Authored by: Jonathon Cocks
Macroeconomic and geopolitical headwinds
Venture Capital firms currently face near-term headwinds when trying to exit their investments and provide liquidity to their LPs. Traditional exit pathways of IPO and Private Equity buy-outs face evolving macroeconomic conditions, global uncertainty, cautious public markets and more selective M&A activity.
The current era of prolonged elevated interest rates reduces the present value of future growth, which negatively affects the valuations of growth-stage companies and make debt financing more expensive.
Global friction, regional conflicts and trade policy uncertainties (such as tariffs) weigh on investor confidence and market stability.
Public market caution
High interest rates and general macroeconomic uncertainty make public investors wary of loss-making, high-growth startups, leading to more disciplined valuations and a general reluctance for companies to go public.
The Initial Public Offering (IPO) market has been particularly depressed. The Global value of IPOs has dropped from around USD500 billion in 2021 to USD 125 billion in 2024 – a massive 75% reduction. Forecasts for 2025 show some rebound, but levels are still way down on the early 2020’s.
Slowed M&A activity
While acquisitions by strategic buyers remain the most common exit route, activity has slowed down as corporate buyers are more cautious, prioritize synergy-driven deals, and often target proven assets with lower growth but more predictable cash flows.
As a result, a significant disconnect exists between the high valuations set during the peak funding years (2020-2021) and the more conservative valuations that public markets or strategic buyers are willing to pay today.
VC firms often hold minority stakes in their portfolio companies which makes it difficult to force an exit on a favourable timeline, especially if the company’s founders or more recent investors have different priorities regarding holding periods.
This has created a pipeline of mature, venture-backed companies waiting for a more favourable window to exit, which directly limits VC firms’ ability to return capital to their LPs.
Are there alternative liquidity options for VCs?
As a result, pro-active VC firms are seeking alternative liquidity options like continuation funds, secondary buyouts, and structured exits to deliver at least partial returns to LPs while they wait for the primary IPO and M&A markets to fully recover.
Continuation funds
A Continuation Fund (CF) is a transaction where the VC firm itself sells its own stake in promising portfolio companies from the original fund into a newly created fund or SPV managed by the same GP. LPs in the original fund are offered a choice: Cash Out (take the sale proceeds for liquidity) at current reduced valuations or Roll Over (exchange their stake in the original fund for a stake in the new Continuation Fund) to extend their holding period until IPO/PE markets recover and the potential value of investments is fulfilled.
This strategy avoids the deadlines associated with closed-ended funds, but fails to both capture value while also delivering liquidity.
Secondary buyouts
Secondary Buyouts are traditionally the province of Private Equity firms who specialize in restructuring and professionalizing portfolio companies, then on-selling their stake to another PE firm (the Secondary Buyout).
The time required is often not justified by the smaller stakes owned by VC firms in their portfolio companies, while the skills needed to professionalize portfolio companies are often industry specific and require deep management expertise that most VC firms don’t possess.
Structure exits
A structured exit is where a portion of the final sale price is contingent on the company achieving pre-agreed financial or operational milestones after the acquisition closes. This often bridges the valuation gap between VC / founder expectations and the lower valuations required in today’s depressed market. The seller gets a higher potential price, and the buyer minimizes risk if the future performance doesn’t materialize.
However, where portfolio companies lack the skills and structure to deliver results a structured exit arrangement can leave exiting VCs and Founders with little to show for their efforts.
How can VCs secure alternative liquidity options?
Venture Capital (VC) firms can significantly increase opportunities for successful secondary buyouts and structured exits by adopting a proactive, private-equity-style approach to operational and financial management early in the lifecycle of portfolio companies.
The strategy shifts the focus from simply waiting for a market window (like an IPO) over to making the company attractive to sophisticated financial buyers who demand clean, professionalized operations.
Professionalize the Financial & Legal Foundation
Secondary buyouts (SBOs) and complex structured exits are primarily undertaken by experienced financial sponsors (like Private Equity funds) who prioritize clean data and reduced execution risk.
Professionalize Reporting
Transition portfolio companies from venture-style financial metrics (e.g., burn multiple, ARR) to PE-style metrics (e.g., EBITDA, free cash flow, operating leverage). Ensure audit-ready financials and robust internal controls, significantly reducing the buyer’s due diligence burden.
Clean Up the Capitalization Table (Cap Table)
Simplify the equity structure by consolidating various classes of stock, address complicated or onerous liquidation preferences and convert instruments such as SAFE notes into equity. A clean Cap Table is far more appealing to a new financial buyer.
Establish Strong Governance and Compliance
Ensure strict legal and regulatory compliance across all jurisdictions. Clean legal documentation (IP, customer contracts, etc.) is non-negotiable for a professional buyer.
Create and Document Plans for Near-term Value-Creation
Financial buyers look for companies with predictable cash flows and clear, actionable value-creation options for the future.
While VCs are typically growth-focused, they should encourage portfolio companies to establish a clear path to profitability or, at least, demonstrate strong unit economics and cost management. This is the cornerstone of a financial buyout.
Help companies optimize customer acquisition costs (CAC) and customer lifetime value (CLV) to prove sustainable, efficient growth.
VCs should articulate a clear, documented investment thesis for the next buyer. This “second-bite” plan might focus on M&A integration, international expansion, or operational efficiency improvements that the new PE buyer can execute.
Establish Deep Bench Management
Build out a robust, institutional-quality management team that is not dependent solely on the founder. A strong CFO, COO, and General Counsel provide stability and a clear path for continuity, making the asset less risky for a buyer.
What kind of VC Firms will come out on top?
VC firms wishing to execute on these strategies require a combination of deep industry expertise in the industry of their portfolio companies and hands-on management experience in scaling and professionalizing early-stage companies. Sector-specific funds like Velocity Ventures are more likely to have this industry knowledge in-house than generalist funds. Entrepreneur-led VC firms like Velocity Ventures are also more likely to have the business management skills necessary to add value.
While exit conditions remain more complex than in recent peak years, they are also becoming more defined. The current environment is less about waiting for markets to reopen and more about preparation, positioning, and discipline. History shows that periods of tighter liquidity often reward firms that focus early on operational quality, governance, and clear value creation.
For venture capital firms willing to engage more deeply with their portfolio companies, today’s market presents an opportunity to broaden the range of viable exit pathways. Alternative liquidity options, when supported by strong fundamentals and professionalised operations, can provide meaningful outcomes for LPs while preserving long-term value.
As markets continue to adjust, exits are not disappearing – they are evolving. VC firms that adapt their approach accordingly will be better placed to navigate this phase of the cycle and emerge with more resilient portfolios and stronger relationships across the investment ecosystem.
