If you're managing a venture fund, you've likely encountered currency challenges – whether you planned for them or not.
Here are three major FX challenges for VCs:
Management fees in one currency, operational expenses in another.
Exchange rate fluctuations between signing term sheets and closing deals.
Maximising returns from foreign exits.
In this piece, we'll focus on management fees in more detail and share how some of our VCs have solved these issues.
The good news? Management fees are one of the easiest FX challenges to solve.
Management fees are the backbone of a VC firm’s day-to-day operations, covering essential costs like salaries and office rent. But when a fund’s committed capital is denominated in one currency (e.g. USD) while operational expenses are incurred in another (e.g. GBP or EUR), budgeting becomes unpredictable.
Of course, you know exactly how much your management fees will be in your fund’s denominated currency – they’re agreed with your LPs. And you probably have a pretty good idea of your operational budget as well (in your operational currency).
But do you know what the exchange rate will be next January? Or July? Or how much money you’ll really end up with to cover those operational expenses? Will you have enough? Will you have as much left over as you expect?
If you simply convert your fees at the start of each quarter, the amount of GBP or EUR available can fluctuate by as much as 10% in either direction, particularly in today’s volatile markets.
This additional unpredictability can wreak havoc on your budget, leaving you scrambling to readjust financial plans, and needing to delay critical decisions. It can also make long-term planning – like hiring or supporting portfolio companies – unnecessarily complicated.
How Moonfire Ventures tackled its management fee currency mismatch
The challenge
Moonfire Ventures, a tech-driven seed-stage VC firm, and investor in Bound, manages a USD-denominated fund while incurring operational expenses in GBP and EUR. This currency mismatch can lead to frequent and unpredictable conversions, which can complicate budgeting and reduce visibility and confidence in financial planning.
Like many firms, Moonfire needed to enhance their FX strategy to stabilise cash flows, mitigate risk, and optimise control/predictability for their finances.
The solution
Moonfire implemented Bound to take control of their currency management using the ranging strategy. This helps set limits on potential downside while allowing them to capture upside opportunities if the market moves in their favour.
How it works
Ranging is essentially a combination of two types of orders: a limit order and a stop order.
A stop order locks in your worst acceptable rate by triggering an exchange if the market moves against you.
A limit order locks in your desired rate by setting a price to exchange if the market moves in your favour.
You can adjust your limits and stops at any time, instantly.
Moonfire’s use of ranging
In September 2024, the GBP/USD rate was ~1.332. At that time Moonfire could have exchanged $1 of their management fees for £0.75 to cover UK operations.
Instead of converting everything at once at the spot rate, they used the ranging strategy to ensure the rate couldn’t move too far against them – while still giving them flexibility to take advantage if the rate improved.
Over H2 2024, as USD strengthened, Moonfire toggled their range parameters each time USD moved in a positive direction. They tracked market improvements while maintaining protection from an adverse rate change.
The result
Moonfire captured a ~10% improvement in the GBP/USD rate, boosted operational cash flows, and beat their operational budget.
Wider benefits
Stabilised budgets ensured Moonfire could confidently allocate resources for salaries and office expenses.
The ability to capture market upside while maintaining a clear view of worst-case scenarios.
Time and cost savings that allowed the team to focus on scaling their portfolio.
This blog kicks off our FX guide series for VCs with insights from top VCs like Moonfire, Notion Capital and Connect ventures. Want early access to the full guide? Be the first to get it when it launches below!
No opinion given in the material constitutes a recommendation by Bound Rates Limited that any particular transaction or investment strategy is suitable for any specific company or person. Results may and will vary. The information in this publication does not constitute legal, tax or other professional advice from Bound Rates Limited or its affiliates.
