Nobody Will Buy Your Shares

The “Praying for Exits” meme accurately reflects VC passivity. But generating DPI will soon require investors to actively manufacture it by embracing an old – not new – model of what liquidity means.

That the SpaceX IPO and upcoming OpenAI/Anthropic listings will generate record liquidity has obscured an uncomfortable reality: even many of the most talented VCs in the industry today may never deliver a dollar of real DPI to their LPs.

People joke about “praying for exits.” Underlying the meme, however, are real anxieties running rampant: investors are sitting on big markups but have no path to turning those markups into actual dollar returns. Most of the once-hot companies – even those that are perfectly healthy businesses – have few liquidity prospects: tepid interest from strategics, little appetite from the public markets for an IPO, the opportunity for “PE exits” drying up as buyout firms manage a wall of debt maturities and their own COVID hangover.

These anxieties manifest in many ways: the slow drip of statistics showing yet another quarter of paltry DPI, half-hearted LinkedIn re-posts from portfolio companies nobody has thought about since COVID, complaints about the “IPO window,” finger-pointing at boogeymen like “Lina Khan,” the rise of increasingly tortured non-solutions like continuation vehicles, secondary funds, and new tertiary structures that don’t solve companies’ underlying liquidity issues.

It wasn’t supposed to be this way. In the old venture ecosystem, liquidity for good businesses was a foregone conclusion. The timing around that liquidity was somewhat uncertain, but that liquidity itself would inevitably come was not. Investors could always rely on someone – whether it was public market investors, a buyout firm, or a strategic acquirer – ultimately buying their shares.

That market no longer exists. Markups mean nothing in a world where IPO/M&A exits are no longer a certainty, even for fundamentally good businesses. Not even praying to God will save investors; those hungry for liquidity will need to actively manufacture it. Successfully doing so will require abandoning industry conventions around capital formation and instead embracing a new mental model (or really, an old one) about what equity actually is: ownership in a business valued based only on future cash flows, rather than what someone else will pay for it.

Whether investors accept it or not, they’ll need to guide all but the largest of their companies over the next decade-plus to deliver liquidity not by finding a buyer but by focusing on cash generation and architecting their own capital return programs.

“Broken” Public Markets

These dynamics are unsurprising insofar as they mirror similar shifts that have happened in the public markets over the last few decades.

Many of the peculiarities of the public markets are downstream of the secular decline in active investing strategies and the commensurate rise of passive investing, the latter of which has been boosted by the growth in defined contribution retirement plans: valuation-agnostic, systematic, bi-weekly capital flows into market-weighted equity index funds and target-date funds that reflexively benefit the largest companies.

A small handful of enormous businesses have increasingly driven market returns, benefitting both from these massive capital inflows and from centralizing technological forces and market tailwinds that allowed them to compound for much longer than anyone anticipated. As a result, large swaths of the SMID-cap universe have fallen outside most investors’ view: less analyst coverage and a declining set of natural buyers of their shares.

These businesses have plenty of intrinsic value: strong near and intermediate-term cash flows that investors can reliably evaluate and run a DCF on. But the market ascribes them little terminal value, which is largely dependent not on fundamental business performance but on capital flows; there is just no appetite to give them credit for the cash flows they’ll generate in the out-years. And as equity values have become less dependent on the former and more dependent on the latter, these companies’ valuations have lagged those of the large-cap flows beneficiaries.

David Einhorn, whose style of active value investing has been punished by these forces for nearly fifteen years now, has called this market “broken.” Whether you agree with the sentiment, his broader description of the market is at least accurate: most companies have nobody paying attention to them, and investors in those companies can’t rely on anyone other than the company itself to buy shares. They generate returns not because external capital flows support price appreciation – those flows largely don’t exist, and there are few investors to buy their shares – but because the company actively uses its own cash flows to repurchase stock.

Private Market Parallels

The transformation of the private capital markets is not dissimilar.

With everyone taking the power-law pill, firms have piled money only into the companies with the potential to become “the most important businesses in the world.” This naturally means only a very narrow set of founder archetypes and company shapes sit within the cone of venture consensus. And it naturally means that a small number of mega-platforms, capable of backing these companies in size, has dominated fundraising.

Venture dollars have flowed into the small number of companies that sit inside the cone – the labs, neolabs, “neofirms,” critical AI infrastructure providers, A&D giants, and a few non-AI venture darlings. These businesses benefit from supply-demand imbalances and a narrative-driven, valuation-agnostic bid for their shares, very similar to what exists in the public markets. Returns, too, are concentrated in these companies. Everyone else sits on the outside looking in. Many CEOs, explicitly or otherwise, have made it their main objective to ensure the investor-focused narrative around their companies remains strong, even if legibility to capital comes at the expense of building intrinsically more valuable companies.

