Early DPI in VC Funds Is Relatively Unimportant in First 4 Years

When do VC funds start returning capital to LPs?

In some ways this is a question without a good answer. Of course ideally a fund would invest in a number of startups that end up becoming public companies, which takes a decade or so.

Under that rubric, any returned capital (known as DPI) in the first 4-5 years is relatively unimportant since the fund holds some real winners.

However - early DPI is also not a bad signal, per say. If a fund has a portfolio company that gets snapped up at a great multiple in the first few years that can be a wonderful outcome.

Now we can layer on the general macro environment. In these challenging times, where any exits are thin across startups, DPI may be relatively more attractive to LPs. In some cases the LPs in question may be unable to invest into new venture funds if they have insufficient recycled capital from the funds they've already committed to.

Tricky stuff.

𝗧𝗵𝗲 𝗗𝗮𝘁𝗮

𝘕𝘰𝘵𝘦 𝘵𝘩𝘢𝘵 𝘵𝘩𝘪𝘴 𝘥𝘢𝘵𝘢 𝘤𝘰𝘮𝘦𝘴 𝘥𝘪𝘳𝘦𝘤𝘵𝘭𝘺 𝘧𝘳𝘰𝘮 𝘰𝘶𝘳 𝘊𝘢𝘳𝘵𝘢 𝘝𝘊 𝘍𝘶𝘯𝘥 𝘗𝘦𝘳𝘧𝘰𝘳𝘮𝘢𝘯𝘤𝘦 𝘳𝘦𝘱𝘰𝘳𝘵 𝘱𝘶𝘣𝘭𝘪𝘴𝘩𝘦𝘥 𝘭𝘢𝘴𝘵 𝘮𝘰𝘯𝘵𝘩. 𝘊𝘢𝘯 𝘴𝘩𝘢𝘳𝘦 𝘢 𝘭𝘪𝘯𝘬 𝘸𝘪𝘵𝘩 𝘢𝘯𝘺𝘰𝘯𝘦 𝘪𝘯𝘵𝘦𝘳𝘦𝘴𝘵𝘦𝘥.

• After 3 years, something between 15%-25% of funds on Carta returned at least some capital to investors. For vintage year 2021, that figure stands at 9%.

• After 4 years, about 36% or so of funds on Carta have returned some capital to investors. For vintage year 2020, that figure was only 21%.

• 6 years in, more than half of funds have returned at least $1 to investors.

I'll reiterate here - the fact that a fund has zero DPI in the first 5 years of the fund 𝗱𝗼𝗲𝘀 𝗻𝗼𝘁 mean that it won't end up being a great performer.

But DPI is the ultimate metric for for venture, and having some early on doesn't hurt.

Excited to dive way deeper into DPI, fund performance, and the general state of young venture funds with the inimitable Elizabeth "Beezer" Clarkson tomorrow morning! Give me a shout in the comments for a link to the virtual event.

#venturecapital #DPI #emergingmanagers #startups