The Quiet Evolution of the Venture Capital Industry

Welcome to the 11th Network Effects Newsletter.

For most of its history, VC was a game of scarcity: scarce capital, scarce founders, scarce information. Today, capital is abundant. Founders are everywhere. AI compresses time and cost. The rules have changed, and the best firms are adapting.

Today, we’re exploring the quiet evolution of the venture capital industry, where VC firms…

• Are expanding through buyouts

• Are restructuring their fund offerings 

• Are targeting a new LP base beyond institutional investors 

Let’s Dive in

State of Venture Capital Today

In 1980, there were only 50 venture funds.
Today, there are ~3,000 VC funds globally, up 60x.

In 1980, IBM was the only technology company in the top 10 publicly traded companies
Today, 8 of the top 10 publicly traded companies are technology companies

Today, more venture capital funds compete for investments in startups in a more difficult environment. As a result, funds are investing in higher valuations with lower returns. 

The abundance of capital has shifted the venture game from access to edge. In an era where capital is commoditized, winning funds are those with differentiated sourcing, sharper underwriting, and deeper platform capabilities.

Also, venture capital is in an IPO liquidity drought.

Over the past five years, venture capital has hit a liquidity crunch. In 2021, U.S. venture-backed IPOs and M&A exits reached over $711 billion. By 2023, that number had fallen by more than 80 percent. Startups are staying private longer, with the median time to exit now surpassing six years, forcing firms to find new ways to return capital to their investors

Adding to the pressure is AI, which is compressing venture economics even further

The availability of AI technology enables startups to build with fewer resources at a greater velocity. In other words, these companies need less capital to get further.

With great companies raising fewer rounds, there are fewer opportunities to deploy capital, and more funds competing to get in. The 2021 and 2022 cohorts of unicorns are raising roughly half as much as the 2016 cohorts.

1. VC firms are expanding into buyouts

An emerging opportunity VCs have seen is transformation 

While category-defining startups remain rare, the market is full of solid software companies with product-market fit that struggle to scale. These are businesses where operational execution is the bottleneck.

Rather than waiting for these companies to break through, some VCs are taking control. By acquiring majority stakes in tech and tech-enabled services firms, they can apply their platform capabilities directly, revamping product strategy, reworking go-to-market motions, bringing in executive talent, and pursuing inorganic growth.

Thoma Bravo estimates that private software companies can often achieve a 25 to 40% margin improvement post-acquisition. As of 2024, they believe most of their portfolio is just 60% through its digital transformation journey, leaving substantial upside on the table.

Vista Equity Partners, a leading technology-focused buyout firm, has demonstrated the success of this model with a 25% IRR, well above the 8–15% range typical of most private equity funds.

When Vista acquires a company, it deploys a dedicated value creation team to drive top-line growth and operational efficiency. Portfolio companies also join OneVista, a curated network of technology executives that supports collaboration and shared best practices across the OneVista platform.

As a result, the number of VC exits to buyout firms has grown significantly, rising from ~100 between 2006 and 2016 to over 200 from 2018 to 2020. During the same period, buyouts as a share of total VC exits increased from 10% to 20%.

2. VC firms are restructuring their offerings 

Great companies now take 12 to 15 years to mature and are choosing to stay private.

Stripe is 14 years old. Databricks is 11. Canva, over a decade.

Meanwhile, liquidity for investors has become more elusive than ever. Early-stage companies are no longer sprinting toward IPOs; instead, they are staying private, growing quietly, and raising successive mega-rounds. This shift creates a timing mismatch that cannot be ignored.

Traditional 10-year funds force investors to exit great companies prematurely, while investors increasingly demand liquidity without being locked in for a decade.

Institutional investors are looking for two key things:

1. Greater liquidity that allows them to invest and withdraw capital without a 7 to 10-year lock-up.

2. Lower fees, especially in markets where investors can earn competitive returns through public market tech giants like the Mag7, DoorDash, and Snowflake.

Among top-tier venture firms, four innovative fund structures are reshaping how capital and ownership evolve in today’s market: (1) evergreen funds, (2) crossover funds, (3) continuation vehicles, and (4) secondary funds.

A. Evergreen funds: 

Evergreen funds are perpetual vehicles that recycle returns and allow for flexible investment horizons. Sequoia’s 2021 shift to a single, permanent capital vehicle, the Sequoia Capital Fund, enables them to hold winners like Stripe or Canva indefinitely without exit pressure, and even after they went public, as seen with Square. 

In evergreen fund structures, 100% of an investor’s capital is deployed into a portfolio with existing assets on day one. As a result, investors in evergreen funds can efficiently mitigate the opportunity cost of holding cash for capital calls by immediately putting it to work in productive investments.

