Venture Capital Economics

Investors use TVPI to analyze the return on their investment in a venture fund.

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- Startup investors use TVPI—”total value to paid-in” capital—to gauge fund performance.
- A TVPI over 1.00x means an investment grew in value. Anything below 1.00 means the investment shrunk in value.
- TVPI is simpler than other performance metrics but ignores the time value of money.

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Venture capitalists use different metrics to calculate financial performance. Two common measures of a fund’s success are IRR (internal rate of return) and TVPI (total value to paid-in capital). In this article, we’ll break down TVPI, explain why investors use it, and address its limitations.

TVPI means “total value to paid-in” capital.

It’s a simple formula that attempts to calculate the total value—both realized profits and unrealized future profits—that a fund has produced for investors relative to the amount of money contributed.

TVPI attempts to answer for the investor: "Based on the fund's current value, how much profit have I made relative to my initial investment?"

Since an investor (also known as a limited partner or "LP") of a venture fund can’t just cash out whenever they choose, there’s some element of future perceived value baked into TVPI until the fund is fully realized. Once the fund is fully realized, investors switch to using DPI, which we’ll cover later in this article.

The formula to calculate TVPI is:

TVPI = Total Value / Paid-In Capital

Anything above 1.00x means an investment grew in value. Anything below 1.00 means the investment shrunk in value. The higher the TVPI, the better for investors.

Say you want to assess the performance of two funds on AngelList. Fund A reports a TVPI of **1.25x**. Fund B reports a TVPI of **0.75x**.

Fund A grew in value: For every dollar LPs invested, based on current investment values they’re projected to get $1.25 in value (in the form of future realized distributions).

On the other hand, Fund B has lost value based on the current value of its investments. For every dollar LPs invested, they’re only projected to get $.75 in value—a 25% loss.

Now, let’s break the equation down further.

Total value—the numerator—is composed of two parts: **cumulative distributions** and **residual value**. These reflect the fund’s realized returns (money in an LP’s pocket today) and unrealized returns (potential returns down the road):

**Cumulative distributions**are the total distributions paid out by the fund to the LPs, once you subtract out fees and expenses. These are the*realized*returns for LPs in the fund.**Residual value**is the estimated value of the investments remaining in the fund. This is commonly referred to as NAV (net asset value). It’s an estimate of investors’*unrealized*returns, and it's typically calculated by the fund manager (also known as a general partner or “GP”).

Paid-in capital—the denominator—is the total amount that has been contributed to the fund at that moment in time.

Paid-in capital may not be the same as an LP's committed capital. An LP commits through a subscription agreement to contribute a given amount to the fund. The GP typically calls that committed capital throughout the fund's investment period, requiring LPs to make capital contributions. So, an LP's paid-in capital typically increases during the fund's investment period as the LP contributes its committed capital.

Let’s look at an example TVPI calculation at two different points in a fund’s lifecycle.

At the three-year mark:

- LPs have contributed a total of $5M into the fund,
- The fund has distributed $250k back to LPs, and,
- The GP estimates a residual value, or NAV (net asset value), of $4.5M.

First, add the residual value ($4.5M) and distributions ($250k) to get a total value of $4.75M. Next, divide that number by total paid-in capital ($5M) to get a TVPI of .95x.

*TVPI at Year 3:*

*TVPI = Total Value / Paid-In Capital*

*0.95 = $4.75M / $5M*

This number is reported as “0.95x” because it’s a multiple of capital invested in the fund. So far, based on the current value of assets, LPs have lost 5% of their investment.

A few years later, the fund produces more returns and increases its projected value after some of its portfolio companies perform well.

At the six-year mark:

- LPs have contributed (paid in) $7.5M to the fund,
- The fund has distributed $3M back to LPs, and,
- The fund’s estimated residual value, or NAV, is now $9M.

First, add residual value ($9M) and distributions ($3M) to get a total value of $12M. Then, divide that number by total paid-in capital ($7.5M) to get a TVPI of 1.6x.

*TVPI at Year 6:*

*TVPI = Total Value / Paid-In Capital*

*1.6 = $12M / $7.5M*

The fund is now showing a positive return. For every $1 an LP invested, they are seeing $0.60 in added value.

