Key Takeaways

  • Venture Capitalists like David Frankel are seeing unprecedented liquidity in secondary markets, even for top-tier companies, due to fewer IPOs and a more developed financial ecosystem around VC.
  • Contrarian to traditional VC wisdom, Frankel advocates for strategically selling portions of winning positions (e.g., 20% stakes) in secondaries to return capital to LPs, rather than holding 100% until a distant IPO.
  • The goal is to improve "cash velocity" and Distributed to Paid-in (DPI) capital, ensuring LPs see returns faster, even if it means missing a theoretical future 'double' on the sold portion.
  • This new approach values certainty and earlier returns over extended hold periods and lengthy lockups, challenging the "hold winners forever" mentality.

The New Calculus of Venture Liquidity

Forget the old playbook where VCs held onto their best companies like buried treasure, waiting for the mythical IPO or blockbuster M&A. David Frankel, a seasoned venture investor, points to a stark reality: the secondary markets today are a river of cash. He calls it an "unprecedented" level of liquidity, especially for the top-performing companies. "It's probably not that surprising given fewer IPOs, fewer M&A up till the moment here, an IPO market that will probably be open for the remainder of this year and then these IPO markets always close," Frankel said on 20VC. This isn't just about distressed assets; it's about pricing positions reasonably and even fetching premiums for high-demand stakes. The underlying finance of venture has grown "so much more sophisticated," as Frankel puts it, opening up new avenues for investors to manage their portfolios.

Historically, an investor's main path to liquidity was a company's public debut or acquisition. With fewer doors to the public market swinging open, secondaries have become the primary, active valve. This shift offers a new strategic lever for VCs: managing what Frankel and Harry Stebbings call "cash velocity." It means not just waiting for the biggest possible win, but ensuring a steady flow of returns back to Limited Partners.

Why "Cash Velocity" Beats Delayed Homeruns

Here's where the conventional wisdom flips. Most VCs cling to their best companies, aiming for the largest possible exit. But Frankel argues for a different approach: strategically taking a percentage off the table even from your absolute winners. Imagine a scenario where you have a hot 2024 fund and a portfolio company that's crushing it. Frankel suggests, “sometimes taking 20% off the table if you can return 25% of the fund, particularly if it's a newish fund.” Why? “Like why wouldn't you do that? And you're still long. You still own 80% of that company.” The logic is simple: returning capital early to LPs builds trust and demonstrates execution, making future fundraising easier. You're giving back concrete Distributed to Paid-in (DPI) capital, not just promises of future multiples.

Harry Stebbings echoed this sentiment, lamenting, “I just think we don't think about the velocity of cash enough.” He continued, “yes, there might be another double, but if I have to wait 5 years and then the IPO and then an 18-month lockup, Jesus, give me 50% of that now and I'll way rather have the certainty and the DPI now than the maybe a double from here with 6 and a half years.” This isn't about giving up on big outcomes; it's about balancing potential future gains with the tangible benefit of present returns. For ambitious founders, this implies a new investor mindset you need to understand and potentially even leverage.

What to Do With This

As a founder, this shift in VC thinking creates a new opportunity. Actively explore secondary liquidity options for your company's shares, not just for employees or early investors, but potentially for yourself. If your company is performing well, even a small, strategic secondary sale could allow you to take some personal chips off the table, de-risking your personal finances while retaining significant upside. This also lets you see if the "unprecedented liquidity" Frankel speaks of extends to your specific company. Understand that your investors might be open to, or even pushing for, strategic secondaries, which changes how you think about fundraising and long-term exit planning.