Metrics & Performance
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
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.
In Practice
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 It 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.
VC Beast Take
LP defaults are the dirty secret of VC fundraising. Most LPAs include severe penalties for defaulting LPs (forfeiture of interest, forced sale at discount), but enforcing these provisions is rare because it creates reputational damage for the fund.
Related Concepts
Further Reading
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How to Calculate Your Startup's Burn Rate (And Why It Matters)
Burn rate determines when your startup dies. Learn the difference between gross and net burn, how to calculate real runway, and the framework for knowing if you're default alive or dead.
What Is a SAFE Note and How Does It Work?
A complete guide to SAFE notes for startup founders — how they work, key terms like valuation caps and discounts, common mistakes, and when SAFEs are the right fundraising instrument.
Venture Debt Explained: When It Makes Sense and When It Doesn't
A comprehensive guide to venture debt — how it works, what it costs, when founders should take it, and the critical term sheet provisions that separate good deals from dangerous ones.
Bootstrapping vs Venture Capital: Which Path Is Right for Your Startup?
A comprehensive comparison of bootstrapping and venture capital — the economics, control trade-offs, risk profiles, and decision framework to help founders choose the right funding path.
Bootstrapping vs Venture Capital: Which Path Is Right for Your Startup?
A comprehensive comparison of bootstrapping and venture capital funding paths for startups, covering the tradeoffs in control, speed, equity, and long-term outcomes.
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