Brian Nichols is the co-founder of Angel Squad, a community where you’ll learn how to angel invest and get a chance to invest as little as $1k into Hustle Fund's top performing early-stage startups.

Every fund manager talks about their TVPI like it means something. "We're at 3x TVPI on our Fund I." "Our portfolio is tracking at 4.2x TVPI." It sounds impressive. But here's what nobody tells you: TVPI is mostly fiction.

TVPI stands for "Total Value to Paid In." It's a measure of how much your fund is worth on paper compared to how much money you put in. If you invested $10 million and your portfolio is now valued at $30 million based on the latest rounds your companies raised, you have a 3x TVPI. Sounds great, right?

The problem is those valuations are make-believe until someone actually writes a check. Your company raised at $50 million? Cool. That doesn't mean it's worth $50 million. It means one investor was willing to pay a price that implies a $50 million valuation. But can you sell your shares at that price? 

Why TVPI Exists

Fund managers need to report something to their LPs while they're waiting for exits. Venture funds take 10 years to fully mature. Companies take years to exit. LPs want to know if their investment is working before a decade goes by. So we invented TVPI.

The idea is that if your portfolio companies are raising at higher valuations over time, that's a signal your investments are working. And to be fair, that is a signal. A company going from a $5 million seed valuation to a $30 million Series A is probably doing something right.

But TVPI treats all valuations as equally real. The $30 million Series A valuation gets counted the same as a $1 billion Series D valuation, even though the Series D valuation is way less likely to hold up in an exit. Late-stage valuations are often inflated by investors throwing money at companies to maintain ownership stakes, not because those valuations reflect what someone would actually pay to buy the whole company.

The Metrics That Actually Matter

If TVPI is mostly noise, what should you care about? Two things: DPI and actual exits.

DPI stands for "Distributions to Paid In." This is real money returned to LPs divided by the money they invested. If you invested $10 million and have distributed $20 million back to LPs from exits, your DPI is 2x. This is real. This is money in the bank.

The problem with DPI is it takes forever to accumulate. Most early-stage funds won't have meaningful DPI for five to seven years. By that point, the fund manager is probably raising their third or fourth fund. So LPs use TVPI as a leading indicator while they wait for DPI.

The other thing that matters is actual exits, not markups. If three of your 30 portfolio companies have exited and returned capital, that tells you something real about your ability to pick winners. If zero have exited but all 30 have raised follow-on rounds at higher valuations, that's less meaningful.

What LPs Actually Think About TVPI

Sophisticated LPs know TVPI is a rough proxy at best. They look at it, but they discount it heavily. They care more about the story behind the TVPI. Are your companies growing revenue? Adding customers? Building real businesses?

LPs also compare your markups to what they're seeing from other fund managers. If you're marking your portfolio up 50% every year while everyone else is being conservative, they notice. If your TVPI is suspiciously high given your fund's age and stage focus, they ask questions.

The best LPs dig into the underlying companies. They want to know which investments are driving the TVPI. If it's all from one company that raised a huge round, that's risky. If it's spread across multiple companies showing consistent progress, that's better.

But here's the thing: no LP is making investment decisions based solely on TVPI. They're looking at your track record, your deal flow, your ability to support founders, your network. TVPI is one data point among many.

The Fund II Problem

TVPI becomes crucial when you're raising your second fund. Most fund managers start raising Fund II about three to four years after closing Fund I. At that point, you probably don't have any exits yet. Your companies are still building. So what do you show prospective LPs to prove your fund is working?

TVPI. It's literally all you have. If your Fund I is at 2x TVPI after three years, that suggests you're picking decent companies. If you're at 1.2x, that's concerning. If you're at 0.8x because your portfolio got hit with down rounds, you're probably not raising a Fund II.

This creates perverse incentives. Fund managers raising Fund II are heavily motivated to pump up their TVPI. They push companies to raise. They mark up aggressively. They highlight their winners and bury their losers in the portfolio reporting.

The market conditions matter a lot here. If you're trying to raise Fund II during a boom when everyone's companies are raising at inflated valuations, your TVPI looks great. If you're trying to raise during a downturn when companies are struggling to raise or taking down rounds, your TVPI tanks. Neither scenario necessarily reflects your actual skill as an investor.

