The ratio of distributions to paid-in capital (DPI) is used to measure the total capital that a venture capital fund has returned to its investors. It’s calculated by dividing the cumulative distributions by the amount of capital invested in a VC fund.
A DPI of 1 means that investors got back the same amount of money they paid into the fund. DPIs higher than 1 indicate that the investors made money.
Why is the DPI ratio important now?
In the current investing climate, with the boom of 2020, 2021, and part of ‘22 over, there are a lot of really high valuation startups still out there, which makes their venture capital funds’ books look like they’ve made a lot of money.
The valuations are so high that the returns on paper look really, really good. However, we all know that paper is one thing, and actual cold, hard cash being distributed out to limited partners is another. The latter is certainly preferable.
The DPI ratio tells you exactly how much money has actually come back to the investors, which is important for actually determining how real the venture capital fund’s returns are. Sometimes when the valuations are too high on some of their startups, a VC fund actually can’t raise money. Some of those companies are going to fail and it will be a pretty big hit to the fund’s returns.
Go and check out our video on startups with too high a valuation to learn more about overvalued startups and why they will need to reset.
Distributions are indisputable
As a limited partner investor, reality is the distributions. That is cash that has come back. You can bank on it and you can also use it to fund the next commitments of that venture capital fund.
A lot of funds have been raising new rounds every couple of years, instead of every four or five years. They purposefully try to send money back to their limited partners so their limited partners feel good about recommitting in the next fund.
The DPI ratio is critical
So for VC funds, the distributions to paid-in capital ratio is very important. Ideally, it’s going to be as high as possible. Investors hope the return on the fund would be a multiple, such as five times the initial investment. However, in the early days of the fund, say the first couple of years, the ratio is going to be a very low number, which should slowly climb depending on the number of successful startup exits.
So the distribution to paid-in equity ratio is a metric that the limited partner community is really focused on right now.
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