Venture capital is its own worst enemy

If you polled a collection of CEOs and asked if they preferred managing a private company or a public company, the majority would almost certainly say “private.” The reason is straightforward: going public comes with a slew of headaches. Public companies face far more regulatory requirements than their private counterparts, and their shareholder bases grow from a few dozen investors to potentially millions of investors. Quarterly earnings reports are also a stressor. With Wall Street evaluating a company’s performance every three months, it’s harder to focus on long-term planning.

However, there are two very important reasons for companies to go public: easier access to capital and liquidity for shareholders. On the first point, publicly traded companies can easily raise new funding through secondary offerings, allowing them to opportunistically strengthen their balance sheets.

On the second point, public markets allow shareholders (a group that includes founders, employees, and outside investors) to sell their stakes. If you were one of the first employees at a startup, for example, and your illiquid stock was now worth tens of millions of dollars, you would want to, at some point, sell some of those shares. The same applies to venture capitalists who invested in a firm’s Series A five years ago: they need to sell their stake to realize gains and return capital to LPs.

But what if you’re a company with a well-capitalized balance sheet that doesn’t need outside funding? Then your only real motivation for going public is liquidity. And what if private market investors will happily buy those shares from you and your employees? Then you could… just… stay private forever?

Anyway, Dan Primack at Axios published an interesting piece today on the state of venture markets, noting that tender activity (tender offers involve outside investors buying shares directly from existing shareholders, instead of adding new capital to a company’s balance sheet) climbed 44% in Q3 2024 compared to last year, and 37% of those tenders came from early stage (Seed to Series B) companies, compared to just ~20% in 2021.

I’ve written, a few times now, about how venture funds have been struggling to return cash to investors as IPO volume fell off a cliff in 2022, but this trend in tender offers is only going to amplify this issue. Again, if the best-performing private companies, like Stripe, SpaceX, and Databricks, have a list of investors willing to buy employees’ shares, why not just tender shares every six months and stay private indefinitely? 

And my follow-up question is, for the investors buying these shares, what is their exit plan? By participating in a tender offer, you’re enabling the company to stay private longer. Without an IPO, your only “exit” strategy is either an acquisition or another private transaction down the road. It feels like venture capital is venture capital’s own worst enemy here.