📶 secondaries 🤝 seed funds

Timelines to Startup Exit

On average 7-10 years to IPO, M&A

10-12 years+ as founders want to keep companies private; narrative that ‘bar is higher’ to go public; more grow/crossover capital to support private companies; periods of slower M&A due to private company valuations and/or regulations

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

CoInvestor Alignment

Mostly structural alignment across the venture sector. Everyone largely underwriting to the same outcome goals.

Growth investors were the ones who added structure to deals and best companies typically just raised a single growth round ahead of IPO.

The dominance (in scale) of the multibillion dollar AUM holders, who are often underwriting to lower outcomes and needing to put more capital to work. That is, they rather have a 5x with $300m in the company than a 10x with only $30m invested.

The alignment gap between investors starts at the Series A, meaning earlier preferred investors cannot assume their interests are always aligned with the rest of the cap table. Angels and seed investors are better off thinking of themselves as common with a 1x preference once tens and hundreds of millions of dollars have been raised by a company.

How Investment Rounds Are Priced

Price discovery and valuation by within a relatively small community, with an independent new investor setting market price

A global auction filled with investors who have all sorts of objectives, experience, and return goals

I’m not bemoaning higher prices – the market bears what it bears and founders will make the decisions that they believe are best for their company. But this dynamic, for certain classes of companies, also means that startup pricing is often enthusiastic, optimistic and gives the company ‘credit’ for execution against forward looking plans quarters or years into the future. This decreases the penalty of ‘selling early’ to seed investors, and adds more performance risk to the investment, especially when seed investors lack the capital to protect/recap the company.

GP Incentives

You get really rich off of carry

With megafunds, you get really rich off fees regardless, which can impact all sorts of incentives to keep private marks high (TVPI!) while you raise new funds.

For more modestly sized pre-seed and seed funds, the returns are where you hope to strike it rich. So DPI matters sooner.

Infrastructure Around Secondary

Opaque, shady

Several large market makers, investor and company counsel have seen this before

There are now standard and trusted processes that reduce risk for all parties around these sorts of transactions. Still need to be careful working with unscrupulous parties.

Impact Upon Startup

Any VC selling is a warning sign that something must be wrong with the startup because they have inside info

Sure, there are cases where this might be true, but increasingly, and especially when the shares are bought by other existing investors/sophisticated players, it’s less of a concern

Balancing and consolidating the cap table on behalf of the founder to make sure the later investors have enough skin in the game. Sometimes we’ve seen founders proactively asking if we want to sell because they have more investor demand than they want to service.

VC Skillset

VCs are investors, not traders. We hold until the founders and company exit.

VCs increasingly are traders. Every venture firm who has held crypto tokens/coins have made buy/sell decisions and some even have a trading desk equivalent.

YOLO, not HODL