TVPI in Different Market Environments

Right now (and I'm writing this in a tougher fundraising market), TVPI is causing problems for a lot of fund managers. Companies that raised at high valuations in 2021 can't raise again without taking down rounds. This craters the TVPI for funds that invested in those companies.

Meanwhile, the fund managers who invested in boring, capital-efficient businesses are doing fine. Their companies are growing slowly but consistently, raising flat or slight-up rounds, and their TVPI is stable or improving. But for years, those fund managers looked worse on paper than the ones investing in high-flying companies.

TVPI is extremely sensitive to market cycles. A fund can go from looking like a 4x to looking like a 2x in a single year if the market turns and companies take down rounds. This doesn't necessarily mean the fund manager made bad decisions. It means the market changed and paper valuations adjusted.

This is why smart LPs look at vintage year and compare funds to their peer group. A 2x TVPI for a 2020 vintage fund might be great. A 2x TVPI for a 2017 vintage fund might be concerning.

What Founders Should Know

If you're raising from VCs, understand that your valuation affects their TVPI, and their TVPI affects their ability to raise their next fund. This creates interesting dynamics.

Some investors will push you to raise at the highest possible valuation because it makes their portfolio look better, even if it's not in your best interest. Other investors will push you to raise conservatively to set yourself up for success, even if it means their TVPI takes a hit.

The best investors care more about your long-term success than their short-term TVPI. But not all investors are the best investors. Some are optimizing for their Fund II raise, not your company's trajectory.

You'll also hear investors talk about their fund performance when they're pitching you. If they only mention TVPI and not DPI or actual exits, that's a yellow flag. It means they haven't returned money yet and they're leaning on paper gains to tell their story.

The Alternative Metrics

Some fund managers are trying to move away from TVPI as the primary metric. They report revenue multiples on their portfolio. They report growth rates. They report customer metrics. Anything to give LPs a better sense of whether the companies are actually building value beyond just raising money.

This is good, but it's hard. Every company is different. Aggregating across a portfolio is messy. And ultimately, LPs want to see returns. All the growth metrics in the world don't matter if the fund doesn't eventually return capital.

The other approach is being really conservative with markups. Some fund managers only mark up their investments when there's a clear secondary transaction at a higher price, not just because a new investor came in at a higher valuation in a new round. This makes their TVPI look worse in the short term but more credible in the long term.

What Actually Predicts Success

Here's what's interesting: early TVPI doesn't actually correlate that well with final fund performance. Funds that look great at year three sometimes disappoint by year ten. Funds that look mediocre early on sometimes end up being top performers because they had one or two huge winners that took longer to mature.

The best predictor of fund success is probably the fund manager's ability to pick founders who will build real, durable businesses. But that's hard to measure until those businesses actually exit. So we're stuck with TVPI as a flawed proxy while we wait.

Getting Real About Returns

The venture industry needs to be more honest about what TVPI represents. It's not fake, but it's not real either. It's somewhere in between. It's a guess about what your portfolio might be worth based on what other investors are currently willing to pay for small stakes in your companies.

When fund managers report TVPI to LPs, they should also report the assumptions behind it. How conservative are the markups? How much of the TVPI is driven by one company versus spread across the portfolio? What percentage of the portfolio has actually had third-party validation of their valuation in the last year?

LPs should push for this transparency. And fund managers should offer it proactively rather than waiting to be asked. The ones who do this build more trust with their LPs and have an easier time raising their next fund.

The Bottom Line

TVPI is useful as a rough signal about whether a fund is trending in the right direction. But it's not a real measure of success. The only real measure is DPI and whether you actually returned capital to your investors.

If you're a fund manager, report your TVPI honestly but don't over-optimize for it. Focus on picking good companies and supporting them well. The returns will come if you do that right. If you're an LP evaluating funds, look at TVPI but discount it heavily, especially in weird market environments.

And if you're a founder trying to understand how venture capital works and what investors actually care about, realize that a lot of what drives investor behavior is about their own fundraising cycles and reporting metrics, not just about building great companies. The best investors align their incentives with yours, but not everyone is playing that game. 

For founders looking to connect with investors who prioritize long-term success over short-term metrics, Angel Squad brings together a community of operators and VCs focused on building real, sustainable businesses rather than chasing vanity numbers.