E382: Why Venture Capital Has a $3 Trillion Liquidity Problem

0:00Ravi, tell me a story about how you spun out of NEA and launched a$1.3 billion fund in 2018. So in 2018, I had been a growth investor for NEA for about 15 years and was noticing some structural changes in the industry. Companies are staying private longer. Another dynamic that was happening is that was really the start of the huge AUM boom. And this wasn't just NEA, this was a cross-venture. Because I was talking to a lot of my friends at other firms. But the venture ecosystem really hadn't evolved. And I found that there was a need for real liquidity and flexible solutions. And so that was really the launch of Nuviu.

0:37We launched Nuviu in 2018, raised$1.35 billion, to really buy out a set of 30-odd companies from NEA and use that as a vehicle to spin off. really as a firm, not just a point in time transaction, but really to build something that I felt was going to be something prevalent for a decade beyond, which is really the need for liquidity across venture capital. Is it consensus who the top companies are? In other words, there's some people that believe that by series being beyond, pretty much it's known which basket of companies is going to succeed. Or is there still these diamonds in the Roth that you could find?

1:16You are seeing right now, at least in the AI boom, a flock to consensus investing. Sometimes that's early. A lot of times it is much later. Our view, we don't have a minimum when we invest in terms of scale. For us, it's really not focusing on consensus or not. It's really focusing on product market fit, the market, and the team. And those three have served me well in the 25 years I've been a venture investor. And so that could mean that could happen earlier, could happen a little bit later. But all of them are companies that we've been tracking, we want to partner with. They view us as value-add partners.

1:51Roughly 25 % of your capital is for primary investments into these companies. Why is that so critical? It's really important because it changes the narrative on who we are. We just didn't want to be a secondary solutions provider because that could become much more transactional. And instead of being transactional, we wanted to be strategic. So how do we be a long-term capital partner, a long-term strategic partner to this company? A lot of times it could start with providing liquidity to employees, to early founders, to institutions on the cap table. But then we can marry that with primary capital and our value adds such that they view us very differently in the cap table.

2:29It's pretty unique in that we can do both. We're not pure secondary. We're not pure primary. But that isn't the real important piece. The important piece is figuring out the companies we want to partner with. they see the value that we can provide, and that's how we start the relationship. I have a bit of a contrarian view on the future of secondaries. Today we have these infamous SPVs in Anthropic and OpenAI and Andurl. The CFOs of these companies, it's unprecedented, are going on Twitter saying, we're not going to authorize these transactions. Second order effects of that is there's going to be a flight back to quality.

3:03The last thing that the CFO of SpaceX and the CFO of Anthropic wants to do is deal with somebody's grandma. Maybe she's technically a credit investor, maybe even a qualified purchaser, losing grandma's money in some shady deal with some SPV holder that they've never even met. So I think there is going to be this flight to quality and there's going to be, again, this return to having trusted capital partners. It sounds so trite, it sounds so basic, but it's such a critical part of the private markets. We totally agree. And in secondaries, you've heard of GP-led secondaries, you've heard of LP-led secondaries.

3:39That's where most of the narrative is. Our view is company-led secondaries is one of the most interesting facets of the secondaries market in venture that we're seeing. It's not doing, again, a point-in-time transaction because a GP needs liquidity or employees need liquidity or an LP wants out. It's much more where the company takes control of the cap table and we partner with them to provide liquidity. And it could be an employee tender, and you tack that on with early founders and early institutions that get liquidity. But it's really important because the founders and the CEOs, and you're hearing about this, this SPV narrative is really front and center to that.

4:14They really want control of their cap table. Their view is we don't want traders. We don't want folks that we don't know who they are, because this is a long journey. Companies are staying private longer. We need partners that we feel good about. That is really important for us, well over 95 % of our deals. It's been blessed by the CEO directly in there with the cap table and the company. So I think that's going to be really important. And you're starting to see elements of it in this top fringe of companies. But I think that's starting to go down into the broader ecosystem. I had another guest talk about the$15 billion that Databricks raised.

