Chasing Markups: Illusions of Success

Strive to understand what's ephemeral and what's enduring.

The advice often handed down to up-and-coming VCs not to chase markups can feel reminiscent of parental guidance to eat your vegetables: it's delivered with a mix of lecturing and an unpalatable taste. This advice, akin to the seemingly inconsequential impact of skipping greens, may not appear to affect the day-to-day life of an investor. After all, new capital flowing into a portfolio company at a higher valuation feels like a badge of validation. It serves as a positive reinforcement in a career path characterized by long feedback cycles, low visibility, and nebulous interim signals. Such outside led rounds are seen as solid short-term milestones, signaling progress for both the startup itself and the investor's acumen in choosing winners.

However, of course eventual success is not measured by TVPI, but rather by DPI. During the origins of venture capital firms marked up their portfolios only at liquidity events, rather than at interim valuations. Over time, however, both industry norms and official accounting practices evolved to value companies based on their "fair value," often reflected by the most recent financing round. (Light reading on SFAS 157 can provide some additional context.)

Yet, the pursuit of markups is akin to chasing ghosts: they can vanish as quickly as they appear, providing a misleading sense of reality. The true substance of venture capital lies in building real, durable value, a metric far more challenging to quantify.

For hungry rising venture capitalists, it may seem pragmatic to play the game of optimizing making new investments for the subsequent downstream investor, where the highest price can be commanded. This strategy, while potentially beneficial in the short term, does not lay a solid foundation for long-term success. In the history of NextView, for instance, a number of our top-performing companies (by actual realized liquidity measures) faced significant challenges in raising follow-on capital. One company, in particular, pivoted to profitability—a seemingly radical move—due to the lack of alternatives before exiting at $1B+ valuation.

Moreover, markups that are unjustified to begin with can result in greater pain going down than if they had never occurred! If navigating the venture capital landscape requires playing a strategic and sometimes cynical game, those efforts should focus on internal firm politics to secure one's position and not lose your seat, rather than pursuing on superficial valuation increases.

Just as maintaining a healthy diet does not necessitate perfection in every meal, so too does building a career in venture capital not require chasing every markup. Making decisions based on what you believe will be long-term right rather than appearance of such not only ensures a more stable and sustainable path to success but also allows for the eventual enjoyment of the proverbial dessert at the end of a well-nourished career. Just as your physical health thrives on mindful choices, so does the professional health. Not every investment will be a standout, but a personal portfolio built on solid foundations will be what provides the most real rewards and longevity.