B. Crossover funds: 

Crossover funds blend private and public market investing within one vehicle. Firms like Coatue, DST, and Battery Ventures use these funds to offer LPs exposure to high-growth private startups like OpenAI, to public giants like the Mag7, all while dynamically adjusting allocations based on market conditions

C. Continuation vehicles: 

Continuation vehicles extend the holding period of strong-performing assets beyond traditional fund terms. Instead of forcing a sale of companies like Stripe or DataBricks at fund maturity, firms spin out these stakes into new vehicles, rolling over ownership and bringing in fresh capital. Insight Partners and Battery Ventures lead this approach, delivering liquidity to LPs without sacrificing long-term upside.

Continuation vehicles extend the life of top-performing assets beyond traditional fund terms. Instead of forcing a sale of companies like Stripe or Databricks at fund maturity, firms spin out these stakes into new vehicles, rolling over ownership and bringing in fresh capital. Insight Partners and Battery Ventures lead this approach, delivering liquidity to LPs without sacrificing long-term upside.

D. Secondary funds 

Secondaries funds specialize in acquiring existing stakes from investors, founders, and LPs seeking liquidity before an exit event. IIn today’s environment of limited IPOs and acquisitions, these funds act as a critical liquidity valve for private market participants, providing much-needed distributions amid prolonged illiquidity.

3. VC firms are targeting a new LP base

While institutional investors such as global pension funds, sovereign wealth funds, insurance companies, and investment funds allocate approximately 27% of their assets to alternatives on average, non-institutional investors, primarily high-net-worth (HNW) individuals, currently allocate only about 6%.

Rising interest rates and the maturation of private markets have driven growing demand for private market exposure among wealth managers and high-net-worth individuals.

There are three primary vehicles through which individuals can access private alternatives, each offering distinct liquidity profiles:

A. Drawdown funds (Most Common Vehicle in Venture Capital)

Drawdown funds are closed-end vehicles that require investor commitments upfront. Capital is called periodically from investors over an investment period, typically 3-5 years, to fund deals. After the investment period, proceeds are distributed back to investors during a harvesting phase that usually lasts 5-7 years.

The duration of investment cycles depends on the stage focus. Early-stage investments, such as pre-seed and seed funds, typically range from seven to 10 years. In contrast, late-stage investments, including Series B and beyond, generally have shorter holding periods of three to 5 years.

B. Evergreen or semi-liquid vehicles (Increasingly Popular)

Evergreen funds are open-ended structures that remain continuously open for investment and redemption, with net asset value priced daily or monthly. Investors can typically redeem up to 5% of the fund’s assets quarterly. Unlike drawdown funds that require capital commitments upfront and have fixed lifespans, evergreen funds remain continuously open to new investments and redemptions

This semi-liquid model allows for ongoing capital inflows and outflows without forcing asset sales or disrupting long-term strategies, which is increasingly attractive to wealth managers, family offices, and institutions seeking private market exposure without extended lock-ups.

C. Listed Vehicles 

Listed vehicles, such as REITs for real estate or BDCs for direct lending, offer public market liquidity while investing in inherently illiquid assets. These structures allow investors to buy and sell shares daily, but market pricing is subject to volatility and often moves in lockstep with public equity sentiment.

Venture capital, by contrast, presents structural challenges. Early-stage startups are privately held, lack standardized financials, and experience sporadic liquidity events. These dynamics make them difficult to value consistently and unsuitable for packaging into public index-style vehicles.

Final Word

In 2023, Doug Leone, Sequoia’s former global steward who had led Sequoia’s investments in RingCentral, ServiceNow, and Nubank, remarked:

As capital investments slowly commoditize, venture funds need to build differentiated capabilities to distinguish themselves as a valuable partner to founders. 

One of the most common advantages incubators leverage is scale, by building a world-class platform supporting hundreds of portfolio companies which smaller funds cannot replicate. We see it in leading funds such as Insight Partners, BVP and a16z. 

Layer the growth in majority-stake acquisitions, venture firms are increasingly adopting hybrid private equity models and are well positioned to compete with traditional private equity in attracting institutional capital to technology investing

Looking ahead, AI will not only reshape how startups build and scale, but it will also redefine exit timelines, liquidity pathways, and capital efficiency. Capital allocators who back the right AI-native companies and embed AI in their operating models will be the ones that win in this era of capital-labour substitution.

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Thank you for reading till the end of the issue. What are the other patterns you observed in the venture capital landscape? Would love to hear your opinion.

Read more: 

• McKinsey Global Private Markets 2024 Report

• KKR A New Foundation for Private Wealth

• Venture Buyout - The Capitalist Substack

• Thomas Daffont - All-in Summit Presentation 

• Credit Fund Report - Sagard