The Future of Venture Capital: Faster Returns and the Rise of Secondary Markets with Practical Venture Capital

Venture capital (VC) has shaped innovation and entrepreneurship. After Harvard Business School professor Georges Doriot founded the first VC firm in 1946 and highlighted the high-risk, high-reward nature of venture capital, it has evolved into a global investment power. In the 1970s and 1980s, VC thrived as Silicon Valley emerged as an international technology hub.

Tax incentives and changes in pension fund regulations spurred the surge in VC investments in the 1980s. The “2 and 20” fee structure (2% management fee and 20% of profits), which became standard practice, was also introduced during this era. Meanwhile, the dot-com bubble of the late 1990s served as another significant phase in the industry’s growth. By the 2010s, VC investments were skyrocketing thanks to the success of private companies valued at over $1 billion, also referred to as the “unicorns.”

Venture capital is more globalized today, with major centers not only in Silicon Valley but also in New York, Shanghai, London, Beijing, and Seoul. The landscape has become more complex, with specialized funds focusing on sectors such as biotech, fintech, and sustainability. As of 2024, several trends have emerged, poised to reshape VC’s future. For instance, alternative funding models continue to compete with traditional VC funding. In addition, more startups are turning to non-dilutive capital options like revenue-based financing or venture debt, reducing their reliance on equity-based venture capital.

However, one of the most glaring transformations in the industry revolves around the development of VC secondary markets—a trend offering new opportunities for liquidity and faster returns for investors. Investing in VC is a high-stakes game. The traditional VC model has downsides for most investors, including the “J-curve,” where initial investments produce negative returns for several years before the portfolio begins to generate returns. Many VC funds don’t make distributions until five to seven years into the lifecycle, and the full exit timeline can stretch to 10 to 15 years.

The VC fund secondary market is an enticing alternative to this model, and Practical Venture Capital (PVC), co-founded in 2019 by Aman Verjee and Stephanie Shorter, stands at the forefront of it. The secondary market allows investors to step into a fund after the initial risky phase when the winners have already started to emerge. This approach reduces risk and time to liquidity. Investors can buy into these funds at discounts from 30% to 70% because the original investors usually look for early liquidity and are willing to sell at a discount to exit their positions. For investors, this is similar to buying a winning lottery ticket at halftime.

This is where PVC excels. It buys limited partner (LP) and general partner (GP) interests in venture funds after the initial five-year mark. Its strategy is to acquire stakes in funds that have already identified winners, bypassing the early high-risk phase where most startups fail. This “skip the J-curve” approach enables PVC to offer its investors exposure to top-performing portfolios at discounts. It provides faster and more predictable returns than traditional VC.

Verjee’s network and operational expertise have been integral to the firm’s ability to successfully navigate VC fund secondary transactions. The Silicon Valley veteran utilizes his extensive experience from his previous roles at PayPal (NASDAQ:PYPL), eBay (NASDAQ:EBAY), and 500 Startups, where he managed global fundraising and investment strategies. These equipped him with the skills to assess multi-asset portfolios, price risks, and identify opportunities others might overlook.

PVC, therefore, stands out for efficiently evaluating and acquiring secondary stakes in venture funds. “Most VC secondary deals are difficult to price,” says Verjee. “After all, they involve multiple companies at various stages of development. Each has its own unique risks and growth trajectories. This is where PVC comes in. We have vast experience and knowledge of the landscape, and that’s the reason why we can efficiently assess portfolios and secure interests in funds with stakes in unicorn companies.”

PVC’s model of generating liquidity within 18 to 24 months is groundbreaking in an industry that usually demands 10 to 15 years for returns. The firm enables its investors to capture outsized returns much sooner by targeting funds already in the growth phase. It’s significant to emphasize that the demand for liquidity and shorter investment horizons will only increase as venture capital continues to globalize and alternative investment strategies become more prominent.