Solving Venture Capital's Liquidity Problem

One of the biggest issues and criticisms with retail access to venture capital is the timeline to liquidity. It takes forever. If you invest in a company at the seed stage, odds are you're waiting well over a decade to see any capital back if it's a winner. Institutions are built for these timelines - they have patient capital, diversified portfolios, and don't need the money anytime soon. But retail investors typically aren't structured this way, with capital needs fluctuating constantly depending on the economy and their own portfolio performance.

This has led to a fair bit of disillusionment with the asset class. Every day investors invest, get excited, overcommit, and then burn out after 1-2 years when they realize their capital is completely locked up in these illiquid names. I get it - I've been there myself, having put millions of my own capital across venture deals. The frustration is real when you suddenly need the liquidity and see paper gains but can't access any of that value.

But something is changing that I'm excited about: liquidity solutions are finally arriving for retail venture investors. With the late-stage institutional and retail secondary ecosystem getting built out, and retail investors getting more sophisticated about private market businesses, there's been a boom in buying out LP stakes in SPVs.

How It Actually Works

Mechanically, this is pretty straightforward. We reach out to our investors who are marked up in SPVs and ask if they want to sell their position. Those who opt in, we aggregate together. Then we find a buyer to take their place in the SPV, and in some cases, we can continue to charge carry on the new buyers just like we did with the original LPs.

It's a win-win-win situation. LPs who want liquidity get capital returned. Fund managers get to realize carry earlier than they normally would, while maintaining the upside.

This won’t work for all deals of course. For underperforming businesses there are thin liquidity markets or the going price will be substantially below last round pricing and/or fair market value. Additionally for mid stage businesses (and earlier), even if high performing, there’s also thin liquidity as demand interest tends to be aggregated in the most mature private market names. 

Why More GPs Aren't Doing This

Not all GPs will pursue this strategy, and there are several reasons why:

• These markets are only recently maturing, so many don't even realize it's an option

• Others don't have the resources or manpower to run this LP interest process 

• Some don't know how to find buyers for their stakes and negotiate those deals [it can be very time consuming and difficult]

• And frankly, some just have no interest in providing liquidity to their LPs, even if they had all the capabilities above 

Why This Matters

But the reality is that GPs who embrace this approach can fundamentally change one of venture capital's biggest pain points - especially as retail gets more involved in the ecosystem. Think about it: if a company goes from Seed to Series C in 5 years and the price per share has increased 20x, it's possible that a GP can return 2-3x capital back to early LPs while still letting almost the entire investment ride for the long term.

There's an argument to be made - and one that is often made - that we should all let our winners ride. And I get it. That's the classic venture playbook. But the reality is that for retail investors, that's not always possible. People have mortgages, kids' college tuition, unexpected expenses, or they just need to rebalance their portfolio. If you can't return capital back to them sooner, retail investors will - and do - exit the game for very long periods if not entirely. 

For the GP, though, by swapping out LP stakes with new investors and maintaining carry on those new positions, you're still letting your entire investment ride. The upside doesn't change. The economics for the fund don't change. You're just solving the liquidity problem for your LPs and realizing some carry while keeping everything else intact.

We're currently in the process of selling out 20% of our position (in aggregate) on a growth investment that will provide multiple times capital back to LPs who want liquidity, while letting the rest of the position continue to appreciate. Early investors get their principal back plus solid returns while still maintaining almost their entire position. 

This is the future of retail venture capital - providing institutional-quality liquidity solutions while maintaining the upside that makes venture such a compelling asset class in the first place, and I’m here for it.

If you enjoyed this article, feel free to view our prior posts on adjacent topics 

• How We Closed 14 SPVs in One Month

• Are VCs the New Bankers

• VC Scouts: Why Waiting for Lead Investors Maximizes Syndicate Success

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✍️ Written by Zachary and Alex