Actual Capital

Distributed to Paid-In Capital (DPI) has become more important across private markets, including venture capital. McKinsey’s 2026 survey of 300 limited partners found that DPI was tied with multiple on invested capital as the second-most-important metric in allocation decisions, behind IRR; 54 percent called it “critical” or “most critical.” Distributions were only 6 percent of private-equity assets under management in the twelve months ending June 2025, versus a 16 percent average from 2015 through 2019. [1]

That shift matters because LPs do not fund new commitments with paper gains. They need cash to meet capital calls and rebalance portfolios. Venture firms are therefore under pressure to turn marked-up holdings into distributions, even when the best long-term outcome would be to wait.

The Liquidity Trap

The exit pipeline is no longer completely blocked, but it remains selective.

PitchBook and the National Venture Capital Association reported record venture dealmaking and exits in the second quarter of 2026, while also calling the recovery uneven and warning that broader improvements in exits are still needed to restore liquidity. [2]

The backlog is still enormous. In 2025, 49 venture-backed IPOs generated $105.2 billion in exit value, but 67 percent of unicorn IPOs priced below their last private valuation. At that pace, NVCA estimates the unicorn backlog would take 17.5 years to clear. [3]

Funds and shareholders are turning to secondary markets for relief. NVCA measured $106 billion in secondary-market volume in 2025. These transactions can generate DPI without waiting for an IPO or acquisition, but the liquidity often comes with a price concession. It is not free money; it is a trade between certainty now and potential value later.

The Bifurcated Market

The venture market has split into two distinct zones.

In the first zone, there is the artificial-intelligence rush. NVCA estimates that AI companies absorbed roughly $220 billion in 2025, while the rest of the venture market received about $100 billion. The same concentration continued into 2026: PitchBook and NVCA say the overwhelming majority of first-half capital flowed to AI companies and rounds of $100 million or more. [3] [2]

In the second zone, there is the rest of the software ecosystem. Here, the rules are punitive. Silicon Valley Bank’s H1 2026 State of the Markets report found that the median annual revenue of a U.S. venture-backed technology company raising a Series A in 2025 was $3.3 million, up from $1.6 million in 2021. [4]

The higher bar is shrinking the middle of the market. SVB says rising revenue requirements are contributing to lower graduation rates and pushing more companies toward extension rounds. Founders who raised at 2021-era prices may still face a down round, a small sale, or a shutdown if growth does not catch up.

The Death of the SaaS Multiple

For ten years, software-as-a-service (SaaS) looked like the perfect venture model: high gross margins, predictable recurring revenue, and a market willing to reward growth far ahead of profit.

That valuation regime has reset. Software Equity Group’s index of public SaaS companies fell from a median 6.7 times trailing revenue in the first quarter of 2025 to 3.6 times in the first quarter of 2026. SaaS acquisitions averaged 6.3 times trailing revenue in the same quarter, with large premiums reserved for a small group of high-quality assets. [5]

This shift changes the math of venture capital. At a six-times revenue multiple, a one-billion-dollar exit requires roughly $167 million in annual revenue. Building a business at that scale takes time and capital. The leverage that came from multiple expansion is gone.

Many SaaS companies can still become good businesses without becoming good venture investments. If they cannot scale fast enough to satisfy the power-law requirements of a large fund, the model and the financing are mismatched.

What Comes Next

Venture capital will not compress uniformly; it will concentrate. In 2025, the number of first-time funds fell to 101, the lowest since 2007, while the ten largest funds captured 32.9 percent of all venture fundraising. [3]

The firms that survive outside that top tier will likely be smaller, more specialized, and more disciplined about capital efficiency. For engineers and founders, the bar has changed. Building a product is no longer enough. Blitzscaling will still exist, but it will be reserved for the narrow set of companies that can attract concentrated pools of capital. Institutional capital remains a strategic weapon; access to it is simply more selective.

Sources

[1] McKinsey & Company — Global Private Equity Report 2026

[2] PitchBook–NVCA Venture Monitor — Q2 2026

[3] National Venture Capital Association — 2026 NVCA Yearbook

[4] Silicon Valley Bank — State of the Markets, H1 2026

[5] Software Equity Group — SaaS M&A and Public Market Report, Q1 2026