New Avenues for Venture Capital: How Secondary Markets May Enhance Liquidity and Long-Term Value

Venture capital (VC) has long been celebrated for its capacity to back transformative companies and deliver meaningful gains to investors over extended time horizons. Although VC returns have recently trailed major public equity benchmarks, it’s important to view this performance within the broader landscape of an asset class that has historically demonstrated remarkable resilience, adaptability, and capacity for reinvention. Now, as some funds consider the use of private secondary transactions to unlock earlier liquidity for their limited partners (LPs), we may be witnessing a positive evolution rather than a retreat—a shift toward a more flexible, multi-faceted ecosystem that can better serve both investors and the pioneering companies they support.¹

A Contextual View of VC Performance

Preliminary data from investment firm Cambridge Associates indicate that venture capital generated a return of negative 1.55% in the second quarter of this year.¹ While any short-term dip may raise eyebrows, it’s crucial to remember that VC’s hallmark has never been short-term predictability. Instead, it thrives on investing early in innovative startups that often require years before the world fully recognizes their value. Historically, VC’s long-tail approach has delivered substantial results: over the past 25 years, venture capital has produced an 18.96% return compared to a 10.44% benchmark—a notable outperformance of 8.52 percentage points.¹ Although more recent intervals have seen the gap narrow, this should be interpreted as part of venture’s cyclical nature rather than evidence of a permanent advantage lost.¹

For LPs such as pension funds, endowments, and family offices, venture investments can remain strategic. They typically understand that the real prize often comes from breakout successes that compensate for less stellar outcomes. While LPs naturally desire greater liquidity and reassurance that fees are justified by returns, they have also historically accepted the trade-off of near-term uncertainty for the potential of long-term transformative gains.

The Rise of Secondary Markets

The path to liquidity in venture capital has traditionally relied on initial public offerings (IPOs) or strategic acquisitions. With the IPO window more subdued and regulatory pressures making blockbuster M&A less frequent, some VCs are now exploring secondary markets as a complementary tool. By selling stakes in portfolio companies privately—rather than waiting for a public exit—funds can potentially realize returns sooner and provide distributions to their LPs even in a quieter exit environment.¹

This approach aligns well with the industry’s innate adaptability. Firms like NewView Capital, founded in 2018 by former NEA partner Ravi Viswanathan, have pioneered the practice of acquiring growth-stage positions from other VC funds, injecting liquidity into historically illiquid holdings.¹ In doing so, they demonstrate that secondaries need not replace the traditional VC model; instead, they can enhance it by offering more nuanced ways to manage portfolios, capitalize on interim success, and mitigate timing risks.

Balancing Tradition and Innovation

• Preserving the Venture Ethos: Embracing secondaries doesn’t have to erode the long-term, founder-friendly mindset that defines venture capital. Top-tier venture firms have built reputations on their ability to nurture relationships with entrepreneurs over multiple funding rounds, cultivating trust and aligning incentives.

• Encouraging Valuation Discipline: A more active secondary market can promote valuation realism. When firms know they have the option to sell partial stakes along the way, they may pay greater attention to the quality and maturity of their investments, ensuring that their portfolios aren’t merely “waiting for a perfect market” but are ready to seize reasonable opportunities for partial returns.¹

Opportunity in a Transitional Moment

Secondary transactions also address LPs’ increasing interest in more frequent and predictable liquidity events. With the distributions to paid-in capital (DPI) ratio under pressure due to subdued IPO activity and regulatory caution around large M&A deals, secondaries can act as a pressure valve. They provide a structured means of unlocking partial returns and maintaining momentum, even when traditional exits remain elusive.

• Incremental Liquidity Benefits: Even if secondary deals occasionally come at modest discounts, their ability to generate earlier cash flows is valuable. In a market where LPs are looking for tangible progress and not just paper gains, this incremental approach can strengthen investor confidence.

• Maintaining Momentum During Lulls: Secondaries can serve as a bridge strategy, allowing funds to demonstrate progress and keep LPs engaged during periods when the exit environment is less favorable.

Encouraging Healthier Portfolio Management

The introduction of secondaries may also foster healthier portfolio management practices:

• Strategic Exits at the Right Time: VCs can move beyond an “all-or-nothing” mentality. Instead of waiting for a unicorn exit, they might choose to sell a portion of their stake in a promising growth-stage company to a specialized secondary investor who is better positioned to hold it for the next stage of growth.¹

• A More Specialized Ecosystem: As sponsor-to-sponsor transactions become more common, certain firms may specialize in early-stage bets while others focus on growth or pre-IPO rounds. This specialization can refine the capital allocation process, ensuring that each phase of a startup’s journey is backed by the most suitable investors.

Patience and Adaptability Pay Off

While secondaries present an appealing avenue to enhance liquidity and moderate volatility, patience still remains a virtue in venture. Industry veterans note that exit conditions could improve if IPO markets reopen or strategic buyers become more active next year.¹ Funds that maintain discipline and avoid rushing into suboptimal sales may still enjoy the traditional, more lucrative exit paths that define the VC success stories of the past.

Yet, the fact that leading firms are willing to explore secondaries as a complement to traditional exits signals a healthy responsiveness to market conditions. This willingness to adapt supports the notion that VC can thrive in varied climates—by preserving the best elements of the patient, founder-aligned approach while incorporating flexible solutions to address investors’ evolving expectations.

Conclusion

The recent performance dip in venture capital need not be viewed through a pessimistic lens. Instead, it can be seen as a catalyst for positive change—an impetus for the industry to diversify its toolkit and better meet the needs of its investors. Secondary markets offer an intriguing solution that can provide timely liquidity, enhance portfolio management, and potentially strengthen long-term returns.

Far from undermining the VC model, secondaries can help refine it. By blending tried-and-true patience with strategic liquidity options, venture capital can continue to back high-potential startups and support long-term innovation. In doing so, the industry preserves its reputation as an engine of growth and transformation, proving once again that adaptability is at the heart of venture’s enduring appeal.

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_{1. The Wall Street Journal, VC Returns Have Lagged Behind Stocks, Are Secondary Markets the Solution?, 2024.}

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