Is Larry Cheng The Only VC in on GameStop

Theory: I’d guess that most active partners at PE/VC firms have a career DPI <1.0 which means they technically haven’t made money for LPs (yet).

DPI (distributions to paid in capital) is cash returned to LPs / cash called from LPs. It’s the realized return metric. If your DPI is 1.0, it means you’ve returned the same amount of capital to LPs as you’ve called from them.

The reason it’s hard to have a DPI >1.0 is that as a new partner, there’s a many year (5-7+ years?) head start on deploying capital before returning capital.

Here’s example math:

Let’s say x = your average check size.

Let’s say you do 2 deals per year. So 2x is the normal activity per year in capital deployment.

Let’s say it’s 5 years before your first exit. So, you’ve deployed 10x capital over those 5 years.

And let’s say the first return is a 3x gross return (so net it’s ~2.3x which is what would get distributed to LPs – this nets out carry and fees).

After 10 years of being an investor, let’s say you’ve deployed 20x capital. And during those 10 years, in terms of returns, you’ve had a two 2x, two 3x, and one 5x return which would be very solid performance. That’s 15x in gross returns which is probably around ~11x net returns to LPs.

So over 10 years, you’ve returned 11x in capital to LPs while calling 20x from LPs – your personal career DPI would be ~.55x. You haven’t made money for LPs yet because you’re not >1.0x.

What makes this even more challenging is the pacing of an investor usually grows over time. So, it’s not 2x ever year. It’s common to make more investments per year or make larger investments with more experience which increases the pace of capital called while you’re waiting for capital to return.

What you learn from watching the math on career DPI is you need outsized outcomes to jump into positive territory.

The reason funds can get into positive DPI is because the denominator (capital called) slows down and then eventually stops after the investment period giving the numerator (capital returned) time to catch-up.

That’s not what happens with careers until you get into retirement. Therefore, you can have partners at PE/VC firms who are 10 or even 15+ years into leading investments who haven’t actually made money on a realized cumulative basis for LPs who have been with them the entire time.

To be fair, all of this excludes the value of unrealized holdings which can be significant but can also be chronically overestimated in our business. As one endowment LP said to me, “You can’t fund scholarships with unrealized returns.”

Understanding the math on DPI helps one to appreciate the power law dynamics not just in funds but in a career to drive not just impactful returns for LPs, but simply to drive positive returns on a realized basis for LPs during one’s career.