4:52Much of it went to clean up their RSU problem, their restricted stock units. Talk to me about that. And what are companies actually trying to solve via secondary? You have employees that have been in the company for five, six, eight, ten years, right? And they need liquidity. And it used to be that they would just wait for that event, an IPO, M &A, et cetera. And this is an opportunity for them to actually, I call it releasing the pressure valve in these companies and really allowing the employees to carry forward and not have this pressure of, okay, I have to wait for this event to get this big batch of liquidity.

5:26That also holds true for a lot of the early investors. And then a lot of it is culminating in this DPI desert that we're in, where you have this massive buildup up until 2021. $3 trillion. $3 trillion. And so the LPs are basically saying, this is great. We still believe in this asset class. The power law is building some incredible generational iconic companies. Having said that, we need to get liquidity. And by the way,$3 trillion in funds with over 10 years. But$3 trillion past the natural fund life. That is a very important point. If you look at a fund life, it's typically 10 to 12 years. And if you look at companies that are now staying private longer, the average has gone from seven, eight years a decade ago to 13, 14 years.

6:08So you're already seeing this mismatch, a structural mismatch in terms of the fund life and the life of a private company. So something needs to give. What you don't want to do is be in a situation where you're forced to do something. No company really wants to be forced to IPO, forced to sell. You want to have the freedom and flexibility in the hands of the founders that are built so much for so long for them to carry forward. And I want to double click on that because what does it mean to be forced? It's subtle. It's somebody on the board saying some offhanded comment. It's employees, your co-founder that might have been with a company 10 years ago that's trying to have a baby and start a family.

6:48It's these subtle things, and they build up to release this pressure valve is a very underrated thing for a CEO that you want him or her focused fully on optimizing the outcome for the company, not optimizing around someone's liquidity. And the signs are subtle, but you said it. The quality CEOs will pick up on the signs. They'll pick up on the signs in board meetings, the institutional investors, but they'll pick up on signs daily with their employees. And one of my companies, this was 15 years ago, that really I thought was one of the early pioneers of this company called MuleSoft, Greg Schott, what he did is he started tacking an employee tender or an employee secondary to every primary financing.

7:29And he found some really interesting trends. He first found that there's a lot of employees that got liquidity. That was one. The second was it really boosted morale. It was a great retention tool. Third, in subsequent tenders, the employees started pulling back on how much they were selling because they realized, wow, I'm part of building something. And the reason I wanted liquidity was that pressure release valve. I wanted to buy a home, et cetera. Once that's been satisfied, I can now build for value. And I took that list, and now you're seeing that much more prevalent. That's why the whole founding of NewView was this.

8:03It wasn't just this point in time trade or transaction. with any, it's really, we think that this market is, there's a structural shift happening in venture. It's following what's happened in PE, right? PE has sponsor to sponsor deals or isn't that way in venture. And I think that'll change. So the structural shift is really enabling companies to continue to build, but also satisfying the needs of the other constituents, the GPs, the LPs, the employees. Expert calls have always been one of the most powerful ways to build conviction. But today, investors are asked to cover more companies, move faster, and do it with leaner teams.

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9:49All 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. Just a steal, man, what you're saying. I believe OpenAI is allowing up to 30 million in secondaries. At some point that becomes counterproductive. What is that point? And how should companies think about how much in secondary employees should be able to sell?

10:31That's a great question. It's kind of the Goldilocks problem. If it's too small, you'll get frustration from the employees and the institutions that they weren't able to sell enough. If it's too big, and that's what I worry about in this climate, you could have complete misalignment. You can have behavioral changes. So this is where these company-led transactions or secondaries really have to be thoughtful. So how we do it, we partner with the CEOs and we help them think about their dashboard. Is there a certain tenure that the employee needs to be there? What percent of their vested stock can they sell?

