As venture-backed companies stay private for longer, the gap between reported portfolio values and realized returns is becoming a defining test of fund manager credibility.
A startup valued at $2 billion is not necessarily a $2 billion business to a buyer. Likewise, a venture fund reporting a sharp rise in net asset value is not necessarily close to paying out meaningful profits.
That distinction sits at the heart of venture capital’s valuation and liquidity challenge. A funding round sets a headline price. It does not guarantee that shareholders can sell at that price, that the company can deliver the growth it implies, or that an exit will repay the original thesis.
It matters most to limited partners (LPs), whose capital can be locked up for a decade or more. General partners (GPs) may report impressive total-value multiples, but LPs need cash to meet obligations, rebalance portfolios and commit to the next fund. As Chronograph puts it, citing Howard Marks: “You can’t eat IRR.”
The British Business Bank’s UK Venture Capital Financial Returns 2025 examines this tension through fund-level data, while Carta’s research shows how hard it remains to turn portfolio valuations into cash. The question is no longer whether venture capital can spot high-growth companies. It is whether managers can show a credible path from thesis to enterprise value, from value to an executable exit, and from exit to cash in LPs’ hands.
The Valuation Gap: When the Last Round Becomes an Unreliable Benchmark
Venture valuations are forward-looking by nature. Early-stage companies often have short track records, negative cash flow and unproven unit economics, so prices reflect expectations about growth, margins and market position as much as current results.
A funding round offers an observable price, but it needs careful reading. The headline figure may rest on preferred shares with liquidation preferences and downside protections that common shareholders lack. Nor does a round establish what the whole company would fetch in a sale: an investor buying a minority stake with special rights may pay a high price, while a strategic buyer weighing full ownership must price in integration costs, execution risk and financing needs.
The gap widens when public comparables fall, interest rates rise or growth capital dries up. A company can keep carrying a valuation set in a more optimistic market even as its prospects deteriorate. The British Business Bank’s 2025 report notes that unrealized investments are valued using fair-value techniques whose results do not guarantee future proceeds, and shows how a high residual value can diverge from eventual realizations, particularly after down rounds.
This suggests a distinction between valuation persistence and economic resilience. A stable mark may reflect a defensible view of long-term prospects. It may equally mean that no new round has yet forced anyone to revisit the assumptions.
GPs must keep marks disciplined without letting temporary dislocation obscure real value creation. LPs must judge whether marks reflect evidence or optimism. A credible process tracks revenue growth, gross margins, retention, cash burn and comparable multiples, and accounts for dilution, liquidation preferences and the chance of later rounds at lower prices. The test is not whether a company has held its last-round valuation, but whether operating evidence and plausible exit scenarios still support it.
The Realization Bottleneck: Valuable Companies, Constrained Exits
Even a company that is performing well can be hard to turn into cash. IPOs and acquisitions depend on conditions no fund manager controls: public investors must back the growth story, and buyers must see enough value to justify the price. When the two sides disagree, deals stall. Founders and investors resist selling below the last round, while acquirers balk at paying for uncertain growth.
Companies therefore stay private longer, sustained by further rounds or the hope of better markets. That preserves upside, but it extends the period in which investors carry operating, dilution and market risk without receiving distributions.
The effect shows up in fund data. Carta’s Q1 2025 analysis found that only 37% of 2019-vintage funds and 30% of 2020-vintage funds had made any distribution to LPs by the end of that quarter. The figures come from Carta’s sample rather than the whole market, but they show how little cash may have returned even as funds mature.
This is why DPI (distributions to paid-in capital) has risen in importance. Unlike total value to paid-in capital (TVPI), which blends realized proceeds with the residual value of unrealized holdings, DPI counts only cash already returned. As Erez Shachar of Qumra Capital writes: “If ‘cash is king’ for businesses, ‘DPI is king’ for LPs.”
Consider two funds. One reports 2.5x TVPI but 0.2x DPI; the other reports 2.0x TVPI and 1.0x DPI. The first may ultimately deliver more, but far more of its value depends on events that have not happened yet. The London School of Economics Alternative Investments Conference makes the underlying point: DPI captures only the cash returned relative to capital contributed.
Time matters too. Even if a company eventually exits at the expected price, a delay of several years can sharply reduce annualized returns, because a GP must earn a higher multiple over a longer holding period to deliver the same internal rate of return (IRR). The test for managers is whether the additional value from holding exceeds the cost and risk of waiting.
How GPs Are Responding: Operational Discipline, Secondaries and Credible Exit Planning
Managers have several ways to narrow the gap between reported value and realized returns, though none removes the underlying risk.
