2.4 Performance Metrics
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Decoding The Alphabet Soup - TVPI, DPI, IRR, MOIC
So, you've heard about Venture Capital (VC) funds investing in exciting startups. But how do the investors in these funds, known as Limited Partners (LPs), know if their money is actually growing?
Measuring performance isn't as simple as checking a stock price, because VC investments are private and take many years to mature.​
VC fund performance relies on specific metrics developed to assess value creation over the fund's long lifecycle.​
​It's also important to distinguish between Gross performance, which typically reflects the fund's raw investment returns before certain costs like management fees and GP profit sharing (carried interest), and Net performance, which represents the actual returns received by investors after those costs.
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This guide provides a high level overview - for detailed explanations and mastery of VC Fund Metrics, check out the VC Fund Modeling Course by VCFI.
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​The Starting Point: Capital Commitments, Paid-In Capital, and Value Generation
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Understanding fund metrics requires clarity on two foundational capital concepts:
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Committed Capital: The total amount an LP agrees to provide to the fund over its entire duration (typically 10 years or more). This represents the investor's total intended investment.
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Paid-In Capital (PIC): The cumulative amount of capital actually transferred from the LPs to the fund to date. GPs "call" capital incrementally as needed for investments and fund expenses. Performance is typically measured against this Paid-In Capital figure.
From Paid-In Capital to Value:
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Once capital is paid in, the General Partner (GP) utilizes these funds primarily to invest in selected portfolio companies. As these companies operate and develop, the assessed value of the fund's investment changes.
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Unrealized Value: Initially, any increase in the value of these investments is considered Unrealized Value. This value is based on periodic valuations (often related to subsequent financing rounds or market comparisons) and reflected in the fund's Net Asset Value (NAV). It represents potential value that has not yet been converted to cash.
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Realized Value (Distributions): When the fund successfully exits an investment – for instance, through an acquisition or Initial Public Offering (IPO) of a portfolio company – the proceeds received represent a conversion of unrealized value into actual cash or liquid stock for the fund. After accounting for fund expenses and the GP's potential share (carried interest), these proceeds are paid out to the LPs as Distributions. This constitutes a Realized Gain (or loss) for the LPs.
Therefore, Paid-In Capital forms the essential baseline against which both the cash returned (realized value) and the value of remaining investments (unrealized value) are measured from the LP's perspective.
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​The following multiple metrics (DPI, TVPI) are typically calculated based on the LPs' cash flows, making them inherently Net metrics from the LP's viewpoint. They relate distributions received (which are net of fund costs/carry) to the total capital paid in (which includes capital used for fees).
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Metric 01
DPI - Assessing Realized Returns
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Stands for: Distributions to Paid-In Capital
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Purpose: Measures the cumulative cash distributions returned to LPs relative to the total capital they have paid in.
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Interpretation: DPI quantifies the realized return – the actual cash returned to investors. A DPI of 1.0x signifies that LPs have received cash distributions equal to their total paid-in capital. A DPI exceeding 1.0x indicates the fund has returned all paid-in capital plus a profit in cash. LPs prioritize DPI as it reflects tangible liquidity. In a fund's early years, DPI is expectedly low.
Metric 02
TVPI - The Comprehensive Net Value Measure
Stands for: Total Value to Paid-In Capital
Purpose: Measures the fund's total value creation (both realized distributions and unrealized remaining value) relative to the total capital paid in by LPs.
Interpretation: TVPI provides a holistic view of the fund's Net performance from the LP perspective. A TVPI of 2.0x indicates the fund has generated total Net value equivalent to twice the amount of capital paid in.
Metric 03
IRR - Measuring the Annualized Rate of Return (Gross vs. Net)
Stands for: Internal Rate of Return
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Purpose: Calculates the fund's effective annualized rate of return, considering the timing and magnitude of cash flows. IRR can be viewed in two important ways:
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Gross IRR: Calculates the return generated directly by the fund's underlying investments before accounting for management fees and the GP's carried interest. This metric helps assess the GP's fundamental investment selection and portfolio management capabilities at the fund level.
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Net IRR: Calculates the return ultimately realized by the Limited Partners after all fund expenses, management fees, and the GP's carried interest have been deducted. This is the definitive measure of the fund's performance from the LP's perspective.
