Why Collaborative Investing? Why the CI MVP (Collaborative Investing Medical Venture Portfolio) vehicle?
Beyond the many positive factors associated with Collaborative Investing discussed in Parts 1 – 4 of the newsletter…It’s the math!
Are fees really all that impactful to an investor’s bankable result?
For the sake of discussion, we are comparing a traditional VC fee structure with that of the CI MVP vehicle. Also, to keep this simple, let’s assume that the VC annual management fee and the CI MVP software usage fee are similar and paid separately from the original capital contribution.
In the illustration below, we demonstrate that the impact of the “success” or “performance” fee commonly paid in the traditional VC model?
Can this fee ultimately be greater in magnitude than the original investment itself? Could participating in a vehicle without this fee increase the final bankable result by one or two “X’s”?
It’s impossible to predict the future performance of a portfolio, but what we CAN compare the end result of a hypothetical portfolio with and without a 20% performance fee. This math doesn’t lie…and it will surprise you.
Many VC’s will use 5-7x gain in 5-7 years as a target level of portfolio performance.
For the sake of illustration, let’s use 5X at 5 years with a 10-company portfolio that at the end of year 5 has seen:
6 exits, 2 fail, 2 open investments
(Remember, just comparing a 20% performance fee as “on” or “off”, so the exact details are not relevant. We will use the “MOIC” or Multiple on Invested Capital for this comparison.
Here’s the math:
100 investors at $25K = $2.5M capital contribution
5X at year 5 = $12.5M
VC MODEL: 5X
Profits (gross) = $12.5M – $2.5M or $10M
Performance fee (20%) = $2M paid to the GPs
Individual share of Performance Fee = $2M / 100 = $20,000
Distributions = $8M paid to the LPs
Individual total of distributions = $80,000
3.2X MOIC with fees approaching the magnitude of original investment
CI MVP MODEL: 5X
Profits (gross) = $12.5M – $2.5M or $10M
Performance fee 0%
Distributions = $10M paid to investors
Individual share of distributions = $100,000 or 4X
To further illustrate this, the impact grows with time and success of the portfolio. Without showing all of the calculations, here’s how it would look for a portfolio performing considerably better (10X) with a comparative look after year 7.
VC MODEL: 10X
Profits (gross) = $22.5M
Performance fee (20%) = $4.5M paid to the GPs
Individual share of Performance fee = $45,000
This approaches 2x the original investment!
Distributions = $18M paid to investors
Individual share of distributions = $180,000
7.2X with fees almost 2X the original investment
CI MVP Model: 10X
Profits (gross) = $22.5M
Performance fee: $0
Distributions = $22.5M paid to investors
Individual share of distributions = $225,000.
9X !
So, do fees really matter? You had better believe they do!
If the CI MVP can solve for the access and high minimum problem for physicians and healthcare professionals, why not also win the math game? As illustrated, the traditional VC success fee can can end up being equal to (or even double) the amount of capital originally placed in the investment.