Stalled to Sold: Unlocking Liquidity in Under-Performing VC Portfolios

At the peak of ZIRP (zero interest rate period) in 2021, starting a VC fund was very popular and it was relatively easy for ex-founders, consultants etc to branch out and raise a first fund. Four years later and the situation could not be more different. Venture capital is going through an existential crisis as limited partners (LPs) retreat from further investments due to the lack of liquidity over the past few years.

To understand what the issue is for VCs and their LPs, let’s look at a hypothetical fund we will call Arise Fund, a 2018 vintage which is fully deployed as of December 2024. In its last LP report, Arise reported a net IRR of 8.4%, TVPI of 1.36x and DPI of 0.03x.

Out of the US$100 million fund, Arise has 80 million investable which it has fully deployed into 40 startups. Average first cheque is 1 million with half of the fund reserved for follow on funding.

If you’re an LP in this fund, the optics don’t look good at all. The General Partners have taken $12million in fees over the past 6 years and have managed to generate cash returns of $3 million.  When a manager like Arise returns to market to raise a successor fund, LPs will naturally be hesitant to commit to re-investing considering the performance of current fund. Unfortunately, the situation with Arise is in line with the average US-based VC fund according to Carta’s 2024 Q4 VC report. It is not an isolated case of bad performance.

So, it’s not surprising to see that LPs are instead ditching emerging managers to invest in more established VCs. In 2024, just 10 VC firms accounted for nearly half of all fundraising activity in the US, according to a 2025 outlook by UK asset management firm VenCap which invests in blue chip VCs globally. The lack of exits and liquidity to LPs is having a material impact on VC funds. Pitchbook’s Q1 2025 venture monitor shows that in 2024, ~600 US-based VC firms received commitments of $78 billion. This is down from a high of 1,700 firms receiving commitments of about $190 billion in 2022.

Given the current abysmal state of exits and financial performance of VC across board, what could be done to salvage the situation and ensure the asset class does not end up not being a giant cash bonfire? To figure out what options the GPs have, let’s look under the hood. What does the portfolio look like?

Fund Portfolio Analysis – Typical Power Law Distribution

Arise has invested ~80 million of investable funds into 40 portfolio companies over the past six years. The performance and status of its portfolio companies is just what you would expect from the average participant in a high-risk, high-reward endeavour that VC is. As at the last portfolio report in December 2024:

VC Portfolio Performance Breakdown

• Nearly half of the portfolio has failed while there’s been just a small exit which resulted in the meagre $3 million return to LPs

• 22.5% of the portfolio is currently struggling, some of these may still return some capital but it is not likely they will be able to stay afloat without some drastic improvement. These portfolio companies have not been able to raise follow-on rounds are hanging on by the skin of their teeth.

• Another 18% of the portfolio are trudging along just okay

• A combined 19% of the portfolio are doing okay to great and have been able to raise Series A and B rounds at some markup to their initial investment by Arise Fund. These two groups are responsible for the paper gains (TVPI) of the fund to date.

It’s the classic power law distribution, many have failed BUT there’s no assurance there will be a winner. Most venture capital funds aim to achieve a net return of 3.0x to investors over the life of their funds, typically 10 years. The accepted wisdom is that a very small fraction of portfolio companies, the outliers will be responsible for the entire results of the fund. For example, for a fund that invests an average of $2 million in each startup, a successful power law strategy is exiting just 1 of 40 companies at a 200x return. If this happens, it doesn’t matter what the situation is with the rest of the portfolio, the fund ends up being successful. The trouble is that achieving these power law outcomes are exceedingly rare, leading to the median VC fund not even returning 1.0x.

“Over 50% of funds raised between 2000 and 2014 had not returned 1x capital after 10 years” - David Clark, Vencap International CIO on 20VC with Harry Stebbings

Why is VC Performance so Poor Across Board?

One word – exits! Or rather lack of it.

VC Liquidity from 2014 to 2024

Net VC cash flow (funds returned to LPs minus funds raised from LPs) was positive between 2014 up till 2017 and has been negative since then except for 2020 when it was positive. This means LPs are cumulatively very deep in the red in the past five years.