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Interpretation: IRR addresses the critical aspect of when returns are generated. While Gross IRR shows the raw investment engine's performance, LPs primarily focus on Net IRR as it reflects their actual financial outcome. A higher Net IRR generally indicates better, faster returns for the investor.
Metric 04
MOIC - Focusing on Investment-Level Returns (Gross Multiple)
Stands for: Multiple on Invested Capital
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Purpose: Measures the total value generated by the fund's investments relative to the capital directly invested into those portfolio companies.
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Interpretation: MOIC provides a Gross multiple perspective, focusing on the performance of the actual capital deployed into deals, often excluding the portion of Paid-In Capital used for management fees. It helps evaluate the GP's effectiveness at generating value purely from their investment activities (fund-level performance) before considering the fee structure's impact on the LP's Net return (which TVPI reflects). A higher MOIC indicates strong performance at the underlying investment level.
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Synthesizing the Metrics
Evaluating VC fund performance requires considering these metrics collectively:Net Metrics (DPI, TVPI, Net IRR): These are paramount for LPs as they reflect the actual return received or expected after all costs.
Strong DPI shows liquidity, while high TVPI and Net IRR indicate overall value creation and performance efficiency delivered to the investor.
Gross Metrics (Gross IRR, MOIC): These provide insight into the GP's core investment skill before the effects of fees and carry. Consistently high Gross metrics suggest strong deal selection and portfolio management, which is a prerequisite for delivering strong Net returns.
By analyzing both the Net (LP-centric) outcomes and the underlying Gross (fund-level) performance, investors can gain a comprehensive understanding of a fund's success, the GP's capabilities, and how effectively value generated at the investment level translates into returns for the Limited Partners.
For Further Reading
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Performance Metrics for Venture Capital Funds
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This Foresight page provides concise definitions and calculation approaches for key VC performance metrics, clearly distinguishing between Gross (investment-level) and Net (fund/LP-level) perspectives for both multiples and IRR. It covers Gross/Net Multiples, MOIC, DPI, RVPI, TVPI, and Gross/Net IRR. ​
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https://foresight.is/docs/vc-metrics/ ​
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Venture Capital Fund Performance Metrics
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Eqvista offers a breakdown of essential VC fund metrics including IRR, TVPI, RVPI, MOIC, and DPI. It explains the purpose of each metric for evaluating fund performance and provides simple calculation examples. ​
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https://eqvista.com/startup-fundraising/venture-capital-fund-performance-metrics/ ​
PE & VC Fund Performance Metrics Explained
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While covering both Private Equity and Venture Capital, this guide explains frameworks like Absolute vs. Relative metrics and Time-Weighted vs. Money-Weighted returns. It details key metrics including MOIC, DPI, TVPI, and IRR, discussing their uses, limitations, and how they apply across different fund stages. ​
https://growthequityinterviewguide.com/private-equity/pe-vc-performance-metrics ​
Evaluating Venture Capital: IRR, DPI, TVPI, and Multiple
Roundtable provides a comparative overview of four key metrics used by LPs: IRR (Internal Rate of Return), DPI (Distributed to Paid-In), TVPI (Total Value to Paid-In), and Multiple (cash-on-cash return similar to DPI). It outlines the pros and cons of each metric. ​
https://www.roundtable.eu/learn/evaluating-venture-capital-funds-irr-dpi-tvpi-and-multiple ​
Key Metrics for Venture Capital Performance: IRR, MOIC, DPI, TVPI...
This article defines and explains six important metrics for evaluating VC fund performance: IRR (Internal Rate of Return), MOIC (Multiple on Invested Capital), DPI (Distributions to Paid-In), TVPI (Total Value to Paid-In), Markup Rate, and Write-Off Rate, including formulas and examples. ​
Venture Capital Returns: True Lies?
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The VC Factory discusses key metrics like MOIC, IRR, TVPI, and DPI, while also exploring the nuances and potential pitfalls in measuring VC returns, such as reliance on "paper valuations" for unrealized returns. It also introduces the Public Market Equivalent (PME) method for comparison against public stocks. ​