11:04What is too little? What is too much? What is that right amount where you're not changing that employee behavior too much, but you're still releasing the pressure valve and it's a great retention tool. it's actually becoming a great hiring tool. And so what does that number look like? It could be 10 to 30 % or 10 to 20 % of their vested equity. It varies company by company, but there is a sweet spot. And a lot of these companies are doing it more and more. It's not just now the open AIs and the anthropics of the world. It's really coming to a much broader part of the market. Do you know the origin of the four-year vesting schedule?

11:42I don't. Actually, don't. So Eric Bond from Hustle Fund told me that the reason employees historically invest over four years was that was the expected timeline to IPO, from Series A to IPO in the 80s and 90s. Just to give you a sense for how things have changed, I think SpaceX is almost in year 20. Palantir was, I believe, in year 17, year 18. Really interesting point that we have noticed after starting NewView in that so much of venture is just how it's been done, right? The four-year investor, I think that's a wonderful example of just how it's always been done. Back then, there was an alignment, right?

12:17But now people don't even think of it that way. And our approach is just to break that or put it on its side, say, well, it's always been done that you invest and you get liquidity whenever you get liquidity. Our view is that it doesn't have to be. What we're trying to do is even disrupt the venture ecosystem in a small way by saying, you know what? Take a lesson from the PE folks that have these sponsor-to-sponsor deals. It's easier for them because they own their company. It's much harder to do if you're a venture investor. But just figuring out ways such that it doesn't have to be this long, linear path.

12:48It's always been, okay, we can't mess with that long, linear path because you don't know, right? You invest in a lot of companies, the power law. And some of these companies just take time. You mentioned some great examples. Having said that, along the way, there are mechanisms for you to increase your chance of retaining great people and continuing to build such that there isn't the stagnation element. It's eight, ten years. we're starting to get going, but man, there's a lot of folks here that are tired. And so I think there's a lot, those, when I say folks, it's all, it's up and down the cap table.

13:17It could be angels, institutions, employees, founders. So all of that plays in. 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, sometimes I even get loyalty rewards automatically.

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15:03I 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, 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 the shop or on the go.

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16:18Whether 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, 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.

16:52You could track sales, manage inventory, book appointments, and see reports instantly whether you're in the 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 to 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 that's sq u a r e.com slash go slash how i invest with square you get all the tools to run your business with none of the contracts or complexity run your business smarter with square get started today do it

17:34We've been talking about these companies, SpaceX, OpenAI, Anthropic, full disclosure, I'm an investor in Anthropic and SpaceX, but these companies are going to have the three largest IPOs in history. How does that change liquidity and the nature of DPI in Silicon Valley? The IPO market is critical for the venture ecosystem. It's really, and this is where I do agree with Bill Gurley, former benchmark partner, when he said that. So I think these are going to be generational IPOs. It's going to put a lot more liquidity into the system. It's wonderful for venture because it's going to put a lot more liquidity in the hands of limited partners.

18:13And that's really important because that's what really gets the flywheel spinning. They get capital back. Guess what? They're going to reinvest it back in venture. When you have this illiquidity DPI desert for so long, the LPs, and it's fair for them to say, look, I need liquidity from you. By the way, a lot of that I'm just going to reinvest back into you, you being the venture ecosystem. But your siblings in the credit world and the buyout world and the middle market world have returned capital to me. I understand that the multiples you're going to promise me are a lot higher. But I do think that that's really going to be important to get that flywheel spinning.

18:50And if you look at just in my 25-plus years in venture, when you have that IPO market start to open, people realize why companies go public and why public institutional investors love the venture ecosystem for growth. You really can't get growth, broadly speaking, in the market. So I think that that's going to be a fantastic set of events for the venture ecosystem. I have a bit of a contrarian take on this, and I think DPI and venture is not going to change long term. And before I tell you why, I want to first steel man that. The original Swenson model just started in the 80s by David Swenson, famous investor at Yale, modeled for 24 % DPI in the private markets.

