<aside> 💡 The venture capital industry is not transparent about performance. This is the case for private equity in general and, more broadly, for the category of ‘alternative investments’, which also includes real estate. These investments are complex and illiquid assets with no open secondary market. Therefore, the valuation is established by the management company, according to strict regulations and principles, but this means that impartiality is limited except for investments that have been fully exited. The only way to get a fair assessment of the performance of a fund is to become an LP and invest in these funds: you need to take a look at the kitchen to form an opinion on the actual quality of the meal. While not transparent, the industry does have standardized ratios that help you understand where a fund stands in terms of performance. It is up to each LP to define its own formula combining these ratios to rank funds. With the strong drop in Nasdaq since October 2021 progressively translating into valuations in privately-owned startups, TVPIs largely based on paper gains (reevaluation of assets following up-rounds) will be under pressure.

</aside>

Valuations, from 2020 to 2022 (source: FT)

Ratios

Here are the standard definitions for the VC Industry’s performance ratios :

• DPI (Distributed to Paid-In) corresponds to the amounts distributed to subscribers compared to the funds called ;
• RVPI (Residual Value to Paid-In) corresponds to the value remaining in the portfolio (net assets value) compared to the funds called;
• TVPI (Total Value to Paid-In) corresponds to the amounts distributed to subscribers plus the value remaining in the portfolio in relation to the called capital. TVPI = DPI + RVPI ;
• IRR (Internal Rate of Return) is that of an investment in units of the fund with the hypothesis of a sale of these units for their book value as of the date of computation and an immediate distribution of the proceeds .

Ratios are calculated on a cash to cash basis for investors in the fund.

• MOIC (Multiple on Invested Capital) is probably the easiest to understand. It is the total return on a fund expressed as a multiple of all money invested. For example, a $100,000 investment returning $150,000 has a 1.5x MOIC. VCs love to communicate on MOIC as figures are flattering compared to TVPI. Symmetrically, MOIC is deceptive for LPs since it doesn’t account for time, fees and carried interests which are obviously part of the equation.

Discussion

• DPI becomes meaningful when it exceeds 65% (typically the 5th or 6th year after launch). That figures comes from discussion with LPs. Below this threshold people may be doubtful of performance, since the latter is made essentially of ‘paper gains’ (increased valuations that do not come from an actual transaction where the fund sells shares).

• TVPI is difficult to understand without going into detail because it implies a valuation of the portfolio companies. It is mostly paper gains before year 6 or 7 in the fund lifetime and paper gains are only what they say they are especially at a time when valuations of the startups increased as observed over the last 5 years.

• Perf 2021 vs. 2022

Performance at Newfund