From: allin
The venture capital (VC) industry has faced challenges regarding liquidity, particularly after 2021, when exit values for companies plummeted, leading to a lack of distributions for investors [00:59:12].
Current State and Signs of Life
Despite these challenges, there are recent signs of life in the market. Two notable developments include:
- Sequoia’s secondary sale of Stripe shares: Sequoia Capital is buying back $860 million in Stripe shares from LPs (Limited Partners) in its older funds (2009-2012 vintage) using capital from its newer funds, such as its Evergreen fund (formed 2021) and Heritage fund [01:00:26]. This provides liquidity to the legacy funds [01:00:56].
- Stripe, a company Sequoia invested 10 billion), is unusual for staying private for so long, though Uber also experienced this [01:00:28].
- The offering price is 70 billion, down from a peak of $100 billion in private markets [01:01:26].
- This move by Sequoia is considered problematic by some, as providing liquidity to one group of LPs via another controlled fund is generally “verboten” in good fund governance, though Sequoia specified that their own personnel would not be offered the option to sell shares received as carried interest [01:02:44].
- Google’s potential acquisition of Wiz: Google is in advanced talks to acquire Wiz, an Israeli-American cybersecurity startup founded in 2020, for 500 million in ARR in 4.5 years [01:07:48].
- This acquisition highlights the critical importance of cloud security [01:08:14].
These two developments have significantly improved the climate in the LP community, addressing previous pessimism about the venture capital category [01:09:04].
Challenges in Fund Structure and Accountability
Traditional VC funds are designed to be 10-year vehicles, with money called over the first few years for investment [01:04:45]. After this period, liquidity is usually only available when the fund itself realizes exits [01:04:56]. Funds typically have two one-year extensions, raising the question of what to do with positions held beyond year 12 [01:05:08].
Solutions for Illiquid Assets
One proposed solution for illiquid, late-stage private companies is to spin shares into a Special Purpose Vehicle (SPV) or other vehicle. This allows new investors to buy shares, and old investors can choose to sell or roll their investment into the new vehicle, providing an “elegant solution” for liquidity [01:05:29].
Concerns Regarding Fund Governance
The practice of one fund (e.g., a newer fund) providing liquidity to another fund (e.g., an older fund) within the same firm is viewed as potentially “smelly” and unseemly [01:03:35]. Ideally, an external, unrelated fund should be the buyer to ensure a cleaner transaction and a market-clearing price [01:03:47]. The valuation in such internal transactions needs careful sanity checking to ensure it reflects secondary market trading [01:06:56].
Overall, the industry is seeking new ways to address the challenges in venture capital and entrepreneurship, particularly the demand for liquidity from long-term investors, while maintaining proper governance.