A PitchBook update indicates that the venture capital ecosystem is grappling with a growing Distributed to Paid-In Capital (DPI) crisis, as exits remain elusive and liquidity pressures mount.
Secondary markets, where investors buy and sell stakes in existing VC funds or companies, have been touted as a potential remedy.
However, a PitchBook update suggests that while venture secondaries are expanding, they are unlikely to resolve the industry’s broader challenges.
Since 2022, dry powder—the uninvested capital available for deployment—in venture secondary funds has surged, more than doubling to $7.2 billion by June 2024.
This figure represents just 2.3% of the dry powder allocated to primary VC funds.
Beyond dedicated venture secondary funds, general secondary funds hold a staggering $94.7 billion in dry powder, with a portion often earmarked for venture opportunities.
This growth reflects a shift in investor demographics, with first-time players like pensions and family offices drawn to secondaries’ appeal: shorter investment horizons and reduced risk through exposure to mature, proven companies.
Unlike primary VC investments, which often tend to fund untested startups, secondaries offer a lower barrier to entry, making them an attractive gateway into the asset class.
The dynamics of the secondary market mirror trends in primary venture investing, providing critical context for its scale and limitations.
During the zero-interest-rate-policy (ZIRP) era, investors paid premiums for secondary stakes as primary rounds were oversubscribed and valuations soared.
However, rising interest rates reversed this trend.
By 2023, discounts on secondary transactions hit a low of 47.7%, reflecting a stalled VC market with sluggish dealmaking and exits.
Fast forward to Q4 2024, and the median premium has now climbed to 8.9%, signaling cautious optimism but also a reluctance to overpay.
Top-tier startups, particularly in high-growth sectors like artificial intelligence (AI), dominate both markets.
In 2024, venture-backed AI companies accounted for over 46% of primary deal value and nearly 30% of deal count, while Caplight data shows the top 15 companies—many in data and AI—drove 61% of secondary market volume, with AI-related firms comprising 26% of the total.
Despite this activity, the scale of venture secondaries remains modest compared to the broader VC landscape.
With unicorn valuations exceeding $2.9 trillion, secondaries account for just 2% of the market.
Even in 2024’s subdued exit environment, where total exit value reached $149 billion, secondaries could theoretically cover only 40% of that figure—if the entire available secondary market were liquidated.
This stark disparity underscores a key point: while secondaries provide a liquidity lifeline, they lack the capacity to fundamentally address the DPI crisis plaguing venture capital.
The allure of secondaries lies in their ability to offer flexibility in a constrained market, but their impact is inherently limited.
As the researchers PitchBook highlight, the strategy’s growth is notable yet insufficient to reshape the asset class.
For now, venture investors seeking meaningful DPI improvements must look beyond secondaries, navigating a seemingly complex landscape where innovation and patience remain in delicate balance.