The VC Scrutiny-Avoidance Machine
Recent VC distribution numbers are just bad ● DPI to TVPI proves that the problem is structural, and it will worsen ● A healthy model needs to make distribution mechanisms a core part of the thesis
The single number that matters most in venture capital has been falling for a decade. DPI, the cash a fund has actually paid back to its investors, is the part of a fund’s report that can’t be shaped by anyone’s optimism. It either arrived or it didn’t. Five-year DPI for the 2019 and 2020 vintages sits at 0.11 and 0.14, meaning eleven to fourteen cents back in cash for every dollar invested, after half a decade. That is not a bad year correcting itself. It is the continuation of a ten-year slide, and the slide has not found a floor.
The same erosion shows up beyond fund-level reporting. Distributions to LPs, which once ran close to a quarter of a fund’s value every year, have fallen to 16%, more than a one-third decline since 2022. At the company level, 857 active unicorns now carry a combined paper value above $4.3 trillion, more than triple the count from five years ago, while 40.6% of them haven’t raised a round in three years, meaning nobody outside the company has set a fresh price on them in that time. None of this is one bad quarter. It is a decade-long trend, and trends like this do not resolve themselves through patience.
The bad-bad news: the bad results will likely be even worse
A falling DPI on its own could be a bad year. The way to tell the difference is to look at what the other number is doing. If the decline were a temporary dip, you’d expect TVPI, the paper estimate of a fund’s total value including everything unrealized, to be correcting downward alongside it, GPs walking back optimistic marks as the cash failed to show up. That isn’t happening. TVPI has held in a healthy band, often above 1.5x, across the same decade that DPI fell apart underneath it.
That’s the part that turns a bad number into a structural one. Funds do have governance around marks, valuation policies, auditors, LPAC review, and none of it is fake. But none of it requires TVPI to reconcile with DPI on any particular timeline. A valuation policy can confirm a mark is reasonable without ever asking whether it should have converted to cash by now. No GP is obligated to write down a mark just because cash hasn’t arrived. No LP is positioned to independently verify the number or has a strong incentive to challenge it, since a markdown this quarter only makes their own reporting look worse. The two numbers are free to drift apart for as long as nobody with both the standing and the motive steps in to force them back together, and right now, the governance that exists doesn’t do that.
A structural gap behaves differently from a temporary one. It doesn’t sit still and it doesn’t average out. Every additional year a fund carries an unrealized mark without anyone testing it is another year of fees, opportunity cost, and quiet erosion stacked underneath an estimate that was never re-checked. The eventual payout, whenever the mark finally does meet cash, is smaller than it would have been had the correction come earlier. That is why this gets worse with time rather than better. There is no mechanism in the current architecture that pulls it back.
The cost of avoidance is quantifiable: a lot
You can watch the underlying mark get tested whenever a private company is finally forced to face a public buyer. Meesho, the Indian e-commerce platform, had been discussed for an IPO in the $7-8 billion range. It priced at roughly $5.6 billion. The gap wasn’t bad luck. Public-market analysts insisted on separating real operating profit from one-off accounting adjustments, a distinction the private mark had never been forced to make. The number moved the moment someone outside the company was finally allowed to check it. This isn’t a scandal. It’s the routine result of scrutiny arriving late.
The solution? DPI as a health check
None of this is unique to venture. Private equity carries the same exposure wherever a GP can mark an asset and also control the timeline for testing that mark, which is why continuation vehicles and similar structures draw the same scrutiny they do. A corporate innovation unit runs a milder version of the identical failure, an internal pilot that’s never been checked against a real kill criterion is an unrealized mark too, just without the paperwork. The fix for a venture model isn’t a better story about exits. It’s building the distribution mechanism into the thesis from day one, not as something to figure out once the asset matures, but as a structural feature decided at entry: a named buyer, a milestone-based path to cash, and a mark that’s never asked to stand unrealized for years because nothing ever required it to be re-tested.
There’s a deeper version of this for anyone who wants to take it further. DPI, TVPI, and the ten-year fund clock were built for one specific kind of venture, late-1990s software, where near-zero marginal cost and fast iteration made a long unrealized mark a reasonable bet. Apply that same apparatus to ventures with different underlying economics, and a widening TVPI/DPI gap isn’t the market behaving badly. It’s a measurement tool built for a different machine, mistakenly attached to this one.
That is what “PE-grade” should mean for a demand-first venture builder, a baked-in criterion, an integral part of the venture builder’s structure and operational thesis, where the distribution question was never deferred long enough for the gap to open in the first place.