Venture’s asset growth has become an albatross around its neck

The venture industry grew rapidly over the past decade because it outperformed other asset classes. That size is now a liability, raising the bar for returns at a time when exits are hard to find.

Cash distributions—the money flowing back to LPs—continue to decline as a share of assets, sinking to the lowest level since the global financial crisis. Distributions amounted to 5.1% of the net asset value overseen by US VC firms last year, down from over 30% in 2021, according to the latest PitchBook-NVCA Venture Monitor.

The combination of large portfolios and low exits suggests that a massive turnaround in tech IPOs is needed to return VC to the performance that underpins its reputation. Over the last decade, the rate of distributions-to-NAV at US VC firms averaged 17.1%.

The IPO market has yet to open broadly. And the smattering of recent unicorn IPOs—like Astera Labs and Reddit—simply don’t move the needle for an industry that now requires a high volume of large offerings to generate meaningful returns. US VC firms managed nearly $1.2 trillion at the end of 2023, according to the report.

While major stock markets have notched new records, that performance has been driven by a handful of names at the center of the AI mania. Revenue multiples for newly public VC-backed companies remain near decade lows.

“Many LPs have been focusing on DPI because prior cash distributions are a concrete measurement of returns for investors, rather than future cash flow projections like IRRs that could vary in practice,” PitchBook lead analyst Kyle Stanford wrote in the report. DPI is the ratio of distributions to the amount paid into a private fund.

LPs’ bias for backing VC firms with a track record of cash returns has harmed emerging managers while benefiting the best-known firms. Established managers captured 77% of LP capital in the first half of 2024. This month, biotech investor Flagship Pioneering closed $3.6 billion for a new set of funds, and Index Ventures raised $2.3 billion to finance an AI-heavy investment strategy.

The median fund from the 2019-2022 vintage years has no cash returns to show for its efforts, the report noted.

The Federal Reserve’s decision to push out expected rate cuts has dampened hopes of a near-term rebound for tech multiples and IPOs. In the meantime, LPs will only grow more reticent to renew commitments to VC, given the mountain of capital currently trapped inside investor portfolios.