Before we dive into the meat of the essay you wrote, I wanted to let you first talk about the dynamic here. I don't know if everybody is familiar with what's happening in liquidity markets. Give us the 10,000-foot view of what has changed over the last 10 years in terms of how VCs actually get cash out of the companies they invest in.

Traditionally, you would think of venture capital as investing in the earliest rounds of a startup, from the beginning to a few years in. Those go by seed, Series A, Series B, and so on. On average, you'd have a few companies that would return some cash via an acquisition a few years in, or things like that. But your real winners, the things that were going to make you and your LPs money, were large acquisitions or IPOs. Obviously, to harvest those, the companies have to get big enough to be worth that. We used to think of that as a seven- to 10-year, maybe 12-year at most, period. That's why most venture funds have a 10-year life cycle, so to speak. It means that within 10 years or so of the initial investment, the VC and their investors expected to harvest the majority of the cash back.

That's really important because the endowments, the foundations, the high-net-worth individuals, all these people investing money into venture funds have a certain expectation for the velocity of that capital. How do they get it back? And when they get it back, hopefully multiples of it, some of it goes to their own needs. For example, if you take money from a university endowment, they're usually using some of the proceeds to pay for the operations of the university. But they're then redeploying that capital into your next fund and other venture funds. When that slows down, capital is not coming back to venture capitalists and thus not being distributed to the people who back venture capitalists. They have their own version of a liquidity crisis: they don't have as much cash on hand to support their own operations. And equally important for our business, they don't have as much money to redeploy into venture. So you can imagine that the venture funds don't have as much capital to deploy into startups, and that slows down innovation.

All of this was based on the notion that startups exit. They exit via M&A, because the M&A markets are vibrant and fertile and not fraught with regulation, or they go public, because companies could go public with a few hundred million dollars of revenue and then grow once they're in the public markets. At those points, a venture capitalist might hold some of those shares, but most of it becomes distributions.

So that's 20 years ago, maybe 10 years ago. As we all know now, some of those assumptions have changed. M&A is harder. We've seen different attempted acquisitions, Visa of Plaid, Adobe of Figma, not come to fruition. With the IPO markets, there's the colloquial "the window is open" or "the window is not open." Every few years, there's been some destabilizing macro event that has made the public markets less attractive or harder to access. There are different opinions about what type of company you need to be and how big you should be to go public, and some of that is just vibes. You have more and more founders, such as the Collison brothers at Stripe, who are clearly running a public-scale company, but doing it from a position of private ownership. So you could be an investor in those companies and find that your capital is tied up for much, much longer than you thought.

One of my concerns with this evolution has been that the mechanics of a company getting acquired or going public force a lot of pressures and evaluations onto a company. One of the reasons that folks like the Collisons don't want to go public is that it's a pretty decent burden to become a public company and then run and operate as one. That's a potential risk. But what is your verdict on this evolution? Is it net positive, net negative, net neutral, or just a different beast with the same story?

The venture industry right now is bifurcating into smaller, artisanal, focused funds, let's say sub-$250 million and most of them very early stage. Those capital bases would basically make you a seed or Series A fund these days. And then there are the AUM vacuums, assets under management, where they're raising either single or joined vehicles in the multi-multi-billions of dollars. You've seen this among the Lightspeeds, Andreessen Horowitzes, Sequoias and Thrives of the world. Those are two very different beasts that we all put under the umbrella of startup investing.

For the larger groups, there are a lot of different incentive models and a lot of different mechanics of putting that money to work. You could imagine that if they are trying to get a return off several billion dollars, it's not just about the multiple of an investment. A 20x return doesn't move the needle for them if they only got $10 million into that company. So those folks need to pile cash into these startups, and a lot of these startups need the cash. We're talking about nuclear fusion and AI models. So I'm not saying that one party is ripping off the other, or that they're taking a company that doesn't know what to do with the cash and tossing it on them because it's in the bank account.

But there is this aspect of what happens when those two styles of investors find themselves in the same company. My experience is that the smaller investors need to reconcile that they are then dealing with other folks on the cap table who are playing a different game. Once you are the smaller ship in a regatta full of yachts, you have to decide what you're comfortable letting ride versus at what point you become a seller.

Think of these private companies, Kyle, as being the size of public companies: multi-billion-dollar valuations, tens of billions of dollars. Those are past the point where venture capitalists normally would have been out of these companies. So there's the argument, as a seed investor, that "I should stay in this because I have privileged information." But you own a fraction of a percent of this company, and the big boys are around the table. You're not getting information. You're not controlling your own destiny. If you're a good investor, you want to get that capital back when you can no longer get 10x, 20x or 30x out of it, and actually put it to use, not just let it grow slowly in a large private company.

So my answer would be that there are all sorts of pros and cons, as a private investor, to buying other private company stock or selling your private company stock. But the reality is that it should be considered part of the playbook now, as opposed to something that was unseemly, like, "Oh, what are you, selling out?" The stigma. Because I think it's actually quite important to the business model of many of these earlier, smaller funds.

