Fund Economics Deep Dive
DPI, TVPI, IRR, waterfalls, and what LPs actually care about
The Key Metrics
TVPI (Total Value to Paid-In): Total fund value divided by total capital called. A TVPI of 2.5x means for every $1 the LP contributed, the fund is worth $2.50 (including unrealized gains). DPI (Distributions to Paid-In): Actual cash returned to LPs divided by capital called. DPI is the 'show me the money' metric — it only counts real distributions. IRR (Internal Rate of Return): The annualized return accounting for the timing of cash flows. A 3x return in 5 years is ~25% IRR; a 3x in 10 years is ~12% IRR.
Distribution Waterfalls
A distribution waterfall defines the order in which fund proceeds are distributed. The most common structure: (1) Return of Capital — LPs get their invested capital back first. (2) Preferred Return (Hurdle Rate) — LPs receive a preferred return (typically 8% annually) before carry kicks in. (3) GP Catch-Up — The GP receives distributions until they've received their carry percentage of total profits. (4) Carried Interest Split — Remaining profits are split 80/20 between LPs and GPs.
Clawback Provisions
A clawback clause requires GPs to return carry they've already received if later fund performance drops below the required return threshold. Example: Early exits generate profits and the GP takes carry, but subsequent investments lose money. At fund wind-down, the GP may owe money back to LPs. This is why many GPs escrow a portion of carry and why fund-level accounting matters more than deal-level accounting.
What Makes a Top-Quartile Fund
Top-quartile VC funds historically return 3x+ net to LPs. This requires not just picking winners but also disciplined portfolio construction, effective follow-on strategy, and patient capital management. The gap between top-quartile and median funds is enormous — median VC funds barely return 1x capital. The best GPs combine investment skill with operational excellence in fund management.
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