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General VC Questions

Where can I find benchmarks for TVPI, MOIC, and IRR?

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Feb 27, 2024
Helping a friend prepare their LP focused investment deck. Their team has a significant historical track record for investment
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Accepted Answer
Feb 29, 2024
The Total Value to Paid-In (TVPI) ratio serves as a critical benchmark in assessing the performance of venture capital (VC) funds, offering insights into the return on investment for Limited Partners (LPs). This ratio is categorized into different performance levels: great (TVPI above 4x), good (TVPI of 2.5x), medium (TVPI of 1.5x), and bad (TVPI below 1.5x). However, the interpretation of TVPI ratios is nuanced, influenced by factors such as fund size, which can range from $5 million to $250 million, the stage of investment from pre-seed to Series B, and vintage years that reflect the market conditions at the time of the fund's inception. For example, the internet bubble era saw TVPI ratios soaring to 4.5x, demonstrating exceptional returns, which contrasted sharply with the post-bubble period when ratios dwindled to 1.5x, indicating reduced investor returns and a downturn in fund performance.

The benchmark for a top decile VC fund is a Distributed to Paid-In (DPI) ratio of 3x over a 10-year period, suggesting that for every dollar invested, LPs should expect a threefold return. This ideal metric underscores the long-term investment horizon and the high-return expectation associated with top-performing VC funds. However, accessing reliable benchmarks for assessing fund performance can be challenging, as only 24% of U.S. funds report their financial returns for the 2002-2021 vintage years, according to studies utilizing databases like Pitchbook and Preqin. This limited data disclosure may introduce selection bias, possibly skewing reported results towards higher-performing funds and not fully representing the broader industry performance.

Given these complexities and potential biases, caution is advised when using benchmarks to evaluate VC fund performance, especially for first-time and smaller emerging managers who might find it even more challenging to compare against industry standards. The variability in fund size, investment stages, and economic cycles, coupled with the limited and possibly selective reporting of financial returns, complicates the assessment of VC fund performance. This highlights the importance of a nuanced understanding of TVPI ratios and the context-specific factors that influence them, ensuring a more informed and balanced approach to evaluating venture capital investments.

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