I would say that feels easier said than done. As a capital allocator thinking about your strategy, that makes sense. The reality is that with most founders, or with employees seeing folks sell, even if you don't structurally have unfair information rights, or your business model as a fund requires some liquidity, there still can be that stigma. And so people still feel obligated to sell. There's that. There's also the emotional side, the loss aversion of selling too early.

Yeah, selling too early. I guide other fund managers all the time, and some of that also depends on where you are in your fund life cycle and what your LPs are going to value. I'm a big believer that early managers should put some runs on the board early, get some DPI, and show that they know how to manage capital. I think that will help their fundraising and their credibility within the industry.

We've certainly used opportunities to take some money off the table in structured secondaries. We were always selling to another investor who was an existing investor in the company, or who was coming in in that round and doing it as part of a financing that includes both primary and secondary. Those are obviously the easiest. The company is happy to have it occur. It's occurring with an investor who's already an insider or becoming one, so they have the information they need, because it's happening around an actual financing event. There's no pricing issue. You're not trying to argue for a price higher or lower than the last mark, so you're not creating a shadow market for the company.

There are transactions that occur between and around those events as well. I don't think we're moving, within the next few years, toward a highly liquid buyer-seller marketplace that you log into to list your shares or buy shares, the vision that some folks have had, or that Carta was working toward in some capacity. But I do think it's going to be much more of a discussion point.

Kyle, I don't know how you think about this, but some of this might be precipitated not by Hunter Walk wanting to take some money off the table in his winners, but by a lot of these zombie funds that raised one, two or three funds and aren't going to continue raising. The liquidation of those assets is a type of secondary. When somebody comes and buys your portfolio for 60 cents on the dollar or whatever, some of that's going to be held and some of that's going to look to transact. So there's going to be different types of volume coming into the market, and it's a question of whether the market can clear it with imperfect information and imperfect pricing.

It's also a function of there being a really significant spectrum of the types of transactions that can happen. There's a big difference between what you're talking about, things like structured tenders, employees being able to sell, or investors coming in as part of a round and buying secondary, versus your friend's cousin who has an SPV of an SPV of an SPV holding $10,000 of SpaceX. I think one of the obstacles is that people get pushed into what are potentially not the greatest end of that spectrum, because there isn't as much transparency, liquidity and volume.

I'm clearly talking about what I'd call institutional transactions, where you're basically saying there are people with different interests, timelines and alignments on the cap table. Why should that cap table be frozen in amber until the company exits, when there can be a realignment, a reshuffling, that makes the cap table more consistent with the company's trajectory?

We're talking about this in terms of the Stripes, the SpaceXes and so forth. I actually think there are versions of this that look more like a PE buyout, or at least management-sponsored. We're seeing more tender offers where early investors are given the option to sell a portion, if not all, of their holdings to an institution or an investor who decides they want to own 40% of this company, not 10%. In those cases, it's not because the company is on an IPO curve. It's because it's on a very good business curve, where that institution is happy to hold a majority in the company, believing that it will be a mid-high nine-digit PE exit at some point, and they can add that to their portfolio. But they don't want to own 10% of it. In that case, why do I want to own 2% of that, if it's going to be something that doesn't look like a traditional venture outcome? There should be a buyer or a seller for everything. We're just not used to buying and selling.

That's a good place to segue into as we wrap up. In the essay, you point to examples from folks like Tomasz Tunguz and Charles Hudson, who believe that this is a structural shift and not a passing phase. Do we have something close to an efficient market for those transactions? Or is there a paradigm shift we have to go through, and changes we need to make?

The venture market will never be an efficient market. It's a bunch of people running an auction based upon the future, a limited auction.

Navigating it as a founder is also the tricky part. What do you wish it looked like?

I think we're going to have more standard documents. I think we're going to have more ways of identifying moments in time when companies are fundraising, with secondary around those in ways that might be a little more structured than just ad hoc. I don't think we're going to see the creation of share classes reserved for secondary. Remember back in the day, Class F for founders? I don't think we're going to see stuff like that. I do think we're going to see more conversations between smaller funds and larger funds in a financing, potentially even along the lines of, "Hey, does anybody want to be a seller here? We have more demand than we need."

I also think there might be opportunities for new structures of funds that focus solely on underwriting a specific company. Like you said, you're seeing that in SPVs right now. But you can imagine somebody raising a bunch of capital, going to an early-stage fund like ours and saying, "Hey, you seem to have a few really good companies here. If we're comfortable underwriting that, would you like to transact those, if the company is going to allow it?" And then essentially saying, "We've come to a decision on this company. It's one we like. Let me crawl that cap table and find 15 other people who are willing to sell." All of a sudden, they're able to structure almost an SPV in reverse. As opposed to "You've been given a $750 million slug to fill; now go find investors for it," it's "I'm underwriting this company, and I'm lining up capital to buy up to $1 billion of it over a period at a particular price." Maybe we'll see more people doing things like that.