E376: The $3 Trillion Liquidity Problem in Venture Capital

0:00Jared, you're the founder and managing partner of Manhattan Venture Partners, which has roughly$3 billion in AUM. And last time we were chatting, you said that there's$3 trillion with a T locked up in venture. What did you mean by that? Here's roughly$2.7 trillion of capital that's locked up in venture funds past their 10-year life. So that means that distributions back to LPs have been relatively negative for the last several years. So meaning the industry is not returning cash, which in part is why I have a business. And I think the reason is simple. There's so much private capital chasing these companies that they don't need to go public.

0:39And staying private gives these companies room to iterate without the noise of a quarterly earnings report. So they stay private. And if you look at some of the most recent IPOs, whether that was Klarna back in, I think it was Q3, they were a 20-year-old company. Think about that for a second. two decades. SpaceX, which is supposed to go out over the summer, that's a 24-year-old business, right? Those aren't outliers. To me, what I'm seeing is that there's a new shape in venture. And so the way we see it is that companies are now on this 20-year journey, but funds are positioned for 10 years, which I think is why we have an active secondaries market.

1:18Perhaps this is a dumb question, but why are these companies staying private for so long? 20 years seems like an egregious amount of time to stay private. They stay private because they can't, right? I know that sounds like funny and I'll explain that. I think the private markets have become the default and the public markets have become the exception because a company has enough capital privately that they can iterate on their business, they could pivot on their business, and they could build without having to deal with the public market noise that sort of destroys agility. And I don't think it's a bug, I think it's really the feature.

1:54A really good example is an investment that I'm not in called Caruso Energy, right? They pivoted on their business model a little bit. And in the private markets, they got a higher valuation on the back of it. Now, if they were a public company, I would imagine that an activist investor would show up, maybe the share price tanks, and you're sort of fighting for your life instead of building. Companies don't need to go public to fund their growth. So ultimately, they don't, right? Distributions go negative. Funds hit their 10-year mark with no DPI. And to me, I think that's the real crisis. The secondary market, you know, broadly has been around for 30 years, but the evolution of secondary directs, now I don't think it's a flash in the pan.

2:36I think it's the infrastructure that ultimately is going to let companies stay private as long as they need. So has the vibe shifted with LPs when it comes to DPI? Absolutely. The shift is simple. IRR does not pay the bills. DPI does. The power law and venture means that many GPs hold these massively overweight positions in late stage companies. And those companies no longer exit on schedule. So LPs, they get stuck. Funds could hit 12, 13, or 14 years when they really expected to exit in 10 years. So that velocity of money that used to be in venture, it starts to collapse. So this is a true story.

3:20I'm flying out to Mexico City a year ago. And I'm online. And in front of me, I bumped into one of our larger families that we work with. And I was a little insulted that Julio didn't come visit us when he was in New York. And he said, listen, I was actually on a tour of all the private equity funds that we're invested in. He goes, for almost 20 years, we've been laddered in every one of these flagship funds, the longest one he was in for 18 years. So if you think about that for a second, they expected half of that. And so to me, that conversation changed so much for me, because what I realized is whether you're a GP in venture or you're a GP in private equity, it's kind of easy to get into the business, but how do you get out?

4:00And to me, that became the real question that I think about as we invest in many of the companies that we invest in. It shows itself in the numbers. I had the CEO of Allocator Training Institute, Alex Ambrose. They've tracked this data for many years. So the original David Swenson model, who started this, the Yale endowment model, they modeled a 24 % yearly DPI on private assets. 2024 is 9%. 2025 is again 9%. So you had almost two and a half times less DPI. And that just breaks the entire model. There's so many downstream consequences to not getting DPI. You mentioned one of these, you have to be more selective where you re-up.

4:42You have to go back to your investment committee and explain why you don't have liquidity and why you did not model the correct outcomes. There's so many downstream consequences that are underappreciated when you're in the GPC. So you mentioned you started the business 12 years ago. We met probably in the first year that you started MVP. And at that point, the secondary market was a gray market, to put it nicely. It was somewhere between a gray and a black market. And over time, it's institutionalized more and more. What's been behind that? Companies, as you know, started to stay private longer and the actual sheer magnitude of them started to get bigger.

