Effective Duration

Effective duration measures the capital-weighted time that the fund has been investing.2 Effective duration is an extension to the concept of a fund’s vintage year that adapts to how quickly that fund invests its money. Imagine you had a 2016 vintage fund and a 2017 vintage fund that both called the bulk of their capital in 2018. A vintage year approach would benchmark these funds against different peer groups because they are different vintage years, however, these funds would have similar effective durations. We believe this accurately reflects that the two funds’ capital has had roughly the same time to appreciate within its investments.

You can read more about how we use effective duration in this blog post on our fund performance calculator. It’s important to recognize that our calculator isn’t intended for every use case in venture capital. Neither newly established funds with an effective duration of less than a year nor funds with an effective duration of more than six years—typically corresponding to 2010 vintage or earlier funds—will be able to get reliable results with our calculator. Our calculator is intended only for early-stage or generalist venture capital funds. Growth capital or other private equity funds have a different profile. We don’t intend for this tool to be used to assess individual venture investments; it should only be used for portfolios of at least 10 investments, and as we note on the calculator page, a single markup can dramatically affect the IRR and percentile score for funds with short effective durations.

2 Formally, effective duration is the time t that balances a portfolio’s TVPI v with its IRR r: v = (1 + r)t.

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