Venture Blues
Clouds, Silver Linings?
Venture Blues
The sheer number of venture capital essays this week forces us to ask if something new is happening in the space.
Dan Gray's X post captures the moment well:
It became clear in the aftermath of 2022, when the venture market took a tumble, that many early stage VCs were frustrated with the state of venture. They had watched portfolio companies get "foie grased", becoming sluggish and overvalued - no exit in sight.
Indeed, it highlighted a serious problem that is unique to early-stage VC: managers are exposed to the late-stage market as their portfolio companies mature.
For no other category of investor is this the case. Asset managers would never find themselves with a book that no longer fit their own strategy. And yet, for early VCs, this was the norm.
He goes on to note:
The obvious desperation for liquidity has - for now - removed the stigma associated with secondaries.
Hunter Walk from Homebrew doubles down regarding liquidity and secondaries. He begins with longevity of illiquidity:
Soon I'll have spent more time on cap tables than org charts. That's a 2025 milestone as Homebrew turns 12.5 years old, surpassing my combined working tenure across Second Life, Google and YouTube.
....
Delayed liquidity hurts LPs who manage to an IRR and even for Cash-on-Cash returns slows distributions which can be reinvested in VC and other classes
For the earliest funds (pre-seed, seed) this means instead of 10 year fund cycles for LPs, you're seeing closer to 15, which fundamentally changes LP calculations about the asset class
....
Secondary is quickly becoming primary for early stage VCs.
Carta charts one stage of the elongated venture journey
My SignalRank colleague Rob Hodgkinson adds to this narrative, opening his essay with:
The current fog of economic uncertainty could lead to a meaningful shift in the make up of venture capital's LP base, and ultimately to how VC is offered as a product to investors.
Endowments, which historically contribute 15-20% of VC capital, are particularly exposed to the new economic & political realities, requiring a rethink in investment strategy & allocation.
A harbinger of change is Yale, who pioneered the 'endowment model' with high alts allocations, allegedly selling $6bn in its PE portfolio in secondaries for the first time.
....
VC is changing. Venture firms need to rethink not just who they raise from, but how their LP base influences what they're offering.
So is venture capital structurally challenged? Can it be re-engineered to better provide both growth in value and liquidity? Can it attract funds from new sources previously not active in venture capital?
Certainly the asset class as a whole is healthy. Below is a chart for 2012-2025 showing the gross dollars invested in Series B rounds. For example 2017 saw $17 billion invested and is now worth in aggregate 4.76x the invested dollars.
But due to the power law most of that capital flowed to a small number of investors and funds, while others made little or no returns. And the 4.76x is measured in MOIC, not cash, so was not distributed.
LPs access venture through fund managers. The number of compelling managers is small. And so most LPs do not get returns, and certainly not liquid returns (the only real kind).
But if an asset class grows 4.76x (that's 476%) in 7-8 years it should be possible to invest in it and extract gains. The reason it is hard is almost 100% due to how venture funds are structured and managed. That structure forces LPs to play the power law game, betting on highly improbable outcomes.
My approach to the asset class follows from the question, how can the average return of venture capital be returned and made liquid? If that de-risking were possible then LPs could invest in probably outcomes closer to the average. And the returns could be in cash.
Enter algorithmic selection, focused access and, private company index creation that can be listed on public markets.
The above chart show what happens when data, algorithms and machine learning reject 93% of the Series B rounds. The remaining 7% return an average of 6.2x in five years. Investing in this 7% as an index gives investors the ability to participate in de-risked average outcomes. SignalRank is 87% accurate in predicting a company will not perform to this level. The index benefits from excluding those companies.
There is no longer a dependency on which fund an LP can invest in, or whether the fund has a power law winner. And liquidity is built into the index approach. An index share can be bought and sold at any stage once listed.
This kind of structural change can make venture capital attractive to allocators, not only traditional LPs. Even retail investors can play.
As venture capital discusses its challenges new ideas are sorely required.
Sorry for the explicit plug. The future of venture capital as an asset class is in play and this approach is able to provide answers. Wishing the dark clouds there are definitely silver linings.
Essays
Venture capital spent the last decade pulling itself in two.
X • credistick • April 22, 2025
X•Essays