Performance Metrics and Risk Management in Venture Capital Investment Funds

A Venture Capital Investment Fund (VCIF) is an investment vehicle designed to provide capital to startup and high-growth-potential companies in need of funding. Commitments collected from investors are allocated to companies in line with the fund's investment strategy. VCIFs generally offer opportunities characterized by a “high risk, high return”profile. The portions of the fund not allocated to venture investments are typically invested in capital market instruments. For a general overview of VCIFs, you may refer to our article titled “What is Venture Capital (VC)?”. In this article, we will explore the key performance indicators and risk elements associated with VCIFs.

Performance Metrics for Venture Capital Investment Funds

Understanding and interpreting the performance of financial products you are invested in—or plan to invest in—is critical. For long-term investment vehicles, it’s more meaningful to focus on long-term performance rather than short-term volatility. VCIFs fall under this long-term category. Therefore, accurate performance measurements provide valuable insights into the current return and future potential of a VCIF.

• Fund Return: Reflects the net return of the fund over a given period.
• Investment Return: Indicates the return on investments made in portfolio companies. Expressed as a multiple, it shows how much each 1 TL invested has appreciated.
• MOIC (Multiple on Invested Capital): A key metric showing how much a particular investment has grown relative to its initial capital. A high MOIC signals strong performance; a low MOIC may indicate underperformance. For instance, if you invested $1 million and the asset is now worth $1.5 million, the MOIC is 1.5.
• TVPI (Total Value to Paid-In Capital): Measures how efficiently the capital contributed to the fund has been utilized. A TVPI > 1 indicates positive performance; TVPI < 1 indicates underperformance.
• TVC (Total Value Curve): Assesses performance based on adjusted returns relative to committed capital, measuring how much each 1 TL invested contributes to the total value of the fund.

Risks Faced by Venture Capital Investment Funds

VCIFs are exposed to two main categories of risk. The first arises from the fund’s financial positions, and the second stems from the companies in which the fund invests. It is important to note that at least 80% of a VCIF’s total value must be comprised of venture capital investments.

Fund-Related Risks:

• Liquidity Risk: The risk of not having sufficient cash or cash inflows to meet obligations in a timely manner.
• Financing Risk: At the first level, it measures the fund’s ability to pay for a venture investment; at the second level, it refers to the fund’s ability to provide follow-on funding to portfolio companies. It also includes challenges related to credit facilities used by the fund.
• Currency Risk: Exposure to adverse fluctuations in exchange rates, especially for companies vulnerable to changes in the value of the Turkish Lira.
• Market Risk: The risk of value loss due to volatility in exchange rates, interest rates, or equity prices.
• Interest/Profit Share Risk: Arises when interest-sensitive investments in the fund increase financing costs due to fluctuations in interest rates.
• Counterparty Risk: The risk of default by the other party in over-the-counter transactions.

Company-Related Risks:

• Financial Risk: The risk that a portfolio company may fail to meet its financial obligations.
• Operational Risk: Risk stemming from internal processes, human error, system failures, or external events that could lead to unexpected losses.
• Credit Risk: The risk that a portfolio company’s counterparty fails to fulfill contractual obligations.
• Legal Risk: Risk arising from legal or regulatory changes (including tax liabilities) that negatively impact portfolio companies.
• Valuation Risk: The risk of incorrectly assessing the fair value of portfolio companies during the investment period.
• Capital Investment Risk: The possibility of partial or total loss of invested capital due to managerial or financial issues within the portfolio companies.

Final Thoughts

VCIFs are long-term investment instruments that offer high return potential, but they are not without risks. Before investing, it is essential to understand the theme, strategy, target companies, and objectives of the fund. We recommend seeking guidance from professionals and considering your personal risk tolerance.

The performance indicators discussed in this article are frequently used in assessing VCIF performance. However, they should not be relied upon in isolation. Investors should evaluate each fund’s advantages and disadvantages holisticallybefore making investment decisions.

At Boğaziçi Ventures and BV Portföy, we emphasize that investing in these VCIFs should not be viewed merely as a regulatory obligation. These funds offer financial return potential while fulfilling statutory requirements. Moreover, joining Boğaziçi Ventures and BV Portföy’s unique investment universe presents significant growth and development opportunities for companies within the entrepreneurial ecosystem. This presents a value proposition far beyond what traditional portfolio management firms can offer.

To avoid year-end rush and time constraints, we strongly recommend that obligated companies initiate their investment decisions and account opening processes no later than early November, even if the cash inflow is scheduled for year-end.

To diversify your portfolio effectively, learn more about BV Portföy’s Venture Capital Investment Funds, and find the fund best suited to your needs, we invite you to contact us.

The most effective way to manage your investments with confidence, diversify strategically, and minimize risk is through the expertise of BV Portföy.