Key takeaways
Growth has two acts. Most LP letters describe the first and price the second.
The seam is where losses cluster. Underwriting goes wrong between the original and the extension business.
Ask the eighteen-month question. What share of next-year revenue depends on new capabilities?
Templates standardize numbers, not narrative. ILPA raised the floor; commentary is now the differentiator.
When the mark prices the wrong business
A growth-stage company hits a ceiling. The next round is priced as continued scaling. Eighteen months later, the markdown lands. The mark wasn't wrong about growth. It was wrong about which business was being valued, and that’s where a meaningful share of growth-stage losses now concentrate.
For GPs, it changes how portfolio companies should be communicated to LPs mid-hold. For allocators, it changes how growth-stage marks should be read in the first place.
Why most growth stories have two acts and only one gets reported
Most growth-stage companies eventually try to do something they weren't built to do. A software business starts lending money. Marketplaces begin holding their own inventory. Direct-to-consumer brands push into wholesale distribution. The original business keeps running while a second one starts up next to it, sharing a brand, a customer base, and sometimes a CEO. From the outside, it still looks like one company growing.
This is where most LP letters get vague. A line like "the company continues to scale rapidly into adjacent verticals" can describe two completely different situations. One is a company doing more of what it's already proven it can do. The other is effectively a startup inside the original business, with new costs, new risks, and capabilities it didn't need a year and a half ago. The sentence reads the same but the underwriting question underneath has changed.
Cambridge Associates' analysis of growth equity investments made between 1990 and 2016 put the capital loss ratio for the strategy at 13.7%. StepStone's more recent figure puts growth-equity loss ratios at around 9% since 2014, against 19% for late-stage ventures and 8% for buyouts. Both numbers are averages, and the losses inside them don't show up evenly across a hold period. They cluster, usually around the moment a company quietly started running a second business.
Where the second business is hard to miss
Before walking through the harder cases, it's worth starting with the example most LPs already recognize: fintech companies that built scalable payment businesses and then decided to start lending money. The pattern is useful precisely because the second business looks so obviously different from the first.
A payment processor earns small fees on transactions it doesn't fund. A lender funds the loans on its own balance sheet, takes credit risk, and answers to bank regulators. The first business runs on software margins. The second runs on net interest margins, with capital reserves, default exposure, and licensing requirements that the original company never had to think about.
Peer-reviewed fieldwork on fintech firms in Latin America and the United States documents this transition explicitly: payments platforms moving into deposit-taking, then into loan origination, often in under three years. By now most allocators recognize the dynamic on sight.
That's exactly why this case is the easy one. The harder cases are the ones where the second business looks like the first.
The transitions most LPs miss
Four transitions come up often enough to be worth knowing by sight, and each one has a public failure that documents the pattern:
Software companies adding payments — Plastiq. A B2B bill-payment platform that let businesses pay suppliers using cards. After acquiring Nearside in 2022, Plastiq pushed into SMB banking-like services and deeper payment infrastructure. The expansion made the company dependent on sponsor-bank, processor, and treasury infrastructure it had never carried before. When Silicon Valley Bank collapsed, Plastiq's processing froze, the integration burdens caught up with it, and the company filed Chapter 11 in May 2023. Assets were later sold for $27.5 million, against a previously announced SPAC deal that had valued the company near $480 million.
Marketplaces buying their own inventory — Zillow Offers. Zillow's listings marketplace was asset-light. iBuying turned it into an inventory owner with home-price forecasting risk, renovation execution exposure, and balance-sheet volatility the original business never had. Zillow shut down Zillow Offers in November 2021, recorded a $304 million Q3 inventory write-down, and projected another $240 million to $265 million in Q4 losses on homes still being unwound.
Direct-to-consumer brands moving into retail stores — Hello Bello. A DTC and subscription baby-products brand that became dependent on Walmart and Amazon as its retail channel. Reporting on the bankruptcy described retailers refusing to accept price increases above 10% while manufacturing costs rose more than 18%, alongside excess inventory and working-capital stress. Hello Bello filed Chapter 11 in October 2023 with FY2023 sales of $179 million and negative EBITDA of $15 million.
Industry-specific software companies offering loans to their customers — Tally. A consumer financial-management app that started refinancing credit-card debt through partner banks. The model depended on external capital and funding availability for its consumer-credit exposure. After raising $172 million and reaching an $855 million valuation, Tally sunsetted its direct-to-consumer loan portfolio and shut down in August 2024 when it couldn't secure new funding.
Tally's shutdown didn't happen in isolation. Fintech-issued personal loans reached roughly $50 billion at year-end 2022, representing about 14% of the total personal-loan market. This is a sector-wide footprint that contracted sharply through 2023 as funding conditions tightened, exposing which fintechs were running a software business and which had quietly become lenders.