The trajectory for TVPI in the examples above is typical for many funds and is often referred to as the “J-curve”. Often, TVPI dips below 1.00x in the fund’s first few years and then climbs. For funds that produce positive returns, the rate of increase typically levels off in the last few years of the fund’s lifecycle.

In its first few years, a fund incurs expenses prior to realizing any gains in it’s portfolio—generating a TVPI below 1.0x.

After a few years, a successful fund begins to make distributions while residual value increases, pushing TVPI above 1.0x. TVPI typically levels off following liquidation events from a Fund’s top-performing portfolio companies (such as an acquisition or IPO).

An underperforming fund, on the other hand, may never see its TVPI reach 1.00x.

Let’s look at the pros and cons of TVPI as a performance metric.

Pros:

**A straightforward and easy-to-calculate measure.**Unlike IRR (internal rate of return), TVPI is easy to compute.**More difficult to manipulate.**Its straightforward nature makes TVPI more difficult for the fund manager to manipulate (a common criticism of IRR).

Cons:

**Does not account for the time-value of money.**A TVPI of 2.00x at the 5-year mark and 10-year mark of a venture fund carry very different implications for investors due to the time value of money. The first means an investor doubled their money within 5 years while the second means they doubled it within 10 years. When comparing TVPI, it’s crucial to keep the timeframe it’s being reported on in mind.**It is often driven by unrealized gains.**The residual value portion of TVPI is a fair value estimate that may significantly differ from the value realized when the investments are liquidated and distributed to investors. The higher the residual value component of total value, the more the TVPI is subject to change.

When using TVPI to gauge a fund’s performance, ask yourself:

- At what point in the fund’s lifecycle am I measuring TVPI?
- How much of the total value is composed of distributions and how much is residual value?
- Do I trust the fund’s valuation methodology being used to determine the residual value?
- How does this TVPI compare to other investments over a similar timeframe?

It’s important to keep the age of the fund in mind when comparing TVPIs. When determining whether a certain TVPI is “good” or not, we want to make sure we’re comparing apples-to-apples—i.e., comparing funds of similar vintage years.

According to data from Cambridge Associates, as of June 30, 2020, the median TVPI for a US venture capital fund that started in 1995 was 2.68x, while those that started in 2018 had a median TVPI of 1.01x.

However, the data is far from uniform. For instance, Cambridge data shows that for funds with a vintage year of 1999, the median TVPI was 0.81x.

In other words, the answer to whether a certain TVPI is good or not is complicated. It really depends on how other funds of a similar vintage year performed, and may be influenced by the market environments.

Two other metrics may come up when discussing TVPI: DPI (distributions to paid-in capital) and RVPI (residual value to paid-in capital). TVPI is actually the sum of these two numbers—accounting for both realized returns (distributions) and unrealized returns (residual value).

*TVPI = (Cumulative Distributions + Residual Value) / Paid-In Capital*

*TVPI = (Cumulative Distributions / Paid-In Capital) + (Residual Value / Paid-In Capital)*

*TVPI = DPI + RVPI*

As the fund progresses through its lifecycle, the balance between the DPI and RVPI will shift. At the end of a fund’s lifecycle, only DPI remains since there is no residual value remaining for investors. A DPI above 1.00x means a fund generated positive returns.

Another term commonly associated with TVPI is MOIC (multiple on invested capital).

MOIC attempts to answer for the whole fund what TVPI answers for the individual investor: How much value did the fund gain?

The formula to calculate MOIC is:

MOIC = (Distributions to the Fund + Investment Book Value) / Invested Capital

What’s important to note here is that the numerator—distributions to the fund and investment book value—are all calculated before fees, expenses, and carried interest. The denominator, invested capital, is the amount the fund invests in its portfolio.

There is no perfect way to measure venture capital fund performance. For example, in our research we found that funds that deploy capital early in the lifecycle tend to have higher TVPIs and lower IRRs than those that spread it out more over time. This creates ambiguity for investors.

So how do we benchmark the performance of our venture capital investments?

We developed a calculator to make it easier for investors to assess fund performance. Drawing on our internal database plus external sources, our calculator offers an apples-to-apples way of comparing venture funds across vintage years. Just input a fund’s TVPI and IRR to see how it stacks up against peers.

Read more about our performance calculator or try it for yourself.

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