How to vet a venture fund
The questions to ask a venture manager before your client commits, and what a good answer sounds like. Covers fit, track record, portfolio construction, terms, conflicts, reporting and references.
TL;DR
- The manager matters more than anything else. Among 2019-vintage funds on Carta, the top decile stood at 3.01 times net TVPI at the end of 2025 and the bottom quartile at 1.02 times, mostly unrealised.1
- Start with fit. Check the fund's stage and sectors suit what your client wants, and that its size makes sense for its strategy.2
- Ask for cash returned before paper value. DPI is what investors actually got back; TVPI includes valuations nobody has paid yet.
- Read the terms and the conflicts policy. Fees, carry, hurdle, the manager's own commitment, key-person and extension clauses, and how the manager handles investing across its own funds.3
- Call people. Other investors in the fund and founders the manager has backed, including ones whose companies failed.
What should you check first when vetting a venture fund?
Check that the fund's mandate (stage, sectors, geography, cheque size) fits what your client is trying to own, then that its size suits the strategy. Size sets how big the exits need to be. Owning about 10% at exit, a $50 million fund returns its capital with five $100 million exits; a $1 billion fund needs several companies worth billions. In Carta's data on 2018-vintage US funds, the top 10% of funds of US$1 million to US$10 million reached 4.03 times net TVPI, against 1.67 times for the top 10% of funds of US$100 million or more.2 Those are past results for one vintage. Stage and fund size explains why.
How do you judge a venture manager's track record?
Look for results you can attribute to the people who'll run this fund, and look at cash returned before paper value.
A partner who sat at a firm that backed a famous company didn't necessarily make that call. Ask which investments each partner led, sat on the board of, or argued for at investment committee, and whether those people are still at the firm.
Judge DPI against the fund's age and vintage, since young funds have had little time to exit. An older fund with a high TVPI and almost no DPI hasn't yet shown it can turn paper gains into cash. Reading a fund report covers both measures. When a manager quotes a quartile, ask which benchmark, which vintage, which date and whether it's net of fees and carry.
Returns depend on the manager more than anything else
Cambridge Associates notes that venture has no passive option, so returns come down to manager selection.4
How should a venture portfolio be built?
Ask how many companies the fund will back, how much it reserves for follow-on rounds, and how it decides where that reserve goes. With too few companies the fund may miss the few that produce most of the gains; with too many, each cheque is too small to matter. A fund that concentrates reserves on its best companies holds its ownership where it counts; one that spreads them evenly, or runs out, gets diluted in its winners. How venture returns work shows the maths.
Good answers are specific: a number of companies, a reserve share and the milestones that trigger a follow-on.
Which venture fund terms matter most?
| Term | Typical | What a good answer looks like |
|---|---|---|
| Management fee | About 2% a year of committed capital | Clear on whether it steps down after the investment period, and what expenses are charged on top |
| Carried interest and hurdle | About 20% of profits, often above an 8% hurdle | Carry paid only after investors get their capital and the hurdle back |
| Manager's own commitment | Varies | A meaningful amount, paid in cash, invested on the same terms as everyone else3 |
| Key-person clause | Names the partners the fund depends on | If they leave or stop working on the fund, new investments pause automatically until investors vote to continue3 |
| Term and extensions | 10 years plus extensions | Extensions limited in number and length (the guidance suggests one-year steps, two at most), needing investor approval, with lower or no fees3 |
| Investment period | Capital called over 3 to 5 years | A schedule your client can plan cash flow around |
Typical terms are common market practice, not rules. The "good answer" column draws on the Institutional Limited Partners Association's (ILPA) Principles 3.0.
How a venture fund works turns the fee and carry terms into dollars on a sample commitment.
What conflicts of interest should you ask about?
The most common one in venture is a manager's later fund investing in companies its earlier funds already own. It's often sensible, since the manager knows those companies best, but the later fund may pay a price that suits the earlier fund, whose paper value can rise on that new money.
ILPA's guidance is to limit these overlapping investments with a cap in the fund documents, treat fees and carry consistently across both funds, and disclose overlaps to investors.3 Ask whether the fund's investor advisory committee approves them, and whether an outside investor leads or prices the round.
Where the conflict sits when a later fund backs an earlier fund's company
New investors' money, possibly your client's
The same manager sits on both sides of the price
Already owns shares; its paper value can rise
Some later funds are set up specifically to follow on into the earlier funds' best companies once those funds can't invest further. That can be a sound reason for the overlap. Whatever the fund, the policy should be in writing and the overlaps should show up in reporting.
