The old PE model is obsolete in software. With high revenue multiples (7-8x) and low leverage (30% debt), firms must genuinely grow the business to generate returns. About two-thirds of value now comes from selling a larger, more profitable company (terminal value), not from stripping cash flow.

The VC model thrives by creating liquidity events (M&A, IPO) for high-growth companies valued on forward revenue multiples, long before they can be assessed on free cash flow. This strategy is a rational bet on finding the next trillion-dollar winner, justifying the high failure rate of other portfolio companies.

TVPI is a paper mark, but DPI (Distributions to Paid-In Capital) is the tangible conversion of uncertainty into cash. It serves as a real, realized mark that validates a VC's process for navigating an uncertain hypothesis, resolving it, and returning capital to investors, proving their model works.

A common mistake in venture capital is investing too early based on founder pedigree or gut feel, which is akin to 'shooting in the dark'. A more disciplined private equity approach waits for companies to establish repeatable, business-driven key performance metrics before committing capital, reducing portfolio variance.

Established metrics for evaluating software (high gross margins, capital-light) are obsolete in the AI paradigm. Top AI companies often exhibit opposite traits, like low margins due to inference costs, signaling the "death of spreadsheet investing."

The burn multiple, a classic SaaS efficiency metric, is losing its reliability. Its underlying assumptions (stable margins, low churn, no CapEx) don't hold for today's fast-growing AI companies, which have variable token costs and massive capital expenditures, potentially hiding major business risks.

'Gifted TVPI' comes from consensus deals with pedigreed founders who easily raise follow-on capital. 'Earned TVPI' comes from non-consensus founders whose strong metrics eventually prove out the investment. A healthy early-stage portfolio requires a deliberate balance of both.

Venture capitalists don't value companies on current revenue. They assess the management team and market disruption potential, pricing the company today at what they believe it will be worth in 18-24 months. This creates a valuation disconnect with strategic acquirers.

Relying on the once-golden 'T2D3' growth metric for SaaS companies is now terrible advice for 2025. The market has shifted, and founders with these strong historical metrics are still struggling to get funded, indicating that even elite growth is no longer a guarantee of investment.