5:23Look, I think one of the issues that bubbled up during those years was everybody at the time was trying to democratize this space. So it was like, let's open up the floodgates to retail. And by opening up the floodgates to retail, they're like, this is progress. But ultimately, today, especially, I think 92 % of all the secondary transactions are actually institutional. 8 % are really retail. And I heard that when I was at an event with Tom Callahan from the NASDAQ private market. And because if you look at their data, they're doing so much more volume than sort of everybody else. And that's because they're running tender off.

6:01So all of these things are happening behind closed doors. But what's really funny is that 8 % retail is where all the published data seems to be coming from. So there's also a mismatch in sort of valuation and pricing. And I think the ratio tells you everything about how this market really works. So again, the total addressable market to me is too big for retail alone. When we started talking about this years ago and we got to know each other, it was very retail centric. And the need to institutionalize capital to create the liquidity at scale that this market demands, nobody was really doing at that time.

6:38Listen, I think retail should participate. I think it's important that they get access to this. And look, frankly, if you're allowed to go to Atlantic City in Las Vegas and bet it all on black at the roulette table, you should be allowed to invest in venture. But again, that's probably a conversation for a whole other podcast. But I think institutional dominance is what's going to make this market more efficient. The first time I ever saw institutional presence was when Tiger Global showed up and they started to accumulate companies like LinkedIn and then later on with Spotify. And they were doing it in the way that a public market investor would accumulate stocks that they understood better than the market, the Warren Buffett method.

7:16That was the moment that I realized, okay, this isn't really a gray market. This is a very real market. This is an institutional market. But at that time, most of my now peers were trying to democratize it. And we realized that somebody needed to step in and institutionalize it. And today, companies are raising billion dollar rounds almost every single day. But the reality is there's a very small subset of, let's call it, sophisticated investors who truly understand how to move that capital, especially secondary capital, at scale. I have a contrarian take on this. And because of my vantage point, I'm having hundreds of these conversations with different players in the ecosystem, there are several headwinds against retail participating.

8:00One is, and this is public information, the CFOs of the most traded secondary names like OpenAI and Anthropic are literally going out on X and saying, if you buy via unauthorized vehicles, we will not honor those transactions. On top of that, you have what's become a meme of itself, these two and 20 on two and 20 and 20, these triple layered SVVs into companies like SpaceX, like Anthropic, like OpenAI, just in full disclosure, investor in SpaceX and Anthropic, not through any of these vehicles. And at some point, you're going to have a reckoning. And I think not only will people be severely disappointed by their actual returns, I actually think some people will go to jail.

8:47And by the way, when I say people will go to jail, I'm talking about rehypothecation of share. Some people probably double, triple, quadruple sold their shares. And the pretty obvious second order effect, if you believe that this will happen, I think it's hard to argue that some part of these trades will not blow up in people's faces, is that there's going to be now a return back to the institutional bid. Why? Two reasons. One is investors are no longer going to trust these SPV vehicles, as they shouldn't blindly. They should always do your diligence. You always want to read the LPAs. You always want to make sure that whoever's selling you this exposure has a very good reputation, has a verifiable track record, all those things.

9:29But two, and perhaps much more importantly, is that of all the problems the CFO of Open AI or Anthropic or SpaceX is dealing with, this is the very last problem on planet Earth that they want to be dealing with, which is somebody's grandma. Let's say that she happens to have$2 million in net worth and she's an accredited investor. Good for her. But somebody's grandma is emailing the CFO saying, I lost my life savings in investing to SpaceX. And this is not going to end well. That being said, I do think this is going to be another buying opportunity for the institutional bed. I think that's an interesting hypothesis.

10:06And the last 72 hours has been pretty wild. And everything that we're able to sort of read online about what especially Anthropic is saying or historically what Anderl has been very vocal about, I think is real. The only problem I have with some of it is that if you look back at the FTX transactions that occurred around Anthropic, so many of those companies, because it's all public, were LLCs. They knew it at the time. I think at some point in time, a lawyer probably woke up and said to them, hey, I don't think you guys know how many actual investors you have sitting on your cap stack because there's a look through to those LLCs.