Operational value creation. Rather than relying on valuation expansion, GPs can focus on durable revenue growth, capital efficiency and a credible route to profitability or sustainable financing. In capital-intensive fields such as artificial intelligence and biotechnology, that includes testing whether the capital needed to reach commercial maturity still fits the original thesis. GPs can also help with hiring, partnerships and preparation for a sale or listing, and can separate businesses worth backing with follow-on capital from those unlikely to repay it.
Deliberate exit planning. Instead of treating an IPO or acquisition as an eventual outcome, managers can assess likely buyers, multiples and diligence readiness well before a company matures. This does not mean forcing an exit into a poor market. It means setting explicit decision points: which milestones justify continued ownership, what price would make a sale attractive, and what evidence would undermine the case for holding.
Secondary transactions. These let existing shareholders sell stakes without a sale or listing of the company. Tender offers can give founders, employees and early investors liquidity, and structured secondaries can let a fund realize part of a position while keeping exposure to future growth. Carta reported that the value of venture-backed tender offers on its platform rose 68% year over year in Q2 2025, a sign of growing demand for alternative liquidity.
Secondaries are not a universal fix, however. Deals may close at a discount to the last round, and selling only the strongest assets can leave a fund with a weaker residual portfolio. Conflicts of interest can also arise when a new vehicle run by the same GP buys assets from an existing fund, so pricing, fees, governance and the split of future upside all warrant scrutiny.
Tighter reporting. GPs should separate realized from unrealized returns, explain significant valuation changes and disclose the assumptions behind exit scenarios. Independent valuation reviews and sensitivity analyses can help LPs judge whether marks remain defensible.
The most credible response combines operating support, realistic exit planning and transparent reporting. Financial engineering can create liquidity, but it cannot substitute for underlying business value.
The LP Perspective: Testing the Credibility of Reported Performance
LP diligence must go beyond headline IRR and TVPI, both of which are shaped by unrealized valuations, the timing of cash flows and assumptions about residual assets. A more rigorous review starts with the relationship between realized and unrealized performance. What share of reported gains has actually been distributed? How much remaining value rests on a handful of highly valued companies? How have earlier marks compared with later rounds, secondary sales or exits? Results should be examined by vintage, stage and sector, with gross multiples separated from net returns after fees and carried interest.
LPs should then test the exit assumptions behind each material holding:
- Operating evidence: Are revenue growth, margins, retention and cash needs tracking the investment case?
- Valuation sensitivity: What happens to fund value if the company exits at a meaningful discount to its latest round?
- Dilution and capital needs: How much follow-on capital is needed to protect the fund’s ownership?
- Exit feasibility: Who are the credible buyers, and what comparable deals support the expected price?
- Liquidity timing: How much of expected distributions depends on exits within two to three years, and what if they slip?
- Manager incentives: Does the GP have a disciplined approach to selling, holding or moving assets into a continuation vehicle?
Scenario analysis (a base case, a downside case and a delayed-exit case) is more revealing than a single forecast. Governance matters as much as analytics: investors should understand the valuation policy, the role of independent oversight, the handling of conflicts and, for any secondary sale or continuation vehicle, the price, alternatives considered, fees and carry, and the interests of both selling and rolling investors.
Finally, track record counts. Strong paper multiples that repeatedly fail to become distributions deserve a different reading from conservative marks followed by successful exits. The aim is not to demand premature sales or penalize managers for conditions beyond their control. It is to distinguish value that is temporarily hard to realize from value that may never be realized at the reported level.
The Real Test: From Paper Value to Cash
Venture capital finances uncertain businesses whose greatest value may emerge years after the first investment. Long holding periods and volatile exit markets are features of the asset class, not necessarily evidence of poor management. But accepting uncertainty does not mean accepting valuation without scrutiny.
A portfolio valuation is an estimate of economic value at one moment. It is not a promise of liquidity, a guaranteed price or proof of the projected return. The longer an investment stays unrealized, the more important it is to test the assumptions behind it.
Three questions should shape the next generation of performance reviews:
- How much of a fund’s reported value would survive an independent assessment of current performance and realistic exit prices?
- How much of that value can become distributable cash within a credible timeframe, without excessive dilution or giving up disproportionate upside?
- And when a GP chooses to hold rather than sell, what evidence shows the decision serves investors rather than protecting an attractive unrealized track record?
The answers will not remove venture capital’s uncertainty, but they will help separate managers who build lasting enterprise value from those whose performance depends on a more favorable future. In an asset class built on long-term potential, the ultimate measure of success is not the valuation a company achieves in its next round. It is the return investors keep after the risk, cost, dilution and time needed to realize that potential have all been counted.
