Naturally, I too asked those questions of the venture capital investor’s newest general partner, Miles Grimshaw. Will you ever increase your fund size and grow the firm? How will Benchmark change? Asked to death in public, in private, by journalists, peers, and their investors, it is a question that has only multiplied in volume as the venture capital industry itself has become a giant. It is much more likely that the final TVPI will revert to the long term mean of the previous decade, with some of the vintages outperforming.It’s almost routine at this point. But when looking at the last ten years, in the prolonged boom period following the dotcom bubble burst, and the financial crisis of 2008, it is hard to believe that the TVPI of the 2011-2019 vintages will turn into DPI. When looking at the long-term median and averages of final venture DPI returns from older vintages, we see that the mean TVPI is around 2X, even though some vintages have outperformed that significantly. Post-bubble vintages, and more important post-financial-crisis vintages performed much better, but as can be seen, eventually TVPI turns into DPI, and the fund liquidates. 19 vintages performed very poorly, at the height of the dotcom bubble. As can be seen here, in funds which are nearing their end of life, DPI and TVPI converge, some vintages are markedly better than others. This chart follows the DPI and TVPIs of top-quartile venture funds in the U.S. The above chart, taken from the incredible “all in” podcast is a very eye-opening look at fund results over the years. Yet, taking a bigger picture view it is very clear that eventual DPI upon fund liquidity of the vintages of the last decade will be significantly lower than the current reported TVPIs. Many of the companies will “grow into” their last round valuations, by the time they will need to raise capital again, and there is a case to be made for waiting with valuation adjustments as long as the company continues to grow and has significant runway until its next financing. Private venture backed companies are generally growing faster than their public market comparables, and private companies have the privilege of taking a long-term view of value creation and are not subject to the short-term verdicts of the public markets. It takes some time to correlate corrections between public market valuation, which are real-time, to private market valuation, which are mostly judgement calls of the fund managers themselves, and historically lagged public markets by a margin. The current market downturn, which in most tech sectors, was more like a crash, with public market valuations dropping 70-80% in most high growth tech companies, is not yet reflected in the reported TVPIs of most funds.
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