Venture funds report a net asset value built on the GP's own marks. Only distributions are cash, which is why DPI and TVPI tell very different stories.
11 min read · Level 4
I would put more weight on DPI than most people do, even though it punishes young funds unfairly, because the failure mode it guards against is so common and so expensive. Unrealised marks tend to be generous in rising markets and sticky in falling ones, and the investors hurt by that are the ones who treated a paper doubling as a result. Cash back is the only number no one has an incentive to flatter.
There is no market price for a venture fund. Each quarter the GP estimates what each company is worth, adds them up and reports a net asset value, or NAV. Those estimates usually lean on the price of each company's most recent funding round, adjusted for events since.
Two ratios summarise a fund, and they must be read together:
DPI distributions / paid-in capital cash actually returned TVPI (distributions + NAV) / paid-in cash returned plus estimated value
Suppose after six years an LP has paid in 80,000,000, received distributions of 20,000,000, and the remaining portfolio is marked at 140,000,000:
DPI 20,000,000 / 80,000,000 = 0.25x TVPI (20,000,000 + 140,000,000) / 80,000,000 = 2.00x
The fund looks like it has doubled the money. In cash, it has returned a quarter of it. The other 1.75x is an estimate.
The early years follow a J-curve: fees are charged and failures are written down before successes are sold, so reported returns start negative and only rise later. Interim IRR figures in years one to four say very little about the final result.
Because marks are set by the people who are paid partly on how the fund looks. That does not mean marks are dishonest, but it means they can lag reality, especially on the way down: a company's last round price stays on the books until something forces a change.
It also matters when a manager is raising their next fund. Strong TVPI with weak DPI is common in young funds and not necessarily a warning, but a manager marketing a new fund largely on unrealised marks is asking you to trust their own valuations.
And it affects secondary sales. If you ever need to sell an LP position, buyers price it off NAV and typically demand a discount, so the NAV is not what you would receive.
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Sources: U.S. SEC - Investor.gov; CFA Institute; FINRA - investor information
Two funds, both at year seven.
Fund Paid-in Distributions NAV DPI TVPI A 80,000,000 96,000,000 64,000,000 1.20x 2.00x B 80,000,000 8,000,000 152,000,000 0.10x 2.00x
Both show a 2.00x TVPI. Fund A has already returned more than the capital paid in; the remaining 64,000,000 is upside. Fund B has returned a tenth of the capital; almost its entire result depends on marks being realised at or near their current level.
What happened next. Over the following three years, Fund B's largest holding raised a down round and two others were sold below their marks. Its NAV of 152,000,000 was eventually realised as 88,000,000 in distributions. Final DPI: (8,000,000 + 88,000,000) / 80,000,000 = 1.20x. Fund A's remaining NAV realised close to its mark, finishing near 2.0x.
Treating TVPI as the fund's return. It is an estimate of the return, and in a young fund most of it is unrealised. The honest question is always how much of this is cash.
If DPI is low late in a fund's life, the result is still mostly an estimate. Weight your judgement toward cash returned.
Find whether marks follow the last round, an independent valuation, or public comparables, and whether any company has been marked down. Marks that never move down are a warning.
Fees and early write-downs make young funds look bad and a single mark-up can make them look brilliant. Judge by DPI and by prior funds' finished results.
When reading a fund report, comparing a manager's prior funds, or valuing an LP position you might sell.
Do not use DPI alone to judge a young fund; low DPI in the early years is normal. The two numbers are meaningful only together and in the context of fund age.
In periods following strong valuation growth, funds commonly report high TVPI based on recent round prices. When funding conditions tighten, companies raise at lower prices or not at all, and marks are reduced over several quarters. LPs who committed to a successor fund on the strength of the earlier marks sometimes find the prior fund's value substantially lower within two years.
Judge a manager on finished funds and cash returned, not on the marks of the fund they are raising from.
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