Praise Our Lord For Secondary Markets, Because Selling Shares Is Now an Essential Part of (Seed) Venture Capital
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. I entered venture capital with some beliefs — many of which still hold true (such as ‘your LPs are your business partners, not your customers’). But I’ve also seen a few change quite dramatically based upon the progressing ‘game on the field’ and my own VC experiences. One example is whether it’s assumed that seed VCs maximize outcomes by religiously holding their shares until the company itself exits. I mean, we’re investors, not traders, right? You’re told ‘illiquidity is a feature, not a bug’ and ‘let your winners ride.’ But when the physics of the model shift, you often need to with it. [While I’m going to focus on investor secondary here, I support common share sales as well — for example, back in 2014 writing “ Getting Some Founders Early Liquidity Can Benefit VCs “ during a period where many founders were being shamed for even asking about taking some money off the table.]
Ok, so what has changed by opinions about seed stage and secondary and why will the best early stage investors know when to sell, not just when to buy? Here’s the logic underpinning why ‘buy and hold’ is being replaced by ‘buy and maybe sell.’
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.
Now, optimally the secondary sales will always occur with the support/blessing of the founders; to favored investors already on the cap table (or whom the founders want on the cap table); without setting a price (higher or lower than last mark) which would be inconsistent with the company’s own fundraising strategy; and a partially exited investor should still provide support to the company ongoing. But even here I recognize than in some extreme situations you, as an investor, are forced to make calls about divergence in needs between your own, co-investors, and founders. The question is can you do it professionally and situationally enough to not harm the company and not develop a reputation for being a pain in the rear. As an industry peer said to me, “I think friendly secondaries are easy, everything else feels new.”
A second point of clarity is often the secondary is being performed for reasons other than just distributions to LPs, but also helps the venture firm recycle capital to support other startups in the firm’s portfolio. That is, early partial liquidity isn’t solely about investor wealth capture but is *good* for other founders in the ecosystem. Cash flow for small firms in pro rata, bridge rounds, and so on is a real challenge, and it impacts young startups disproportionately.
Listen to what my friend Charles Hudson (founder of Precursor Ventures, and former NVCA president) says in conversation with The Information:
For funds like his, selling stock of private startups to other investors will be “75% to 80% of the dollars that [limited partners] get back in the next five years,” Hudson told me from his office in San Francisco’s brick-lined Jackson Square.
and
Hudson said majority of the capital he’s returned to LPs over the past few quarters was through secondaries, but declined to give specific names of the companies he sold.
And my former Google colleague, turned VC Tomasz Tunguz recently wrote a data driven analysis which concluded “It’s [secondary sales] not just a temporary anomaly, but a structural evolution in how venture capital will function.”
And trust me, there are many more who prefer to keep this type of activity private but are active harvesters. Secondary is quickly becoming primary for early stage VCs.
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Originally published at https://hunterwalk.com on April 21, 2025.
