At Tetrix, we’ve engaged with hundreds of capital allocators and limited partners (“LPs”) across private markets, gaining insights into the nuances of fund diligence. In this blog series, we break down the key metrics and characteristics that fund investors prioritize. Whether you’re refining your diligence process or simply curious about what top investors think about, these posts are designed to shed light on an opaque industry, offering clarity and insight into what drives investment decisions. We begin our series with venture capital.
Fund investors understand that investing in venture capital requires assessing both financial metrics and qualitative characteristics. It’s not a one-size-fits-all approach: qualitative factors often carry more weight for emerging managers without established track records, while financial metrics become more critical for funds with multiple vintages. It’s like investing in early-stage startups versus later-stage growth companies. Investors gain conviction through a balanced combination of both. Investing in venture capital requires a long time horizon; because the fund lives of early-stage venture capital funds range from 10-15 years, investors in these funds are making extremely long-term commitments to fund managers. When they decide to back an investor, they often know they will have to invest in multiple funds before seeing liquidity—so these commitments can last for twenty years or more. Below, we’ve outlined the key metrics and characteristics our customers consider most essential.
We’ve outlined the main financial metrics that fund investors use. These are all important, but the relative importance of each waxes and wanes over the course of a fund cycle. Benchmarking allows investors to identify the best managers.
TVPI: TVPI (Total Value to Paid-In Capital) assesses specific investor returns during a fund’s lifecycle, capturing both realized gains and the estimated value of unrealized holdings. TVPI is calculated by adding the value of realized investments (fund distributions) to the residual value of unrealized investments, then dividing by the total LP capital invested to date. Funds report TVPI on both gross (before fees) and net (after fees) bases. Because TVPI includes the value of unrealized investments, it is more useful in the middle stages of a fund’s lifecycle, before most investments are realized. Although there’s no absolute “magic number”—TVPIs vary based on vintage and market conditions—a TVPI above 3X is generally considered best-in-class.
DPI: The DPI (Distributions to Paid-In-Capital Ratio), or realization multiple, measures cash returns by dividing cumulative distributions by total capital invested to date. In today’s market, LPs prioritize DPI as distributions enable reinvestment in new funds. Many venture and growth funds show high TVPIs but lag in DPI due to overzealous internal marks on unrealized investments and sluggish IPO and M&A activity weighing down exits. The latter is especially important to keep in mind when comparing funds of different vintages. Carta’s study of 1,800+ funds shows that 25% of 2017 funds started returning capital to investors within three years (i.e., by 2020), versus only 9% for 2021 funds. Vintage matters; funds that are able to return capital to investors, especially in tougher market environments, earn their investors’ trust. However, DPI only fully materializes by the end of the fund’s cycle, so it is a less useful metric that becomes more useful over time. Investors in venture capital funds sometimes deploy capital into three, four, or even five vintages before material capital has been returned from the first fund.
IRR: The internal rate of return (IRR) represents the annualized percentage return of an asset or fund. This metric is valuable to LPs as it allows for cross-industry and cross-asset class comparisons, regardless of the time frame of the investment. However, IRR is sensitive to various interim assumptions—for venture capital funds, it is very sensitive to the internal marks that general partners (“GPs”) place on their investments. Like TVPI, IRR is reported on both gross (before fees) and net (after fees) bases. Leading venture capital funds aim for a net IRR of approximately 30% over a 10-year fund life and closely monitor IRR throughout the fund’s duration, especially in its latter half when more investments have been realized and value is less sensitive to internal GP assumptions.
Fund returners: In early-stage investing, Moore's Law often underscores a pattern where only a few companies within each fund drive the majority of returns, with one or two high performers returning the entire fund. Fund investors conduct detailed diligence on these standout companies, evaluating how they were sourced, the ownership stakes held, how they exited (i.e., did they exit via IPO, acquisition, or secondaries) and other strategic factors. These factors gain importance as successful VC funds grow over time; the “fund returners” from Fund I and II may not have returned Fund III or IV. Leading funds differentiate themselves by clearly stating their strategy (target number of deals per fund, maximum exposure %, number of deals per year, target % ownership etc.), consistently investing in “fund returners” that follow that strategy, and ensuring that the “fund returners” of the past are consistent with their current strategy. This is how fund investors gain confidence that GP performance is repeatable.
Deployment risk: Some investors go a layer deeper than fund size, evaluating deployment risk by figuring out how much capital each investment team member is responsible for deploying, on average. For example, a $1 billion fund with ten investment partners is very different from a same-sized fund with only two investment partners. In the former, each investment partner is responsible for investing $100 million; in the latter, each partner is responsible for deploying 5x more. The second scenario carries more concentrated deployment risk.
Historical Partner-Level and Industry-Level Returns: LPs will also cut historical returns by various filters. They might uncover that one partner is responsible for a disproportionate share of the returns. (LPs should, to the extent possible, do their own diligence on deal attribution—true attribution within a fund is sometimes opaque.) Or they might uncover that one sub-sector accounts for the majority of returns. These insights might lead LPs to consider the fund more risky or their returns less repeatable, particularly if they do not align with the fund’s stated strategy.
Track Record: Part of assessing a fund’s track record is analyzing the actual partner-level returns, as discussed above—but part of it is also analyzing the qualitative factors that drive success. LPs evaluate the track record of both individual team members and the fund as a whole, seeking clear signs of repeatable success. They prioritize seasoned operators and investors who can source proprietary deals and actively support portfolio companies. A strong fund track record is also vital, as top founders often choose investors based on the fund’s reputation. For emerging managers who may lack a traditional track record, LPs value prior angel investments or operating experience, as these can help attract founders and establish credibility. Fund investors also analyze whether their prior track record is consistent with the size and strategy of their current fund size.
Strong Relationships: LPs seek to invest in managers who are deeply embedded in the startup ecosystem, as venture capital is fundamentally a relationship-driven business. Building and maintaining strong connections with current and future founders offers a competitive edge, often resulting in exclusive deal flow and more favorable terms. Additionally, VC funds with strong relationships across the media, other operators, advisors, and peer funds are better positioned to support their portfolio companies effectively, particularly as these companies scale and face new challenges.
Team: LPs are frequently investing in a team, particularly in a fund’s early stages. They typically spend 1-2 years building relationships with the team before committing, carefully assessing the backgrounds of members of both the investment and operations teams. LPs assess whether the team’s background aligns with and supports the fund’s stated strategy. LPs often rely on references from founders and other LPs to gain additional insights before making an investment decision. The best references are typically those from non-listed sources (e.g., an LP’s personal connection who worked with the manager). Investors also often seek off-cycle references (e.g., they keep hearing a person’s name from founders in their network). They will also evaluate a team’s history (e.g., turnover, promotions, board seats), income split (including distribution of carried interest), culture, and values. Are they driven? What’s their “why”? Will they stick together when times are tough?
Specific Focus: LPs want to understand a fund’s competitive advantage and raison d'être. For a sector-specific or geography-specific fund, for example, they will evaluate whether or not the fund invested in the top-returning companies within their sector/geography. They will question whether or not their sector or geography specific strategy is enabling them to participate in the best deals. For a generalist fund, they will interrogate the fund’s ability to “beat” a sector-focused fund and deploy capital into top companies. They will also evaluate to what extent particular fund programs (e.g., incubations or increasingly popular “entrepreneurs in residence” programs) are contributing to the fund’s overall returns.
At the end of the day, the key is repeatability of performance —especially in venture capital where only a couple of investments can drive the whole outcome. Through quantitative and qualitative assessments, investors seek comfort that their portfolio funds can consistently find and invest in those companies.
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