When we released our recent blog post on Fund Unicorns, we looked at how many funds out of the roughly 650 submitted were “Unicorns.” We defined a Fund Unicorn as a 10x TVPI fund. After we released the analysis, one reader asked us to analyze cash-on-cash returns (aka “DPI”) as well. Here, we try to oblige.
As requested, we went back to our database of fund returns and looked at DPI. We removed all the returns data from predecessor funds, funds sub $1M, SPVs and angel track records. We looked only at blind pools.
I want to be clear on one thing: self-reported DPI data from emerging managers with less than less $200M AUM is not representative of the venture industry as a whole. After all, the data pool skews very young. With the time to IPO growing each year, it's not reasonable to expect an early-stage fund to have much DPI until the final years of a fund’s life (8-10+ years). Given the current malaise in the public markets, we can safely assume that the time to liquidity is getting longer and longer.
If LPs wait around for DPI as a proof point, they are probably going to miss the chance to get into some great venture capital funds. So, let’s all take this data with a grain of salt. I am sure many more of the funds will generate amazing DPI during the next cycle.
Nonetheless, there are a very small number of funds with unicorn-level DPI. These funds are rare. One can guess that luck is more responsible than sustainable, repeatable skill. They had a single huge early exit.
How rare? Only two funds have a DPI over 10x.
The best performing fund (a 2012 vintage) is 26.2x DPI. This pre-seed fund invested a total of $2M, but one of their cybersecurity companies went public and currently has a market capitalization of almost $5B. This one investment generated over 2600x. Impressively, this fund has 7.2x RVPI, so those lucky investors can expect even more returns in the future. Over 11 years, this fund has generated a 47.60% IRR. This fund is truly a unicorn.
The second best blind pool (a 2014 vintage $5M fund) has generated a 10.7x DPI and has a number of remaining investments with a 1.17x RVPI for a 55.00% IRR. While it's a little more difficult to discern their return drivers from the materials provided, this LA-based fund invested early in NerdWallet (IPO) and Honey (acquired), which I assume are the drivers.
There are 13 funds that have between a 3x and 10x DPI. Notably, all the funds that have substantial DPI are nano funds - sub $10M. So, if an LP is looking for a unicorn, think small.
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Disclaimer
The Tipping Point Series, including Featured at RAISE articles, (“Tipping Point”) is a collection of interviews with fund managers who (a) have previously raised a venture capital fund and (b) are providing advice and insights into the formation and management of venture capital funds (the “Presentations”). Tipping Point is not an offer to sell or a solicitation of an offer to buy any security issued by any venture capital fund, including without limitation, any venture capital fund managed by Tipping Point’s speakers, presenters, or producers.
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