Also ask whether partners invest personally alongside the fund, how co-investment opportunities are allocated, and whether the manager charges portfolio companies any fees.
How does the fund value its portfolio and report to investors?
Ask for the valuation policy. Some managers adopt the International Private Equity and Venture Capital Valuation (IPEV) Guidelines by name;5 others set out their own methodology, such as holding at cost until a new priced round, with set rules for markups and write-downs. Ask what moves a valuation, who signs off on it, and whether the annual accounts are audited.
Then ask for a real investor report from an earlier fund to see what your client will receive each quarter. Formats vary between managers. Reading a fund report covers what to look for.
Is the fund a registered ESVCLP, and will it stay compliant?
Check the fund on the government's list of registered ESVCLPs.6 Ask who handles compliance, how the fund tracks whether each company is still eligible, and how it works out the offset, which is capped by what the fund invests in eligible companies by two months after each income year ends.7 The tax treatment depends on the fund staying registered. The ESVCLP guide and ESVCLP, VCLP and unit trusts cover the rules.
Who should you call for references?
Investors in the manager's earlier funds and founders the manager has backed. Ask the manager for names, then find a few on your own. Founders whose companies failed often give the most useful references: ask how the manager behaved when the money was running out. From investors, ask whether reporting arrives on time, whether bad news comes early, and whether they would back the next fund.
How to vet a venture fund, step by step
- Check the fit. Confirm the fund's stage, sectors and size match what your client wants to own, and that its size makes sense for its strategy.
- Split the track record. Ask which results each partner can claim, then look at DPI before TVPI, by vintage, net of fees.
- Test the portfolio plan. Find out how many companies, what share is reserved for follow-ons, and how follow-on decisions are made.
- Read the terms. Compare fees, carry, hurdle, the manager's own commitment, key-person and extension clauses against typical terms.
- Ask about conflicts. Get the written policy on investing across the manager's own funds and how overlaps are approved and reported.
- Review valuation and reporting. Ask for the valuation policy and a real investor report from an earlier fund.
- Confirm registration. For an ESVCLP, check the register and ask how the tax offset is calculated.
- Take references. Call investors in earlier funds and founders, including some the manager didn't nominate.
Once you're comfortable with the manager, turn to your client. How much to allocate covers sizing, and The wholesale investor test covers eligibility.
Frequently asked questions
The manager. Among 2019-vintage funds on Carta, the top decile stood at 3.01 times net TVPI at the end of 2025 against 1.33 times for the median, so who picks the companies matters more than any single term or tax benefit.
Both, but DPI first, judged against the fund's age. DPI is cash returned; TVPI adds the manager's valuation of what the fund still holds.
Commonly about 2% a year of committed capital and about 20% carried interest, often above an 8% hurdle. Terms vary, so read the fund documents.
It names the partners the fund depends on. If they leave or stop devoting enough time, new investments are suspended until investors vote on what happens next.
It's common and can be sensible, but it's a conflict of interest. Look for a written policy, a cap on overlaps, independent approval or outside pricing, and disclosure in reporting.
Check it against the list of registered ESVCLPs on business.gov.au.
Investors in the manager's earlier funds and founders it has backed, including founders whose companies failed. Find some yourself rather than relying only on names the manager provides.
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Talk to us about Fund III
Tall Order is a Melbourne seed fund. Fund III is a registered ESVCLP for wholesale investors. Justine Lum, our Head of IR, works with advisers and their clients.
Sources
- Carta, Q4 2025 VC Fund Performance (19 March 2026): TVPI by percentile for the 2017 and 2019 vintages. ↩
- Carta, VC Fund Performance Q4 2024: net TVPI by fund size and vintage. ↩
- Institutional Limited Partners Association, ILPA Principles 3.0 (2019): GP commitment, key person, term extensions, cross-fund investments and reporting. ↩
- Cambridge Associates, Venture capital manager persistence and dispersion. ↩
- IPEV Board, International Private Equity and Venture Capital Valuation Guidelines, 2025 edition. ↩
- business.gov.au, Early Stage Venture Capital Limited Partnerships: eligibility and the list of registered ESVCLPs. ↩
- Australian Taxation Office, ESVCLP tax incentives and concessions: offset is 10% of the lesser of contributions in the year and the partner's share of eligible investments made in the year and within two months after it. ↩