The same shape across all four: the company stays in roughly the same market, keeps roughly the same customers, and reports roughly the same kind of growth, but the business behind those numbers has migrated into a different risk class. None of these failed because the original business stopped working. They failed because the second business carried risks the original underwriting was never priced for.
Not every transition fractures. Some compound. Square's Cash App, Shopify's payment processing, and Amazon's third-party marketplace all strengthened the original business eventually. Some compound, some fracture, and the work is telling them apart, which LP reporting in its current form rarely clarifies.
The diligence question that surfaces the issue
The standard checklist for evaluating a growth-stage company is well covered in how allocators build conviction. Revenue growth, retention, customer acquisition cost, payback period, addressable market: none of those metrics, however, distinguishes a company extending its original business from a company quietly running a different one inside the same brand.
The question that does is harder to chart, but it's the right one to ask:
What share of next-twelve-months revenue depends on capabilities the company didn't have 18 months ago?
Apply it to a portfolio review. A company reporting 60% YoY revenue growth, where 35% of next-year revenue comes from a lending product launched fourteen months ago, is, for underwriting purposes, two companies. One is growing at roughly 15% on the original software base. The other is a sub-scale startup carrying balance-sheet risk and regulatory exposure the parent company has never managed before. Both descriptions are accurate. Only one is useful for marking the position.
The question opens up follow-ups that don't appear on a standard portfolio review. Each of these, on its own, looks like an operational detail. Together, they reveal whether the mark on the position is being carried by the company that was originally underwritten or by a different one wearing the same brand:
separate gross margin by business line
working-capital funding sources for the new business
inventory days
credit-loss cohorts
partner-bank concentration
regulated capital requirements
customer-data ownership
and whether valuation marks use comparables from the original model or the new one.
Each of those, in isolation, can look like an operational detail. Together, they tell an LP whether the mark on the position is being carried by the company that was originally underwritten or by a different one wearing the same brand.
The same question works in reverse for IR teams thinking about how portfolio companies get described in quarterly updates. A company that has materially shifted what it does in the last 18 months, but whose reporting still describes it as scaling adjacent verticals, is the company that creates the surprise downstream.
Where ILPA stops, the GP narrative starts
ILPA's standardization work over the last two years sits across three templates, each at a different stage of rollout:
Reporting Template v.2.0 — released January 2025, applicable for funds in their investment period during Q1 2026. Standardizes how GPs report fees, expenses, capital flows, and performance to LPs.
Performance Template — also released January 2025. Standardizes how returns get calculated.
Portfolio Company Metrics Template — currently being refreshed, scheduled for release in January 2027. Sits closest to the questions raised in this article.
What these templates can't standardize is how a GP narratively frames the underlying business of a portfolio company. Whether a lending product launched 14 months ago gets called out as a distinct phase, or folded into a "continued strong growth across product lines" sentence, is a GP communication choice.
That has a real consequence for how investor relations strategy is built. On a standardized template, a portfolio company that has quietly entered a second business looks the same as one that hasn't. The difference lives in the GP's commentary or doesn't show up at all. The strongest commentary, when companies are partway through a hold and entering new businesses, treats the original business and the new one as separate stories, even when the numbers roll up into a single line.
The pressure on that commentary is rising. Coller Capital's 40th Global Private Capital Barometer found that LPs flagged three concerns about NAV financing as a liquidity tool:
the introduction of additional leverage,
the importance of transparency in performance calculations,
and the use of NAV-based facilities to support failing portfolio companies.
Distributions are running at 14% of NAV in 2025, a level not seen since the 2008–09 financial crisis, with distributions having lagged historical averages for four straight years. LPs are sitting on slow distributions, growing skepticism about marks, and rising pressure to scrutinize what's actually inside the NAV.
Flagging a portfolio company's transition into a second business early puts the GP ahead of the LP question, with the GP doing the explaining instead of fielding it later. In a fundraising cycle where re-up decisions are made on the strength of mid-hold confidence rather than realized exits, how a fund talks to its LPs is what separates one GP from another when the performance numbers can't.
Bottom line
Growth-stage losses cluster at the seam between the original business and the extension business. That's where underwriting goes wrong, where reporting goes vague, and where LP confidence quietly erodes, usually well before any markdown formally registers.
Across the four cases, the consistent pattern is a change in the unit of risk while the brand stays constant. Asset-light models took on inventory duration. Software businesses took on regulated capital. Marketplaces took on home-price forecasting. The label on the position never moved. The thing being underwritten did.
The next fundraising cycle is likely to reward GPs whose portfolio communication can describe a two-phase story before LPs have to ask for it. The same logic works in reverse for allocators who treat "scaling" as two questions instead of one. Both are the same problem from opposite sides of the table.
If your firm is approaching a fundraise and thinking about how mid-hold portfolio narratives are landing with LPs,Collateral Partners works with private capital firms on exactly this kind of communication architecture.
