As venture capital has matured, growing 5x over the last 12 years to $350 billion, the scale of private holdings has never been greater. With the exit markets quiet and with both regulatory and market forces bringing uncertainty, there’s an increase in pressure for exits. The VC business is predicated primarily on M&A and IPOs to produce returns. Still, given the economic volatility, VC firms will need to access the secondary market to thrive in this next economic era.
Venture capital buys shares in a company and holds them, typically for eight to 12 years. At some point, however, the firm must sell its shares. Sometimes, that occurs when a strategic acquirer buys them or when a company goes public and public market investors buy them.
But a venture firm might sell those shares to another VC firm or a fund raised to buy these types of shares. In the last two or three years, billions have been raised to pursue this.
VC parallels to private equity
This evolution in the venture capital market parallels private equity’s history, and VC could benefit from taking a page out of PE’s book—or risk shrinking the asset class. Private equity was a cottage industry in the 1970s, during KKR’s initial leveraged buyout years. It remained so for about a decade until Michael Milken’s junk bond bonanza catapulted the market to considering even larger buyouts. Chronicled in Barbarians at the Gates, the RJR Nabisco buyout (worth $64 billion in 2025 dollars) marked the end of the jumbo buyout era.
The PE industry also matured by segmenting lower mid-market, mid-market, and bulge-bracket firms. The lower mid-market firms buy, hold, and improve a company for a few years, and then sell it to a larger company, and so on. This pattern has produced consistent returns and liquidity. There are about eight secondary funds, the largest of which is worth more than $22 billion: an asset class of its own.
The major difference between venture capital and private equity, which could derail VC’s future potential to generate returns via secondaries, is that total loss occurs frequently in VC firms’ portfolios. This has improved since 2001, when the capital loss ratio was about 50%. Now the loss ratio for VC is about 20%—but in the case of private equity, that’s a rare occurrence. How would a buyer value a company or a portfolio that could conceivably go to zero? Not to mention that most private equity companies produce cash, and nearly all VC-backed startups produce losses. Further complicating valuation, no wonder VC secondaries traded, on average, at a 40% to 60% discount to the net asset value (NAV) in 2024.
Significant secondaries also impact underlying portfolio companies. Since the Jobs Creation Act of 2004, startups have been required to value their common stock to price options. This is a figure known as the 409A valuation for the clause that requires it. Significant secondaries executed by insiders can alter that price, which could have positive or negative impacts on the strike price at which employees received options. Higher strike prices mean less upside for new employees.
Maturity of the asset class
Venture capital secondary activity is nearly equal to the private equity market already, a dynamic that’s only been present since 2023. Should the exit markets continue to suffer a lack of liquidity, VC secondaries will become an increasingly important exit path for illiquid private positions.
As private unicorns continue to exceed 1,000 in count (a growing herd), and the classic liquidity markets remain relatively closed, we should expect venture capital secondaries to grow significantly. Distributed profits from VC firms will be a distinguishing hallmark of VC firms that continue to raise capital in these lean exit markets.
This rise of VC secondaries isn’t merely a tactical shift to navigate a constrained exit environment; it signals a maturity of the asset class. We’re witnessing a segmentation of liquidity options, a diversification of strategies, and the emergence of a dedicated secondary market capable of sustaining returns even amidst primary market headwinds. In other words, the VC firms that adapt to this trend will win.
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