19:31I had Alex Ambrose, CEO of Allocator Training Institute. They've tracked this for several decades. 2024 had a 9 % DPI, lowest since 2000. 2025, again, roughly 9%. I don't think it's changing. And the reason for that is if you think about venture capital as an asset class, a couple of things are happening. One is you have this extreme concentration in these top quartile funds. The Sequoias, Andreessen, Founders Fund, et cetera, et cetera. And it's important to remember, and people forget when talking about DPI, is venture capital is an access class, not an asset class. meaning the top LPs are trying to get into the top VCs, but on top of that, the top VCs are trying to get into the top startups.

20:19So the startups pick the VCs, the VCs pick the LPs as it relates to over 50, close to 75 % of AUM in certain years. Therefore, if the founders are the ones that are ultimately picking whether they want to go public and they have an infinite amount of capital from VCs, I don't think it makes sense for them to go public quickly for many of the reasons that are obvious and many non-obvious. The most obvious being, of course, having to report on a quarterly basis. We talk about incentives. You basically can't take long-term bets. It's extremely difficult, which is why you see in public companies the main CEOs that are taking big risks are the founders that either have literal control via founder shares and special bonus shares like at Google or at Facebook or figurative control where the public markets trust them, kind of like Elon and Tesla.

21:12I don't think that's changing. And yes, I think those three companies will provide a lot of DPI. But fundamentally, the problem is the same, which is it's significantly easier to grow a company in the private markets. And the more disruptive and the more fast moving the market, the more of a competitive advantage it becomes to build in the private markets. So let's unpack that. We make some good cases. I would say two things to point out. The DPI, it's a fair point to say that 24%, probably that number may be unattainable. But DPI, there's also a denominator, which is the paid-in capital piece.

21:48And that has exploded in the last decade. So what you're saying is if the DPI still remains very low, we'll still give a lot of DPI, but we'll still keep raising massive amounts of capital. I just don't know the institutional LP base that can support that for a very long period of time. So that's one. So maybe it's not 24%. Maybe it's not 5 % to 10%. And that 9 % may be generous in some of the low points in the last decade. There's probably some equilibrium where you can provide more DPI but still bet on your winners. And that 24%, that's basically saying you pay back the fund in four or five years.

22:24That's also very tough to stomach. I think in the buyout world, it's very different, right? But in venture, I think these are maybe the rails you're looking at. So I think that there needs to be a normalization. And that's happened if I've witnessed several downturns post the dot-com crash, post the GFC. There was this normalization and equilibrium. There's always a run-up. But post that, people start realizing you need to marry that DPI with capital raising. The way I frame it is for the longest time, VCs would look at the three main metrics, multiple, IRR, and DPI. And the way I think about it, just to visualize, multiple was 50-point font.

23:04IRR was 24-point font, and DPI is 6-point font. And I think what you're hearing from the LPs are multiple is great, but you need to start normalizing the three, right? That's one point. The other point about staying private longer, I think that there is going to be some companies, I've talked about this, perpetually private companies. I think it's a fringe set. Maybe it's 5%, 2%, 1%. That why did people go public in the past? It was really for two reasons. Capital, access to capital, and liquidity, right? you're right. The way the private markets are evolving, you can do both of those. Having said that, we do need public markets for a variety of other reasons.

23:44And even some of these folks that want to be private for a long time, if you look at the journey of many of these companies, post-IPO, there's a period of time when inorganic growth starts becoming interesting. Most venture-backed companies really think about organic growth. They have product market fit. It's this amazing product that they have. They scale that. After a period of time, they really start thinking about buy versus build. And when you have a public currency, it's a lot easier to do that. You could argue OpenAI is buying a lot of companies. But if folks thought that OpenAI would be private forever, there may be a different reaction to folks selling because how would these institutional investors get liquidity?

24:21So I do think there's some real benefits there. And also access to a shareholder base that could be longer term. But again, And we don't know where that equilibrium point will be, that DPI percentage. I think that is evolving. I agree with you. Such a good point about build versus buy. The other way that I also look at it, because these are markets. People forget these asset classes. My biggest pet peeve is someone will say, well, I don't like early stage venture. Well, what does that mean? At what valuation? At$5 million or at$50 million? Every asset class has some equilibrium, some theoretical equilibrium, which is why you see these waves.