#93 VC DPI & Power Laws - What They Mean Today

Hi Everyone! 👋 Welcome to the new members of @TheFundCFO crew! We recently launched a paid tier and released our VC Fund Playbook + Models @ Streamlined.Fund! Re-linking some top 2023 posts: #67 Top VC CFO Posts & References & #65: WTF is Going On in VC (+ New Fund Model Data).

Every Tuesday/Thursday, we bring you actionable tools, real-world experiences, and insider insights for #VC CFOs/Finance Pros and fund managers, #LP investors, and industry enthusiasts/people who want to learn :). As a reminder:

• Tuesday: insights + interviews. Free for everybody.

• Thursday: deeper dives on VC GPs, CFO/COO strategy, more insights from LPs/GPs, and our take on what it all means (from 15+ yrs. of experience). Exclusive to Paid subscribers (most of whom expense these insights).

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“Who you are tomorrow begins with what you do today.” -Tim Fargo

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VC Deep Dive Recaps - August

Dear readers, thanks for all the great feedback on our August VC deep dives! We’ve gone deep on some notable VCs & unpacked some insights around building generational firms (#91 VC Deep Dive: Fresh Takes From Top VCs, #89 Brad Gurley (Benchmark) + David Sacks (Craft), & #87 Building Generational Firms). “Now more than ever, VC firms need to think strategically about their business model.”

There’s a lot of great content from notable VCs, LPs, and CFOs/finance pros on the internet if you look hard enough. The challenge this newsletter tries to overcome is pulling out the insights out that really matter, as well as finding the most current content that overlays historical lessons with current market dynamics, which are changing faster than ever.

Today, we’ll share some insights on DPI from Fred Wilson (USV), David Zhou (Alchemist Accelerator), Beezer Clarkson (Sapphire), and David Clark (VenCap).

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Visual: Net DPI by Year from David Zhou at Alchemist Accelerator

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Venture Capital DPI: When Does It Really Matter?

The job of a venture capitalist is simple in theory. Invest in a group of early-stage companies (often 20-30) over ~3-5 years. If the VC sources, selects, and supports at a high level, a few “winners” will emerge over a 10-year fund life (sometimes extended to 12-15 years). Ultimately, the VC fund must “distribute” cash back to its investors, driven most by the winners in the portfolio. This is called DPI. VCs typically target >3x TVPI/DPI and >30% IRRs.

DPI has been a hot topic recently for VCs and LPs that invest in VCs. In the bull market that peaked in 2021, VC funds had highly valued portfolios due to their investments in highly valued companies. A VC owning 5% of a company valued at $1 billion had a position worth $50m (in theory). Unfortunately, many of those companies valued at >$1 billion are worth much less, being sold, or shutting down. Most VCs didn’t sell at these high prices because they A) didn’t have the option to do so and/or B) expected the prices to go higher.

Choosing when to sell a position hard. Selling too early reduces your upside. Not selling risks your investment going to zero. We’re big fans of Fred Wilson’s thinking on this (see Taking Money “Off The Table”).

VCs typically fundraise for a new fund vehicle every 3-5 years. However, it takes 10-15 years to know how your fund will ultimately perform. How do you measure your fund performance in the meantime to communicate to existing and prospective LPs?

David Zhou (Alchemist Accelerator) shared the chart above and it’s a good starting point - here are some key takeaways for VC funds at the year 5 mark (you can use the chart to adjust to your respective fund life):

• Great (Top Decile) Year 5 Metrics: 3x TVPI, 1x DPI

• Good (Top Quartile) Year 5 Metrics: 2x TVPI, 0.5x DPI