough to just have one.
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If your “big winner” only returns 5x, it’s not going to move the needle like you need it to. Your model should be set up to chase those 70x outliers that make a real difference.
Don’t be afraid of losses
Here’s the thing that not everyone likes to admit: more losses mean more hits. The best funds understand this and build it into their venture capital fund model excel.
What matters more?
Get those couple of big winners that make up for the rest.
Your model has to factor in a higher loss ratio.
If your model shows you’re being too cautious, take a step back and ask if you’re really taking the risks you need to get those outsized returns.
Fund size is strategy
If there's one thing to remember, it's this: fund size is your strategy. You've got a $30M fund? Good—know that you'll likely perform better than a larger $250M fund in pre-seed or seed because your threshold to return capital is way lower.
Smaller funds? They don’t need as many huge wins to return the funds.
Bigger funds? They’ve got to hold back reserves, chase those follow-ons, and deal with way more complexity to see the same returns.
So, if you’re running a smaller fund, know that you’re not at a disadvantage—you’re just playing a different game. Your model should reflect that.
It’s not just for partners.
I don't think enough people realize that fund modeling isn't just for the partners. If you're part of the team—whether you're an associate or a principal—you need to know this stuff, too.
Why? Because fund modeling drives the entire fund's strategy. You're missing a huge piece of the puzzle if you're not in the loop.
You don't need to be the one building the model, but you should understand how the pieces fit together:
How assumptions are made.
How returns are calculated.
What does it mean when we talk about divestments or follow-ons?
The model isn't just some spreadsheet the partners mess with. It's the backbone of your fund, and the more everyone on the team understands it, the better off you'll all be.
Keep It simple, not stupid
Now, I'm all for being thorough, but there's a fine line between a solid model and an overly complicated one. If you're trying to model every last SAFE note or convertible loan, you're probably just adding complexity without much benefit. Sure, those details are important, but don't lose sight of the bigger picture.
Focus on the practical stuff—what's really going to move the needle? Keep your model simple enough that you can actually use it but detailed enough that it reflects reality. And for the love of everything, update your model.
Market conditions change. What worked five years ago probably doesn't work today.
Final thought - don’t underestimate opportunity funds
As your fund matures, there's a good chance you'll be setting up opportunity funds. These are game-changers if you have a solid portfolio, allowing you to shift more mature assets into later-stage investments.
But don't get overambitious. Managing multi-stage investments in a single fund is complex—splitting your strategy by stage is usually the way to go. It's just simpler, and LPs like it when things are clear.
Mastering VC fund modeling is not just a "nice-to-have"—it's the core of running a successful fund. It guides your decisions, helps you navigate the inevitable ups and downs, and ensures you're taking the right risks to deliver real returns.
It doesn't matter if you're a partner or not—understanding how the model works will make you better at your job and help you see the bigger picture.
So, if you haven't already, it's time to get familiar with fund modeling. It's not just numbers on a spreadsheet—it's the future of your fund.
Ready to take your fund modeling to the next level? Join the EUVC Community that offers an exclusive experience tailored for VCs and learn more about fund modeling from our learning sessions on:
Essential building blocks
Assumption sheet construction
Portfolio construction & decomposition
Join our next Portfolio Modeling Masterclass in London!
If you’re in London, don’t miss the chance to learn in-person at our Portfolio Modeling Masterclass with Marc Penkala.
This in-person masterclass integrates three key aspects of Venture Capital Fund Modeling: Fundamentals, Assumptions Sheet Construction and Portfolio Construction & Decomposition,
Led by Marc Penkala, Co-Founding Partner of āltitude and advisor to multiple European Family offices and VCs, this masterclass will be delivered in a small-group setting with just 15 seats available, providing a rich opportunity to discuss, exchange perspectives and do hands-on work with the provided material and resources.
