Welcome to the new members of @TheFundCFO crew that have joined in the last week. Thanks for your support and spreading the word! Every week, we’ll bring you actionable tools, real-world experiences, and insider insights for #VC fund managers, #LP investors, and general industry enthusiasts. #OpenLP
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Today’s Top 3:
Every business needs a budget and a VC fund is no different! Why? Provides a plan for spending, investors will often ask for one, and it helps you navigate an uncertain future!
Keep it Simple (you’ve heard this before :) ): you should be able to explain your budget on the “back of a napkin” in <30 seconds! We share our starter version outputs below (ask and we’ll send your way)!
Just do it, then review monthly! Starting is often the hardest part. Once you do it, review it once per month to track budget vs. what actually happened and adjust!
What Is a Budget + Our Thoughts for VC
Per Investopedia, a “budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a group of people, a business, a government, or just about anything else that makes and spends money.
We were previously interviewed in great detail by our friend Winter Mead at Oper8r (dubbed the "YCombinator for Emerging Managers") on this topic but wanted to share a number of new thoughts and an updated budget below!
One of the key unknown unknowns of starting a micro-VC is knowing what it will cost to run one. When we meet with fund managers, we used budget tools to help them map this out, step by step!
Remember that you should spend wisely but “spending is not always your enemy” - minimizing expenses may maximize investable capital, but can also limit a VC’s ability to do their job effectively. So balance and make decisions accordingly.
Let’s dive in - what are the typical expenses a VC should expect?
Expenses usually fall into one of three categories: Organizational, Management Company, and Fund.
Organizational expenses are associated with forming the fund (legal, accounting, setup, organizational, marketing, etc.). These are typically capped at a fixed dollar amount, depending on the strategy and investors. These expenses are typically paid for by the investors in the fund. Chris Harvey dives deeper on his Law of VC Substack to give you real estimates for legal, your largest expense.
Management Company expenses are required to “run the business,” such as salaries & benefits, your VC tech stack, and operating expenses. These are paid for by the management company. Salaries & benefits are most predictable as they’re driven by market rates (next section). Other operating expenses like legal, tax, and other professional services can vary, depending on market and level of expertise.
Fund expenses are related to the fund and portfolio companies, such as fund administration, fund audit & tax, travel & entertainment related to acquisition, disposition, and holding of fund investments. These expenses are paid by the fund, not the management company, so they don’t impact the management company budget. However, they do reduce net returns to investors, so managing prudently is important.
People are your biggest management company expense
We’re asked often about what is “market” for #VC compensation. As you may expect, for most funds, people costs (salary, equity, benefits, etc.) are your biggest expense! You need to pay yourself a salary and build the right team around you (lots of views on that, more to come later).
Your fund size or AUM (assets under management) determines your revenue so this can vary widely, especially for emerging #VC. Therefore, please take the following data with a grain of salt.
At Airstream Alpha, we’ve found that Pitchbook has some accessible data points here (although some stuff is behind the pricey paywall). Their 2019 report is publicly available via this link. We’ve pulled the following chart that tells most of the story, including compensation by gender:
In addition to Pitchbook and other publicly available studies, we’ve found recruiting firms and peers in #VC to be helpful in sharing this data, so continue to evolve our views on what is “market.” We always appreciate insights from our readers!
Here’s our updated budget
We’ve iterated on this budget with hundreds of funds over the past few years. The example we’ve laid out below is for a $20m fund and includes a number of simplifications.
We advise #VC funds that every situation is unique and there are a number of ways to modify these numbers. This is done on a case by case basis with some combination of your legal team, finance team, and lead investors.
Remember, fund expenses are different than management company expenses! These are costs related to the fund and portfolio companies, such as fund administration, fund audit & tax, travel & entertainment related to acquisition, disposition, and holding of fund investments. Here’s a basic example:
Go deeper (helpful links & resources)
Resource Library for Emerging #VC by Recast Capital (Courtney McCrea & Sara Zulkosky)
Law of VC Substack by Chris Harvey
That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”
Hey Ben, of course! We linked the latest here!
https://thefundcfo.substack.com/p/27-the-playbook
Can i have a link to the budget please (not seeing it here or: https://airstreamalpha.com/financial-model/)