If managers are forced to chase safer bets, we lose the bold ideas that have historically driven transformative outcomes.
The venture world thrives on patience, long-term commitment, and the willingness to endure volatility for the promise of outsized returns. Yet, a troubling trend is emerging: pressure on early-stage managers to manufacture DPI (distributions to paid-in capital) far too early in their fund cycles. This short-term thinking, driven by a few rough years since 2022, risks eroding the very foundations of the early-stage ecosystem.
Yes I’m being a little dramatic and facetious but it’s true.
Ben Braverman@braveben
A friend of mine is buying strips of venture funds from managers that need to show DPI. Here's how she underwrites each deal and what it means for the ecosystem at large:
1. An emerging manager approaches an institutional fund of funds to sell a % of a given vintage. There's…x.com/i/web/status/1…
Let’s set the stage with data: According to industry reports, the median time to exit for early-stage startups has grown from6.3 years in 2011to over8.2 years in 2023.This means that even in a healthy exit environment, early-stage funds aren’t likely to show meaningful DPI until their later years and/or after raising multiple funds. Moreover, venture funds as a whole have historically returned the majority of their capital from years 8 to 12, meaning the LPs pushing for liquidity now are significantly ahead of the natural timeline.
The Scarcity of Blue ChipsA large percentage of emerging managers—particularly those managing sub $100M funds—don’t have material stakes in the blue-chip companies that dominate secondary markets (think SpaceX, Anduril, and Rippling). According to PitchBook, only2% of venture-backed companiesachieve the type of valuation that makes them attractive targets for secondary sales. The rest of the portfolio, which is where true early-stage investing happens, is undervalued or entirely dismissed in these transactions.
Disproportionate Impact on ReturnsSelling portions of portfolios early, often at a steep discount for non-blue-chip assets, locks in lower returns and minimizes the upside potential. Industry data from Cambridge Associates shows thattop-quartile early-stage venture funds generate over 80% of their total value from outlier exits.Premature DPI disproportionately hurts returns for both the fund manager and the LPs who were counting on those outsized outcomes.
Skewed Risk-Reward DynamicsForcing liquidity prioritizes large, established names over riskier bets, discouraging managers from funding transformational but unproven founders. As a result, we see inflated valuations for "safe bets," like repeat founders or hyped sectors, while other potentially groundbreaking startups are overlooked. This harms not just the venture ecosystem but innovation as a whole.
Beyond individual funds, the push for early DPI could have lasting consequences for the venture industry:
Fewer Emerging Managers:Emerging managers, already operating on tight budgets and higher risk, are less likely to survive in a market where liquidity is forced. Data shows that nearly40% of new venture funds fail to raise a second fund,and LP impatience exacerbates this trend.
Stifled Innovation:The early-stage ecosystem exists to take risks on the unknown.
Compressed Returns:By prioritizing short-term liquidity, LPs could miss out on the potential for venture to outperform other asset classes. Historically, top-performing venture funds have deliveredIRRs of 25-35%,but that upside relies on patient capital willing to weather years of illiquidity.
Early-stage investing isn’t about quick wins—it’s about building a pipeline of long-term value. When LPs push managers to sell early, they undermine the very thesis of venture investing. Here are three principles LPs should keep in mind:
Time Is the Secret Weapon:The best funds take time to mature. Emerging managers often outperform legacy players because they can deploy capital in undervalued opportunities, but this requires LPs to be aligned on an 8-10+ year horizon.
Support, Don’t Pressure:The role of an LP is to enable managers to focus on portfolio growth, not distract them with liquidity demands. Trust the process and the strategy you bought into when you committed your capital.
DPI Is a Marathon, Not a Sprint:The best-performing funds often have little to no DPI until their later years, withtop-decile funds returning over 3x MOIC (multiple on invested capital)despite showing minimal early DPI.
The venture capital industry needs to realign around its core principles. LPs who commit to early-stage funds must recognize that liquidity should come naturally, not as a manufactured response to temporary market challenges.
Instead of pressuring managers to sell prematurely, let’s support them in building transformational portfolios. The long-term rewards—both for LPs and the broader innovation ecosystem—will far outweigh any short-term gains.
Let’s remember:DPI is earned through patience, not panic.Short-term thinking has no place in a long-term asset class. If we want to sustain the vibrancy of venture capital, we need to let managers do what they do best—identify and back the future’s greatest companies—and give them the time they need to succeed.
David Clark@daveclark85Replying to@daveclark85
The best-performing fund in the sample has a DPI of 12.3x. In year 5 its DPI was zero. Conversely, the best-performing fund after 5 years had a DPI of 1.28x. It's now at 2.55x. /2
Trace Cohen@Trace_Cohen
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