Secondaries will not save VC (and 8 charts from venture-land)

Admission is the first step to recovery, so there's that

Secondaries will not save VC

• ‘every VC should have a secondary strategy’ and other sterling advice

• money has been lost, and the only path forward is forward

• secondaries ought to play a much bigger role in private capital markets going forward, but there isn’t nearly enough secondary capital to bail out existing VC portfolios

• something happened in secondary markets that hasn’t happened in two years

Elsewhere in venture-land

• Startup concentration risk

• venture lenders b like “it’s a picnic out there . . . like shooting fish in a barrel.”

• Figma puts on lipstick for its forthcoming IPO

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Secondaries will not save VC

Venture Capitalist continue to not-generate returns for their investors.

Not all of them, of course (and they’re not the only ones), but as an asset class, Venture overpaid by a country mile, and now having ‘bought high,’ their only option is ‘sell low,’ and that’s no way to generate returns.¹

So mostly they stand pat, holding out for ‘better market conditions’ or whatever made-up thing that’s definitely not coming.

And LPs get anxious, but also, VC get anxious because (a) they like to generate returns; (b) they can’t raise new funds until they do; and (c) they might not be able to call capital on existing funds, if their LPs have no liquidity.²

It’s not a good situation, but such is life in the risk-business. It’s not always up-and-to-the-right.

Money has been lost

Venture LPs have lost money, plain and simple, whether or not they or VC want to admit it:

Pitchbook

Unicorns are valued at $3.2T, but only $56B worth of startup equity has been “realized” for cold hard cash this year.

There is a $3.1 trillion gap between what the largest techcos are collectively valued-at (on paper), and the actual dollars that buyers have been willing to pay.³

It’s a mess, and Random Walk has written about this at-length, and the only path forward is forward, and that’s where the interesting developments lie, such that they exist. It’s not fun, but everyone makes mistakes, and it’s still a great asset class, now more than ever.

It’s just smaller, leaner, smarter, and different-er (and, if not, it’s toast).

Secondaries will not save you

But, “forward” is painful, and VC are nothing if not hopeful, so often they are the last to know that capital markets have moved on.

Plus, when the realization does finally take hold—and to be fair, acknowledgment is the first step to recovery—VC have a tendency to reframe their own fear and loathing as “insights” to be passed along to founders or other GPs.⁴

It’s endearing in its way, but also opaque, and the point is really that when VC start giving advice, it’s often because they’re anxious.

Recently, “secondaries,” as a necessary part of the “exit strategy,” has been a hot topic in the VC ecosystem. It’s now become very important (according to VC), that VC have a secondary path as part of their route to exits—waiting for IPOs and M&A just won’t do “because liquidity.” Random Walk won’t name names, but suffice to say, the “advice” and “insights” are out there.⁵

Now, Random Walk is a big believer that secondary markets for private equity (i.e. the buying and selling of private company stock) are ripe for innovation and change. It starts with fund structures (and regulatory requirements), and better data and reporting. Plus, a lot more connectivity between VC (especially), and the rest of the capital markets. It’s a very interesting problem to solve, and some of the biggest players in private capital are working on it, including Apollo, Blackrock, and others.

But in this case, it should be clear that secondaries will not save VC, in the sense of “what are we gonna do with all our current investments.”

There is not nearly enough secondary capital out there to get anywhere close to the amount of exit liquidity the recent vintages need to make bank.

Secondary funds have become popular, but not nearly popular enough: