On paper, venture capital has rarely looked better. The more than 2,000 US funds in Carta’s latest analysis are sitting on more than $104 billion in unrealized gains, and every vintage from 2017 through 2023 shows a median TVPI of at least 1x. The open question is how much of that value will ever come back to LPs as cash.
In a new article, “VC fund managers face an uphill battle to turn paper profits into concrete returns,” Carta senior writer Kevin Dowd examines why so little of today’s paper value has converted into distributions, and Alpha Partners Founder and Managing Partner Steve Brotman shared his perspective on where the marks stand and what comes next.
Among funds from 2017, the most mature vintage in the sample, realized gains account for just 18.6% of total value within the median fund, and even at the 90th percentile, DPI makes up only 58.4% of reported TVPI. For the median fund from 2019, DPI amounts to less than 1% of total value, and roughly nine years out, not even the 75th percentile of 2017 funds has returned its investors’ paid-in capital.
Steve’s view is that a meaningful share of those marks would not survive a true market test.
He told Carta he believes many reported marks would not hold up in a true market test,, suggesting that if VCs graded the real value of one another’s portfolios, the results would look very different from what funds report today. At the same time, he cautioned against writing off every position that has not traded recently, since the absence of a transaction does not mean an asset holds no real value, and the work ahead for GPs and LPs lies in separating one from the other.
Carta’s reporting finds LP attitudes already moving in that direction, with investors placing less weight on internal marks and more on when their capital actually comes back. Steve’s read is that the most sophisticated LPs can see where this is heading.
At Alpha Partners, the gap between paper value and realized returns sits at the center of how we invest. We provide capital that allows early-stage VC partners to exercise pro rata rights in companies we believe have strong growth prospects.
As the exit market begins to thaw, the next few years will sort venture’s paper gains into realized returns and write-downs. In our view, transparent valuation practices will matter more to LPs over time.
Read the full article here.
Note: The views expressed by Steve Brotman represent his personal perspective and may not reflect the views of Alpha Partners as a firm.
Note: The views expressed by Steve Brotman represent his personal perspective and may not reflect the views of Alpha Partners as a firm.