10:47I started to see over the last six months, we're this hub on the wheel. So often we get somebody who thinks they have something. And the new thing is this is an L1 or an L2 or an L3, meaning layer one, layer two, or layer three. First off, I hate it. Second off, it's pretty wild that we're there. To your point, I think that there's probably a method that where retail can get it. And it's probably through the likes of mutual funds, like 40 act funds, right, where you have real managers like the Liberty Fund, which used to be the Shares Post 100 Fund. Big mutual fund, blessed by the companies, direct to cap table.

11:25That's where retail should go. Companies are going to be a bit more aggressive about who's on their cap table. I can tell you from being an investor in XAI and their Series B, they asked who our LPs were. They weren't the last. Since then, I've had at least two other companies ask for a list of who our LPs are. And so I think that to your point, there's going to be a bit of a new normal, right, where they're going to be a little bit stricter on who's on the other side of the transaction. Look, I see my relationships with the companies as a partnership. So trust is probably the most important thing when it comes to those relationships.

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13:21All of it lives inside the AlphaSense platform, trusted by 75 % of the world's top hedge funds, alongside filings, broker research, news, and more than 240 ,000 expert call transcripts, turning raw conversations into comparable, auditable insight. Take advantage of AlphaSense AI-led expert calls now. The first to see wins. The rest follow. Learn more at alpha-sense.com slash how I invest. If you had to guess, what do you think they were trying to ascertain there? there's still cap table limitations especially when it comes to accredited investors right not to qualified investors and so if there is a look through which i know there is they don't know how many accredited they have and if you hit a certain number then um i think you're forced to start to either report like a public company or you're forced into the public markets Today, you focus on the Series B to Series E part of the market.

14:19Sure. What's your right to win? How do you compete in one of the most competitive parts of the entire capital markets? 12 years, it's four different business lines, and it's one signal engine, and it's the value proposition that I'm able to provide to the company. So look, I'm not Andreessen Horowitz. I'm not Sequoia. I cannot walk into you as a founder of a company and tell you how I'm going to help you build and scale and how I have these most amazing connections ever so that you can become the next unicorn or decacorn. I'm not T-Row. I'm not Fidelity. I can't help you sort of pre or post IPO like companies like that can do.

15:00But what I can offer you is the ability to be a pressure relief valve on your cap stack. I can keep you private as long as you need and ultimately so you don't end up in the hands of potentially those SPVs that were being called out. Think about it this way. I land in your Series C. Somebody bubbles up on your cap stack. It could be an early investor. It could be your CFO who's moved on. And what you end up doing is you introduce them to us and we can be that pressure relief. It goes into the hands of a friend. That is one of the many value propositions I think that we provide. And to be selfish here, I think every piece of my business, especially on the LP side, I think really feeds into each other.

15:48So I have four parts of my business. We have research, which you could go find on Bloomberg terminals. There's 15 ,000 subscribers who have come to our website organically. It kind of blows my mind. When we publish a report on, I don't know, XYZ company, and it goes out into the world, we see buyers, we see sellers. They start to sit. I've been doing this since the early days of Facebook. We were in Facebook. We were in Twitter. We were in Palantir, Spotify, Alibaba. And the people that I helped preserve their net worth in those days, today they're VCs, today they're founders. And that trust compounds over time.

16:23We're going to have new entrants into this market, right? But they cannot sort of replicate the receipts that I think that we have. Have you thought about CVs and what are your thoughts on CVs in venture? So I think the best and the largest venture funds have the ability to create their continuation vehicles. So all the tier ones that you're talking about, right? Those top potentially decile performers. I think it's a lot harder for newer and smaller VCs. Look, I mean, we utilized it ourselves. So in my MVP All-Star Fund 3, we had SpaceX was the last piece of that portfolio. We didn't force a choice.

17:07What we did was we gave our LPs an option, hold it and ride it to the IPO or sell it to a new LP with a different timeline to liquidity. Some wanted the home runs, others wanted cash. I think both are legitimate and we engineered a way to solve for both. I think that what you're going to see is you're going to see some traditional VCs submit it to the company for transfer. I think other times they're going to create continuation vehicles. It really depends on the depth and the breadth of the organization. I'm very bullish on continuation vehicles in venture capital. For one, it literally solves a DPI problem.

