Hype, AI, and trapped money: The reality inside venture funds

This article summarizes an episode of Tank Talks by Ripple Ventures’s video series featuring John Rikhtegar, vice president at North Capital Partners.

Image credit: Timmy Loen

Headline fund valuations no longer tell the full story of venture performance. John Rikhtegar, vice president at North Capital Partners, says limited partners (LPs) are looking beyond paper gains to determine whether those investments can ultimately generate cash returns.

Rising AI valuations, aging startups, and a slow exit market have made traditional performance metrics harder to interpret.

Investors are demanding proof behind the paper valuations

The biggest red flag for investors is outdated paper returns. A fund might boast a high valuation based on prices from the 2021 boom, completely ignoring that those same companies have since slowed down or failed to raise new money.

Rather than relying solely on headline fund metrics, LPs increasingly evaluate the underlying portfolio companies. They examine how each business has progressed since the initial investment and expect fund managers to justify their valuation assumptions.

To evaluate a fund today, investors must execute a strict playbook:

• Treat reported returns as a starting point requiring verification.
• Track every portfolio company from its entry price to its current revenue.
• Interview founders directly to verify growth rates and market position.
• Demand that fund managers explain weak spots before the data exposes them.
• Measure the portfolio’s original business plan against the current AI-dominated market.

“You’re looking at company progression from entry to today, referencing the founders, looking at growth and technology, and building a thematic thesis about whether you believe in the companies,” Rikhtegar explains.

This review helps investors distinguish between companies with outdated valuations, businesses that continue to execute, and those that may no longer deliver meaningful returns.

Rigid fund rules break in the AI market

The rapid rise of AI has also challenged long-standing venture investing rules. Higher valuations make it increasingly difficult for funds to achieve traditional ownership targets in the companies they want most.

Fund managers now face a difficult tradeoff. Passing on expensive AI companies may mean missing major opportunities, while paying any price can weaken overall fund returns.

To survive, funds must adapt their rigid investment rules:

• Spread investments over several years to track early-stage growth.
• Abandon outdated ownership targets when entry prices detach from historical norms.
• Ensure that any massive check written for an AI deal buys enough equity to actually impact the fund’s overall return.
• Hold back aggressive cash reserves to support winners in future rounds.
• Price less obvious investments against realistic exit scenarios rather than peak-market hype.

Paper billionaires cannot cash out

The market lacks infrastructure for cash exits