Despite widespread complaints about a lack of liquidity, LPs in an a16z fund unanimously rejected the opportunity to sell shares in top portfolio companies like Stripe. This reveals that LPs want to ride their winners and only seek exits for their less promising investments, creating a fundamental market mismatch.
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The market's liquidity crisis is driven by a fundamental disagreement. Limited Partners (LPs) suspect that long-held assets are overvalued, while General Partners (GPs) refuse to sell at a discount, fearing it will damage their track record (IRR/MOIC) and future fundraising ability. This creates a deadlock.
Limited Partners should resist pressuring VCs for early exits to lock in DPI. The best companies compound value at incredible rates, making it optimal to hold winners. Instead, LPs should manage portfolio duration and liquidity by building a balanced portfolio of early-stage, growth, and secondary fund investments.
Success in late-stage venture resembles trading more than traditional investing—it's about buying and selling on momentum. However, this "new public market" has a critical flaw: while liquidity exists on the way up, it vanishes on the downside, making it impossible to execute a true trading strategy when a correction occurs.
As top startups delay IPOs indefinitely, institutional portfolios are seeing their venture allocations morph into significant, illiquid growth equity holdings. These "private forever" companies are great businesses but create a portfolio construction problem, tying up capital that would otherwise be recycled into new venture funds.
Botha argues venture capital isn't a scalable asset class. Despite massive capital inflows (~$250B/year), the number of significant ($1B+) exits hasn't increased from ~20 per year. The math for industry-wide returns doesn't work, making it a "return-free risk" for many LPs.
In frothy markets with multi-billion dollar valuations, a key learned behavior from 2021 is for VCs to sell 10-20% of their stake during a large funding round. This provides early liquidity and distributions (DPI) to LPs, who are grateful for the cash back, and de-risks the fund's position.
With fund lifecycles stretching well beyond the traditional 10 years, LPs are increasingly seeking liquidity through secondary sales. This trend isn't just a sign of pressure but a necessary market evolution to manage illiquid, long-duration assets.
VCs face a paradox with LPs. For early funds, LPs complain about the lack of distributions (DPI). For later funds, after the VC has made money, LPs question if they are 'still hungry enough,' creating a no-win situation.
GPs are caught between two conflicting goals. They can hold assets longer, hoping valuations rise to meet their paper marks and maximize returns. Or, they can sell now at a potential discount to satisfy LPs' urgent need for liquidity, thereby securing goodwill for future fundraises. This tension defines the current market.
When a portfolio company is public, liquid, and highly appreciated, some VCs distribute shares directly to their Limited Partners (LPs). This tactic returns value while allowing each LP to decide whether to hold for further upside or sell for immediate cash, effectively offloading the hold/sell decision.
