Once considered a niche corner of the financial markets, venture capital secondaries are emerging as one of the most dynamic areas of opportunity in private capital. These transactions, where investors buy and sell positions in venture capital funds or privately held startups, are growing rapidly amid liquidity constraints in the broader VC ecosystem. As interest rates remain high and IPO windows remain sluggish, interest in these secondary deals has surged — providing both liquidity to early investors and new opportunities for buyers to acquire innovative assets at discounted prices.
Understanding the Mechanics of VC Secondaries
Venture capital secondaries broadly fall into two categories: direct secondaries and LP secondaries. Direct secondaries involve the sale of shares in a startup — typically from early employees, founders, or early investors — to another investor. LP secondaries, on the other hand, occur when a limited partner sells their stake in a venture fund to another investor, often at a negotiated discount.
This growing secondary market is increasingly viewed as a necessary pressure valve for a liquidity-starved VC ecosystem. According to Crunchbase, the median time to an exit for a startup has ballooned to nearly 10 years, creating long holding periods for early backers. As primary funding markets have tightened, employees and early investors are turning to secondaries for early liquidity without waiting for an exit event.
Firms like Forge Global and Carta, alongside more traditional players such as Nasdaq Private Market and secondary-focused funds like StepStone Group and Lexington Partners, have built significant infrastructure to facilitate these trades, thus contributing to increased market efficiency and transparency.
Key Drivers of the Trend
Macroeconomic Conditions
One of the most significant forces pushing demand for VC secondaries is the changing macroeconomic environment. With the Federal Reserve maintaining elevated interest rates to combat inflation, access to cheap capital — once the lifeblood of venture investing — has receded. In 2023, global venture funding dropped to $285 billion, down over 40% from $480 billion in 2021, according to CB Insights.
In this context, founders are reluctant to raise new rounds at compressed valuations, while investors are stuck holding illiquid assets. Secondary markets enable liquidity without forcing startups into down rounds, a compromise that benefits both sides. CFOs and employees keen to cash out after years of illiquid equity view this as a necessary evolution — not simply a workaround.
AI’s Role and Capital Reallocation
Artificial intelligence (AI) has reshaped the VC investment landscape, causing major shifts in capital allocation. The rise of foundation models like GPT-4 from OpenAI and Gemini from Google DeepMind has led to more aggressive capital deployment into fewer, larger players. According to VentureBeat, over 60% of all AI VC funding in Q4 2023 went to just 10 companies, concentrating investment at the top.
As AI development costs soar — driven by increasing resource requirements for training large models — smaller companies fall outside the primary fundraising spotlight. Sequoia Capital’s recent AI portfolio adjustments and Andreessen Horowitz’s $7 billion redirection toward fewer bets underscore this trend.
Secondary buyers now see a unique entry opportunity in undervalued AI startups struggling to raise primary financing. With compute-heavy companies requiring tens of millions in AWS credits and GPU access (often powered by NVIDIA’s chips, which surged in demand as reported by NVIDIA Blog), secondaries provide access to innovation without participating in inflated primary rounds.
The Evolution of Secondary Market Infrastructure
While informal secondary transactions have existed for years, infrastructure improvements have spurred reliability, compliance, and scale. Platforms such as SecondMarket (acquired by Nasdaq), EquityZen, and CartaX have introduced digital interfaces, secure escrow mechanisms, and enhanced verification protocols that allow transactions to occur swiftly and legally.
Moreover, blockchain and tokenization advances are beginning to be explored as enhancements for this market. Tokenizing equity stakes through smart contracts ensures traceability and connectivity to cap tables, potentially reducing legal friction in transferring ownership. Companies like Securitize and Figure Technologies are already piloting such innovations.
However, challenges remain. Each startup has its own right-of-first-refusal (ROFR) and transfer restrictions embedded in its shareholder agreements. This often elongates transaction timeliness. Efforts are ongoing to standardize secondary rights in term sheets, especially for later-stage startups seeking operational scale.
Market Size and Transaction Trends
The venture capital secondary market is rapidly becoming one of the most active segments in private finance. In 2022, global PE and VC secondary deal volume was estimated at $108 billion, with VC alone accounting for nearly $20 billion — a fivefold increase from a decade ago, per McKinsey Global Institute.
While exact 2023 data is still compiling, projections from PitchBook indicate another record-breaking year — driven especially by delayed IPOs and the rise of decacorns (private startups valued at over $10 billion).
| Year | VC Secondary Deal Volume | Primary VC Deal Volume |
|---|---|---|
| 2018 | $5.6B | $267B |
| 2020 | $9.8B | $370B |
| 2022 | $19.5B | $430B |
This data points to growing institutional attention from pension funds, corporate LPs, and even sovereign wealth funds, looking to rebalance venture exposure or access alternative assets with downside protection.
Regulatory and Ethical Considerations
As the secondary market matures, it finds itself under greater legal and regulatory scrutiny. The U.S. Securities and Exchange Commission (SEC) is increasing its oversight on how these transactions are presented to LPs and startup boards. The FTC, as reported on their official site, is also investigating potential antitrust issues related to secondary trading among concentrated buyers such as Tiger Global and Coatue.
Transparency and fair pricing dominate ethical concerns. As valuations for privately held startups are opaque, secondary investors sometimes leverage information asymmetries. This raises concerns about employees being lowballed for their equity. Forward-thinking platforms are mitigating this via third-party pricing algorithms and fairness opinions — firms like Equidam and SharesPost are providing ecosystem-standard valuation guides.
The Future Outlook: More Democratized, More Strategic
Looking forward, the continued growth of venture secondaries may redefine portfolio management. More fund managers are launching hybrid primary-secondary vehicles, allowing them to underwrite full lifecycle risk better. Institutions like Hamilton Lane and Goldman Sachs are paving the way with dedicated strategies in this segment, backed by performance data suggesting that secondary deals have better risk-adjusted returns compared to traditional venture entries.
Further democratization may occur as fractional investing platforms bring venture secondaries to retail accredited investors. Enabling broader access to formerly illiquid deals is not without challenges, especially in terms of risk education, but platforms like Allocate and Moonfare are lobbying to open up these alternatives to new classes of investors.
In parallel, AI-driven analytics are making it easier to assess secondary pricing through real-time sentiment, financial modeling, and predictive valuation tools. Deep learning models trained on exit databases, such as Crunchbase and PitchBook, are being used by funds to identify undervalued assets, mimicking hedge fund long/short strategies in public markets. As AI computation costs continue to rise — driven by cloud GPU inflation and increased data needs, as noted in the OpenAI Blog and MIT Technology Review — efficiency becomes central, and secondaries offer a capital-light way to maintain innovation exposure without fronting the initial high-risk capital.
Ultimately, venture secondaries are no longer just exit options; they are filters through which investors are curating future innovation. The line between primary and secondary is blurring — and therein lies the promise of this evolving landscape.