Disclaimer: The following is the perspective of Amish Patel, Founder and Managing Director of Conduit Venture Labs. Amish is a 15+ year physical-tech veteran spanning contributions, product leadership, and founder roles across consumer electronics—including his time at Microsoft/Xbox—and building and leading 0-1 ventures in the medical device, robotics, and wearable technology sectors. Conduit is an investment platform built by "the builders and operators behind the products and services we all use every day." It's in this collective experiential wisdom we share the following learnings and our overall thoughts and perspective—of which we hope only to evoke discourse and debate—AND ultimately our mission is to reshape the way we think about investing and building tomorrow's real-world solutions and the application of AI into everyday lives!
Venture capital operates on a somewhat well-understood and “herd mentality” playbook, refined over decades in Silicon Valley. Most VCs are playing the same game with agreed-upon rules around valuations, multiples, and exit expectations. But to understand why this in breaks early-stage physical tech, we first need to understand what GPs are actually optimizing for.
A general partner's goal isn't just to make one successful fund—it's to build a multi-fund franchise that spans an entire career. Like any business, this requires sustainable economics. The standard VC model operates on what's known as the "2 and 20" structure: a 2% annual management fee on committed capital and 20% carried interest on profits.[1]
Here's the critical insight: GPs get paid to operate the fund via management fees before they return a single dollar to LPs. For a $100M fund, that's $2M per year in operating capital for salaries, deal sourcing, and overhead. The larger the fund, the more operating capital—but also the more capital you need to return to justify your existence.[2]
To raise Fund II while still deploying Fund I, GPs need to show TVPI (Total Value to Paid-In)—the unrealized value of their portfolio. This is calculated when portfolio companies raise new rounds at higher valuations, creating "paper returns" that look impressive in quarterly LP updates.[3]
Here's the typical timeline:
This creates a powerful incentive structure: For emerging managers, TVPI metrics matter more than DPI in the critical fundraising years. "Look at the investments we made—the unrealized value is 3x, we're crushing it, let's raise another fund."
The problem? When every VC in a market is playing this game, valuations inflate. Companies raise at ever-higher multiples based on revenue projections, market scarcity of talent, or competitive fear of missing out. The goalposts keep moving further away—from both founders and the business fundamentals.
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The Misalignment: VCs optimize for round valuations and ownership percentages with preferred liquidation preferences. Founders are pressured to hit aggressive revenue and growth targets to justify those valuations. Meanwhile, the founders and team are last in the liquidation waterfall—meaning if the exit doesn't clear the preference stack, they get nothing or next to it.
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