One of the biggest challenges with running a venture fund is that the feedback loops are notoriously long. It takes 10 – 15 years to know if an investment decision is the right call, leading to outsized fund returns or the wrong one, leading to failure. Also, investing at the intersection of innovative technology and finance means VCs are susceptible to wild swings in both fields.

VCs today are dealing with the effect of steadily rising valuations in the decade from 2013, fuelled by low interest rates and intense competition between VCs. This reached a peak in 2021. Comparing Pitchbook-NVCA data over the period, median US seed pre money valuation increased 3x from $4 million in 2013 to about $12 million in 2023, while the median early-stage valuation (Series A + B) climbed 1.7x from about $22.9 million to $39.6 million over the same period.

VC Exit Activity

Though exit activity in 2024 reflected a modest increase from 2023, the 1,260 deals announced were just over 60% of the 2021 figure. Exit volumes of $158 billion was less than 20% of the 2021 high.

Currently, a cycle of doom seems to be in effect: startups cannot exit because of inflated valuations and macro‑economic uncertainty; the lack of exits hampers VCs’ ability to raise new funds, which leaves more startups under‑funded and prone to failure, further hurting VC performance and depressing exits even more.

What Can the Venture Capital Firms Do to Drive Exits?

VC View on Exits: Must Be Nurtured

Considering majority of acquisitions happen at early stages pre-Series B, it is not practical for startups to have in-house expertise such as an experienced CFO or investment banker to lead exit preparation.

VCs on the other hand have historically focused on the early part of the investing equation, picking “great companies” and then letting them be. This is starting to change as many VCs now realise that VCs are doomed without an industry-wide focus on exits and delivering liquidity to LPs. The problem is that apart from multi‑billion‑dollar giants such as a16z, Benchmark, Sequoia, Atomico and the likes, most VCs lack the in‑house resources to help portfolio companies prepare for and execute meaningful exits.

“In the last few months getting to an exit has been as hard as trying to raise funds.” – UK-based Corporate Venture Capital Investor.

Supporting portfolio companies is challenging because each startup’s circumstances differ and therefore require different interventions. The framework below simplifies the task by treating all companies as being at the same point, just before Series A, and by grouping them into two categories: “high‑fliers” and “strugglers”. In practice, a fund will hold startups at several stages.

23mile VC Portfolio Exit Framework

How would Arise Fund apply this framework to its portfolio? A structured approach would be

1.    Triage: classify the 24 surviving companies as either high-performers or strugglers. Another way to do this apart from the metrics approach in the framework is to classify by a) able to raise next round easily OR is cash flow positive b) all others

2.    Identify priorities: the needs of each group are vastly different. The top group needs a methodical, medium to long term M&A readiness approach. This ensures they are always well placed to achieve a great exit while they continue to scale the business. The “struggling” group needs more urgent attention – they need to stay alive and possibly sell for some sort of return.

3.    Allocate resources: should Arise buy or build the capabilities required to support exit needs of the portfolio? With a US$100 million fund, building a full M&A / corporate finance desk in-house is uneconomic, so Arise would most likely need to work with an external partner.

4.    Create and execute tailored action plans: High-flyers need to run a dual-track timetable. Keeping growth financing open while preparing for strategic sale. This plan requires targeted relationship building with corporate development teams, bankers and private equity funds. Strugglers need a decisive path: bridge financing, extensive cost cuts and/or bridge-to-fix and / or expedited sale.

5.    Quarterly review: the least disruptive approach is to integrate exit readiness KPIs into existing investor updates – at least for the top category. The strugglers may need a weekly / monthly update depending on how critical their runway situation is.

Unlocking Value from Struggling Portfolio Companies

VCs spend 80% of their time on “the losers". They should spend much more time on handful of winners instead. - Peter Thiel

Venture capital is and always will be about finding big wins. In a fund like Arise, seeking to improve its metrics in tail end of fund life, this will still be the case. As such, it will prioritise efforts on the handful of startups with potential to 10x or 100x their original investment. Let’s say they’ve identified four companies with this potential. What about the millions of dollars trapped in the other twenty? Write them off and leave them to die?

This is where 23mile steps in. We partner with VC funds to help portfolio companies transit from VC hyper-growth to profitability. This ensures good companies that are no longer “venture scale” stay alive and return some capital to investors. Our edge? A unique combination of fresh capital, restructuring support and medium-term exit support.

Get in touch to claim a free portfolio review.