Stalled to Sold: Unlocking Liquidity in Under-Performing VC Portfolios
Venture capital is facing an existential crisis. Trillions of dollars are stuck in portfolio companies which are not able to exit many years after raising initial funds. VCs are therefore unable to recycle capital back to LPs, impacting ability to raise new funds. We explore how VCs can unlock liquidity across their portfolio. From the high fliers and the struggling companies
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.
Announcing 23mile Capital – Restructuring Support and Capital for Venture-Backed Startups
Venture-backed startups and their investors are facing significant challenges in the past three years that call into question the entire future of the asset class.
23mile is a turnaround fund for venture backed startups who need capital and support to transit from hypergrowth to profitability.
The venture landscape is shifting and we’re here to help investors and founders with the transition
Is venture capital as we know it dying?
Venture-backed startups and their investors are facing significant challenges in the past three years that call into question the entire future of the asset class:
Graduation from Seed to Series A at an all-time low: according to research by Carta, only 24.6% of US startups that raised a Seed round in Q4 2021 have raised Series A, 3 years later. This is down from an average of 46% for those that raised in 2017.
Startup closures at all-time high: the number of startup shutdowns on Carta hit a new high in Q1 2024, with 254 company closures—a 58% increase compared to 2023.
Unicorns are stuck in “no-man’s land”: as of December 2024, there are over 1,200 unicorns globally. 61% of the US-based unicorns have not raised another round since 2021.
The situation is not any better with the VCs.
Venture capital lags the S&P 500: since 2021, the US stock market benchmark has returned 28% returns year on year. VC? -25% according to Hamilton Lane’s private markets report.
Distributions back to LPs are also at an all-time low: according to Carta’s “VC Fund Performance 2024”, funds from the 2017 vintage, just 14.3% of funds have a DPI greater than 1x. Similarly, a report by Redpoint Ventures show that only 20% of Funds from the 2020 vintage have made any distributions after 4 years. At the same time after closing, the 2017 vintage had almost double, 37% with distributions greater than zero.
IPO market “shut”: there were 17 tech IPOs in 2022, 2023 and 2024. In 2021 alone, there were 126! Before the Covid-driven boom, there were an average of 35 tech IPOs per year between 2016 and 2019.
What are the Causes of the Founder and Investor Downturn?
Why are so many startups shutting down?
Why can’t large, scaled startups successfully IPO?
Why are investor returns so consistently disappointing?
All massive market shifts happen for a confluence of factors and this is no difference. The biggest factor creating existential threats to venture landscape is rising rates. In the past two years, the fed rates have risen to almost 5%, a 17-year high.
There is reduced LP interest in investing with GPs when risk free rates are decently high. HNIs and institutions would rather place funds in secure bills or public markets than illiquid VC funds. Especially when these VCs don’t have performance that matches the risk profile.
The high-risk, high-reward power law approach to venture investing works when it works. But the lower capital availability, following a period of exuberance is having a marked impact on VC-backed startups across funding stages.
Early-stage startups that have raised seed to series A funding to purse venture scale growth are facing challenges as the requirements to raise further rounds has changed dramatically. Compounding matters is ongoing disruption from generative AI adoption.
At the later stage, startups that raised millions of dollars in funding are stuck in zombie land as they don’t have the metrics to either IPO or be acquired. In many cases, funding terms such as liquidity preferences mean founders and early investors will receive nothing in the event of an exit at prevailing market terms.
What’s come Next for Venture Capital?
“Insanity is doing the same thing over and over again and expecting different results” – Albert Einstein
For an industry associated with innovation, it’s ironic that many VCs are so resistant to change. But change the industry must if it wants to remain relevant. What would need to be true for founders, investors, LPs and other stakeholders to be genuinely happy with the state of venture capital? One thing: exits! Exits mean:
Wealth creation for founders and early investors. These funds become available to be invested as angel investments creating new startups.
Returns to VCs and LPs. Healthier DPI means LPs have the incentives and ability to invest in existing and emerging fund managers.
Society wins from more jobs and reduced inequality.
For venture capital to remain relevant to innovative founders, the industry needs to return to its roots. Early VCs were real partners in growing their portfolio companies and it is only in recent years that it evolved into a spray-and-pray approach.
In Comes 23mile
We are excited to announce the launch of 23mile. 23 mile offers venture-backed startups capital and restructuring support to help them transition from hyper-growth mode to a more sustainable approach.
Mission statement: empower ambitious founders to overcome challenges and create great outcomes for all stakeholders in the long run
What makes us unique is the combination of capital, restructuring support and M&A advisory we offer. We also create a true partnership where we build long-term success for all stakeholders - founders, investors and employees
23mile takes its name from the stage in a marathon where the worst is over but there's still work to do to get to the finish line. That's what we exist to do - to get founders through the toughest patch of their founder journey.
For venture-backed founders seeking to take their destinies into their hands, we’re here for you.
For venture capital funds who need help orchestrating exits for portfolio companies, we’d be happy to help.
Our team of founders, investors, bankers and potential acquirers are ready to roll up their sleeves and work with you to get startups back on the path that frees founders from the cycle of endless fundraising and impossible targets.
If you’d otherwise like to be part of our mission, we’re all ears as well.