How to Measure Venture Performance (TVPI vs DPI)
In the All In Podcast of April 30th, 2022 the besties breakdown how venture returns should be measured. Chamath uses his Funds, Social Capital, Annual Letter as an example.
This is was an awesome explanation that I would like to share. The basic takeaway is that there is a huge difference in:
Unrealized returns, how much the companies in your portfolio were last valued at.
The money you actually returned to your LPs.
The TVPI is the Total Value to Paid-In, it represents the returns "on paper", It is a ratio of realized and unrealized gains vs the amount contributed. TVPI illustrates the first point. DPI is the Distributions to Paid-In Capital, this only takes into account the money distributed to LPs relative to the amount contributed, the second point.
Understanding these metrics is crucial because what matters is the latter, how much money you have actually returned in the investor's hands. In a readjustment cycle like the one we are going through, prices will eventually be remarked, and If the TVPI didn't convert into DPI, the LPs will come out losing.
In a more recent episode Oct 22nd, 2022 Brad Gerstner shows historical industry data comparing the top quartile venture performance on TVPI and DPI, what we see is the latest year's TVPI converting to the DPI average of 1997 to 2017. Gerstner states that we will likely see huge markdowns on TVPI while it converts to the DPI average.
Learn More TVPI and DPI on Angel List
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