Liquidity Now
It's 2025. Donald Trump is in office. Lina Khan is gone. The stock market is booming. And we're now all being trampled by the rush of startups looking to IPO.
Actually, hold those horses on the last one. There are a few companies looking to IPO, but it's a slow trot, at best. And actually, there isn't much indication that this will change any time soon. Given the lead times required to go public, perhaps the best we can hope for is that the latter half of the year is busy. But again, there's nothing really pointing in that direction right now. If anything, there are signs that the current status quo will stay the same for quite some time. The real question is if this will be the case going forward: is it "the new normal"?
Obviously, that's a dangerous thing to try and predict. The history of finance is littered with the bodies of those who dared to utter such words. Things tend to ebb and flow. And that would suggest that IPOs will be back, in a big way, at some point. But again, there are signs pointing to why this time may be different™...
The biggest of those is the sheer scale of capital available in private markets. Right after OpenAI raised a then-record amount of venture capital last year at $6.6B, xAI essentially matched it. Anthropic is about to raise north of $2B on top of the $4B Amazon recently put into the company. No word on how much Safe Superintelligence will raise in their new round, but if their "seed" round was $1B... Databricks recent "Series J" went from $8.6B to $10B to $15.3B – yes, a lot of it is debt and secondary, but still. The money is flowing in the private markets.
Oh yes, have I mentioned that OpenAI is now back in the market, just a few months after their record-setting round, raising... $40B? And have I mentioned that it would be more money raised than in any IPO – ever?
Staying private is the new going public. Only the biggest and best companies can do it. But they can seemingly do it forever.
It raises another question, one I know that is at least being discussed amongst investors, if not exactly communicated to LPs at fundraising time (though being discussed a lot right now with LPs to find liquidity in the market): should a new standard exit path for venture capital deals be to exit via a sale into a later stage fundraise?
The word "standard" is key there. Obviously, VCs have been selling secondary into other rounds and getting liquidity forever. For small, early stage funds, this can literally make them. But no investor goes into a funding discussion with a startup (and again, with LPs), with the notion that they'll aim to invest and then sell in a later round. Again, in practice, this happens quite a lot, but it's not the goal, obviously. Everyone fully expects a "real" exit, be it a sale or ideally, that pesky IPO. Hell, even an "aquihire" is better optically than an investor cashing out early.
But this market is changing that equation. Previously, if you invested in a round valuing a company at over $1B, you were presumably on board through an IPO. But if you had invested in, say, OpenAI at $1B, you could have exited two years later with a 14x return. That's an incredible return for a late stage investment, most of which hope for a 3x but will settle for a 2x, depending on the size of the investment, fund, and amount of time. But if you had simply waited another year, your return could have been 20x. Or a couple more years for 86x. Or a few months later at 157x. Or a few months after that at 300x!1
At some point, it becomes silly not to sell at least a portion of your holdings given the fiduciary duty to your LPs.
And again, this was a standard part of the equation for early stage investors who were lucky enough to board the proverbial rocket ship (lasso a "unicorn") early. But now it seems like it may become standard for investors in some late stage companies, such as the ones listed above.
It's more complicated than my simple math because there are often rights of first refusal (ROFRs) and in some cases, blocks on selling without a company's explicit permission. But this is all getting more fluid as the private markets get more liquid. And so again, I think it's worth wondering if a new standard investment entry point isn't putting money into a company with the exit most likely being a secondary sale to a larger investor in a few years.2
Firms focused on buying secondary shares have also existed for a long time.3 And some to even buy up other firms' entire holdings (or packages of them) at times. But the mega funds and sovereign wealth funds are taking the practice mainstream and scaling it thanks to, well, more money than the public markets are offering. And certainly more money than would-be acquirers have been offering in recent years given the regulatory pressures. "Hackquisitions" alleviated some of this, and the new administration will likely ease more pressure here. But undoubtedly not to the point where someone is going to buy one of these ultra-late stage companies for hundreds of billions of dollars. What was 'IPO or bust' is now 'IPO or trust' (in SoftBank to come along).
Certainly from an IRR perspective all of this makes sense given the increasingly elongated IPO timetables. But at these multiples on these late stage rounds, it makes sense from a DPI perspective too!
On the flipside, this being the actual model feels a bit pyramid scheme-y. But to quote John Tuld in Margin Call: "We are selling to willing buyers at the current fair market price." I mean, at the end of the day, this is what a market is – what's shifting is simply the exit path. Because it has shifted! But the model, at least as stated publicly, has not yet. My question is if it should? Or will it take a trillion dollar private company to make this all more obvious? So... give it a year?
1 Though one element of this new "bet" would probably have to be on the founder and/or founding team's ability to raise money. I mean, to some extent that's always part of the bet, but in this world, you'd have to be really good at it. History has many examples of people who are really good at it ranging from Adam Neumann to Elon Musk to now, yes Sam Altman.
2 Also, one nice "bonus" of this model is that you probably don't have to exit the position entirely. Again, just as many early stage funds now just sell a portion of their position, later stage funds could do this as well while maintaining a stake for optionality and upside -- assuming the company was okay with that, of course. It does create a sort of weird tension where you'd be signaling that you believe in the company, but not enough to keep all your money in. Still, at high enough prices, it's just a math equation (which is how many seed/early funds talk about exiting some of their positions now, to return capital to LPs, etc)...
3 I get an email from various such firms about interest in buying Stripe shares about once a week -- and have for years at this point.