DISCLAIMER: Things I am not: an accountant, a lawyer, a fiduciary to any reader, or a registered advisor. I’m just a guy writing a newsletter so none of this constitutes any tax, accounting, legal, life, or investment advice.

Following up from last week

Following up on last week’s coverage of companies moving their domicile, TripAdvisor’s move to Nevada was approved on Tuesday afternoon, though it still will face lawsuits in Delaware with a monetary remedy as a possibility.

It was also brought to my attention that I should’ve talked more about the concept of case law. In Delaware there are hundreds of years of business disputes and tens of thousands of rulings. This sets precedent which informs judges as they adjudicate cases. Definitely an important component to why companies should stick around in Delaware…though as. we know precedent can always be broken…but I won’t even begin to discuss starre decisis.

It’s the market, not the players.

Last week I wrote about corporate domiciles and this week I’m writing about something very different — the emerging manager market. Specifically the component of GPs advertising to LPs on Twitter/X, and how the numbers are usually meaningless. My goal is to inform new LPs because I’ve found many jump in without understanding the asset class.

This issue is less fleshed out than last week, I lost a bit of my solid thinking so I apologize for the disjointed nature — I’ve tried to use more headlines though to make it easier and I think I got the information necessary in. If you have any questions feel free to reply to this and I’ll do my best to answer.

Now on to this week!

We’ll call this rotating column Numbers where we talk about statistics, performance, or in this case, the lack of meaningful numbers in spite of appearances.

Numbers
VC Algebra

It’s well known that X/Twitter and other platforms favor numbers and people respond to numbers. It’s why presentation coaches, advisors, and others always tell people to use numbers whenever possible to illustrate a point.

But while that may be true to represent traction as a founder, there is generally only one number that matters in VC and thats DPI. DPI is the ratio of Distributed dollars to Paid In dollars— meaning the amount of money investors invested — and what they got back. That accounts for all fees on the fund side. There is likely an argument that an after taxes calculation of DPI matters, however the counter argument is decently strong as well because of QSBS - but that’s for another issue.

Generally fund LPs underwrite investments DPI of 3 or greater. That means you get $3 million for every $1 million invested. However that does not mean that the VC successfully got a 3x on their investments, it actually means they got closer to a 4x because (and this is very simplified) there is generally 2% x 10 years of management fees (assuming a seed/Series A fund) and 20% carry. So only 80% of the dollars are invested (management fee cut) and 20% of the gains are taken off the top as carry. To simplify things we’ll call it 36% of fees — though realistically it can be more or less depending on timing and other factors. This doesn’t matter as much but is an interesting point so I figured to mention it — I’ll definitely write a future issue on fees.