Despite the focus on markups and paper gains, top VCs believe the ultimate measure of a fund's success is returning cash to investors (DPI). This focus on liquidity is so critical that even a young fund should signal its commitment by distributing cash from early, minor exits.

Unlike many VCs who hold winners indefinitely, LeadEdge has a formal disposition committee that meets monthly. They constantly underwrite the forward IRR of each position and proactively sell, even in secondary markets, if a target return is met early.

A fund showing a 7x return on paper is already a massive success. The logical move is to sell positions and realize those gains for LPs. The tendency to "go for it" reveals a flawed incentive structure that prioritizes future potential over locking in exceptional returns.

First-time fund managers may feel pressure to sell shares in breakout companies early to prove they can return capital (DPI) to LPs. This is often a mistake driven by insecurity. While most LPs will praise the liquidity, the most sophisticated ones will recognize it as prematurely de-risking a massive winner.

GPs are holding assets longer not just due to market conditions, but out of fear for their own business. They believe extending the hold period will allow underlying business growth to eventually hit their crucial Multiple on Invested Capital (MOIC) targets, which is critical for successfully raising their next fund.

Private equity funds, driven by IRR targets and fund lifecycles, often pass up good exit opportunities in hopes of maximizing returns later. This can backfire if the market turns. A better strategy is to sell opportunistically into a rising market, even if it feels early, rather than risk missing the window.

The independent sponsor model allows for longer hold periods, focusing on maximizing a single asset's value. This avoids the fund-driven temptation to sell successful companies prematurely to show a high IRR to LPs for the next fundraising round, capturing more value in the later years of an investment.

In frothy markets with multi-billion dollar valuations, a key learned behavior from 2021 is for VCs to sell 10-20% of their stake during a large funding round. This provides early liquidity and distributions (DPI) to LPs, who are grateful for the cash back, and de-risks the fund's position.

Investors fixate on selecting the right companies, but the real money is made or lost in the decision of when to sell or hold a winning position. The timing of an exit can create a 100x difference in outcomes. Having a disciplined approach to portfolio management and liquidity is more critical to fund performance than the initial investment choice.