17:44Why? Because a continuation vehicle is classified as a secondary, which very importantly means that the VC is able to market as DPI for the next fundraise. And And venture capitalists, just like any asset manager in the world, are in these continuous fundraising cycles. So having these marks is extremely valuable. Two is it's difficult for LPs to have the cognitive dissonance in that I think it's terrible that you're doing this, but also I don't want to roll my equity into these CVs. And almost every single CV that I've ever seen, that I've ever heard of, allows the LPs to recommit to the next vehicle.

18:20and oftentimes with lower fees. So sometimes it goes from a two and 20 to a lower fee. Many of these CVs, not in terms of AUM, not in terms of number, but many of the highest quality CVs have very good alignment with the GPs and that oftentimes they're rolling their carry, they're recommitting a GP commit in order to make it marketable if they're trying to bring in new LPs. That being said, there's one very big friction on CVs is that they are also extremely problematic if you're a venture capital exempt. Because again, there are secondary, they're a fund of one, they basically negate your entire venture capital exemption.

19:00So that I think has been the big friction on CVs. Everything else points to many CVs happening in the future outside of this caveat. And I think some very smart, large asset managers are starting to partner with GPs on the CV opportunities in order to solve around these exemption issues as well. But at a high level, if you take away the venture capital exemption, there's so many reasons to do it and very few reasons not to do it. I don't have these statistics. I wonder how many venture funds at this point have become RIAs instead of these exempt reporting advisors or these exempt... Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place.

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20:54Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square, and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square.

21:25They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back.

21:57And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. At Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smarter with Square. Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground.

22:28I was actually thinking about this the other day when I stopped by a local cafe here. They use Square, and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You can track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go.

23:03And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back. And right now you can get up to$200 off Square hardware when you sign up at square.com slash go slash how I invest. At Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smarter with Square. Get started today. Answer for you. Somewhat tongue in cheek, but 75%. Why? Because 75 % by AUM. It's my tongue in cheek answer.

23:38It's an estimate. Why? Because 75 % of firms raised of capital raised in the last year were basically top five. If you think about 75 % of all of VC is the top 10 firms, almost all of them are RIAs at this point. From a firm standpoint, I think it's still small. I think it's still probably less than 10 % of funds are RIAs. And by the way, the quantity of the number of firms is as important as the AUM, because it's decision makers and people around the tables on deals. Right. So if there's only one person that may be interested in a company and a CV, even if that person has$100 billion, it's a different dynamic than having 100 people have a billion dollars.

24:22So I think both quantity of funds as well as AUM of funds are both important metrics. So if I have this right, you're saying that it's a small number of VCs, but 75 % of the dollars. When we originally met in 2014, you had just gotten started. You've now grown the firm to nearly$3 billion in AUM. What has surprised you the most about building an asset management firm? It goes back to what I was saying before. I think the answer is trust. The most surprising part of going from zero to I think it's$2.8 billion is the trust. That comes from both sides, right? So the trust our LPs put in us and the trust that the companies we serve also put in us, right?

25:11So when I was launching on my first fund, I had an investor who made a lot of money with us and sort of one-off opportunities when we started off as this fundless sponsor. So I flew to Spain. I met him in his office. I looked at him and I said, look, this first fund is the most important thing that we're doing. And he looked back at me directly in my eyes and he said something like, I'll give you a million dollars, kid. And that's the LP side of trust, right? And that's how the firm got built. On the company side, that trust is also really important. Hawkeye 360, they did their round recently, right?

25:43We invested in their series D1 in 2023. They're an RF satellite intelligence business. I'm a true believer in John Serafini, who's running that organization. We landed in that primary. And over time, John introduced us to secondary, which let us bring our cost basis down for our LPs. But we also added real value because it was a need that he wanted for his cap stack, which is why we had the opportunity to invest. Obviously, we had some real value beyond capital. We introduced him to Admiral Mike Gilday, who ended up joining his board. And then three and a half years later, Hawkeye is now a public company.