Show Me the Money...LPs Need DPI

“Show me the money!” does not exactly require a translation, or any deep dissection. It’s a direct, obvious, and pretty prescient theme in Jerry Maguire - and a very appropriate theme for the current venture market. 

NFL players need to maximize their earnings in a potentially short window. Players pay a very real price, and never know when their season, or career could end. In many ways, players are risking their future for the present - and the gamble needs to have a big enough payoff. 

Venture fund LPs (Limited Partners) are not exactly putting their bodies and minds on the line. And, their investment horizon is likely far longer than a typical NFL career. However, LPs are somewhat blindly betting on both a GP’s (General Partner) ability to find/pick the right deals, and on the quality of the fund vintage. Like an NFL owner, they don’t know how a player will perform - track records certainly provide a clue, but the past does not always predict the future. And, once the digital ink dries on the Docusign, they’re more or less stuck with the GP, the fund vintage, and the future portfolio. 

Since my experience is mostly with HNWIs (high-net-worth-individuals), and FOs (family offices), I’ll stay in my lane. While I’m mainly drawing from my line of vision within the VC world, institutional LPs seem to have the same issues. 

DPI (distributions to paid-in) is a core metric for most GPs and LPs - in many ways, it’s irrefutable proof of success, or failure. TVPI (total value to paid-in capital) is a very inexact, and inconsistent metric - and is often mostly all “on paper.” In some cases, the paper valuations are real - but in most cases, they’re as fantastical as a unicorn.  

SVB’s H2 report touches on the current state of past unicorns (page 23) - and also clearly shows the total lack of DPI in 2017-2022 fund vintages (page 31). Pitchbook’s Q2 report and Carta’s Q1 report show basically the same core theme - LPs are not being shown the money. 

While the largest funds are still hauling in massive raises, non-institutional funds are fighting to stay on the field. HNWIs and FOs piled into venture from Fall 2020 to Spring 2022 - and potentially pulled forward many years of future venture allocations. Most of these investments (into funds or SPVs) have produced no DPI - and older investments are not producing much DPI. In other words, LPs over-allocated into a rough vintage (2020-2022), and are still waiting on most of their original capital back from older investments. Add in a contentious presidential election, and most LPs seem content with 4%-5% in a money market fund/account, and heavy allocations in index ETFs (or cash). 

I think my own Fund 1 LPs should have all of their initial investment back (1x+ DPI) in about 2-2.5 years (from a 2020/2021 vintage Fund 1). And, I’m targeting faster DPI in Fund 2…even after sitting on the first 25% of Fund 2 for almost 2 years. LPs seem laser focused on DPI - and if I don’t show them the money, I will not have a Fund 3. I’ve mostly shifted Fund 2 to A/B/Bridge rounds…partly for the better risk/reward, but also for faster liquidity. Unless something dramatically shifts, LPs will keep banging on the DPI drum - GPs will press founders for exits, and founders will actively look for liquidity.