Formula
How to Calculate Default Rate
The percentage of LPs who fail to meet capital calls, or the percentage of venture debt borrowers who default on their obligations.
Portfolio Default Rate
Default Rate = Failed Investments / Total Investments x 100%
Where
- Failed
- = Investments that returned < 1x or went to zero
- Total
- = Total number of investments in the portfolio
What Is Default Rate?
Default rate in venture capital has two primary contexts. For LP commitments, it measures the percentage of limited partners who fail to fund capital calls when due. For venture debt, it measures the percentage of borrowers who miss payments, breach covenants, or fail to repay principal. LP defaults are relatively rare but can be devastating for fund operations; venture debt defaults have increased as the market has grown.
Worked Example
During the 2008 financial crisis, LP default rates spiked to nearly 5% industry-wide, up from the typical 0.5-1%. This forced some funds to reduce investment activity, seek substitute LPs, or modify their investment plans to accommodate the shortfall.
Why Default Rate Matters
Default rates affect fund operations (LP context) and investment returns (venture debt context). Understanding historical default rates helps GPs stress-test their fund models and LPs assess the reliability of capital commitments.
Related Terms
Frequently Asked Questions
How do you calculate Default Rate?
Default Rate is calculated using the formula: Default Rate = Failed Investments / Total Investments x 100%. The percentage of LPs who fail to meet capital calls, or the percentage of venture debt borrowers who default on their obligations.
What is a good Default Rate?
What constitutes a "good" Default Rate depends on context — the fund's stage, vintage year, and strategy. Check our benchmarks and calculators for specific ranges.