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.

The traditional venture model focused on buying and holding. In today's market, where companies stay private longer, a VC's fiduciary duty to LPs has evolved. It now includes proactively selling portions of high-valued private holdings in the secondary market to generate distributions (DPI), even if it creates friction with founders.

Venture capitalists have their own fundraising pressures and obligations to their LPs. Founders who understand that VCs need to generate returns to raise their next fund can build a more strategic and aligned relationship. This empathy helps in navigating milestone discussions and exit strategies, moving beyond a simple capital provider-recipient dynamic.

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.

Rather than making emotional decisions, top VCs now use a formulaic approach to secondaries (e.g., "sell 15% of a position to return 0.5x of the fund"). This codification makes the process transparent to both LPs, who want to see distributions, and founders, removing guesswork.

Young investors should prioritize achieving liquidity, even on smaller wins. These exits act as a 'report card' for Limited Partners, proving the VC can manage a full investment cycle. This track record of returning capital is a crucial career milestone that demonstrates fiduciary responsibility.

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.

LPs have a binary focus: cash-on-cash returns. As long as a VC fund is consistently distributing multiples back to them (high DPI), they are less likely to question the fund's strategy. This "what have you done for me lately" attitude is key to securing re-investment in future funds.

Private equity firms will sell a high-performing asset not just for a good return, but to generate DPI (Distributions to Paid-In Capital). This provides LPs with tangible cash returns, validates the firm's paper valuations ('marks'), and builds crucial momentum for raising their next fund.