To fail in this regard relegates a company to the capital pit of despair, where the vast majority sit today. These are strong businesses: demonstrable PMF, long growth runways, exciting product roadmaps that leverage their data and distribution advantages in the post-AI era, and the ability to generate cash if they capitalize themselves correctly. Irrespective of their fundamental quality, however, these companies don’t benefit from capital flows, and they’re priced as if they’re terminally ill beyond the cash flows they’ll generate today or tomorrow.

Like public markets, private markets have become far more concentrated and flows-driven: the biggest winners have too many buyers, and everyone else has too few. The latter can no longer rely on new buyers to generate liquidity for existing shareholders; liquidity will necessarily come from companies’ own cash flows.

Power Law Psychosis

Liquidity driven by cash flows rather than capital flows may seem novel to the venture industry, but it’s not new at all. For many industrialists throughout history, the concept of “net worth” tied to an external mark was totally anathema to them; they became wealthy because their businesses generated tons of cash, not because there was a robust market for their shares.

There’s no reason that VCs must adhere to a liquidity paradigm that is quite new by any historical standard. For so many of them – sitting on massive markups with few liquidity prospects, yet dependent on delivering DPI that will make or break their careers – the appeal of a different, “older” paradigm should be obvious.

Yet almost nobody is paying attention, and many are resigned to do nothing. This mentality is downstream of the obsession with the power law, with backing not unicorns or decacorns, but companies that can achieve $50B+ outcomes.

The power law strategy is becoming overdone, piled into by a class of VCs who are playing an adversely selective game. More importantly, the power law approach is one that makes sense ex-ante, for initial investments. It’s an insane framework for value creation among existing positions. There exist tens, if not hundreds, of billions of dollars locked inside these healthy businesses with no passive liquidity prospects.

Investors have a fiduciary responsibility to their LPs to monetize these positions, which can deliver meaningful distributions even if they’re not fund-returners. They owe it to founders, who have sacrificed for years to build their companies; telling them that their generational wealth opportunity “doesn’t matter” because their company isn’t SpaceX or Anthropic or Databricks is disrespectful if not downright psychotic. And they owe it to the employees of these companies – tens of thousands of them – who serve as the backbone of the industry and forwent higher salaries and cushier jobs to “take a swing.” Any investor who lets valuable companies rot rather than actively manufacturing liquidity is abdicating basic responsibilities to everyone else in the ecosystem.

Manufacturing Liquidity

VCs sitting on enormous amounts of locked-up value are waiting – praying – that someone will eventually buy their shares and deliver them DPI. But prayer is not a strategy.

Nobody is going to buy a $300M ARR software business growing 25% annually and generating a bit of cash, at least not for a price that doesn’t understate its intrinsic value. And that’s fine. That these companies command no capital flows – and that the market ascribes them no meaningful terminal value – doesn’t mean they’re bad businesses, nor does it mean they have no liquidity prospects. They simply must accept what people like Einhorn and many others have accepted in the public markets: that they need to use their own cash flows to deliver liquidity.

The objective, then, becomes maximizing cash flow. This is a balance sheet optimization problem, a question of thoughtful capital formation.

Historically, generating cash meant sacrificing growth. But that trade-off is an unnecessary one, driven by outdated perspectives on how to capitalize a technology business, by an over-reliance on expensive, dilutive, pro-cyclical equity that doesn’t scale. When a business thinks very carefully about matching every use of capital to the right source – when it uses equity to finance only high-value, unstructured risks and the right form of credit to finance structured ones – it can both grow and generate enormous amounts of cash.

That $300M ARR business may not have a natural buyer. But financed appropriately with non-recourse, duration-matched leverage available in size, it can generate tens of millions in cash every year – not just without cutting growth investments, but by doubling down on them. It can use this excess cash to architect a capital return program that delivers liquidity at scale irrespective of capital flows and the market’s appetite for the company’s shares. It may not do so at levels consistent with peak COVID bubble valuations. But “not frothy” is not the same as “not meaningful.” And it’s better than zero.

This is fundamentally why every investor must care about capital allocation and balance sheet optimization. It isn’t simply a matter of minimizing dilution – or even building bigger, stronger businesses with higher returns on equity. In today’s market, characterized by capital flows that benefit only a small number of companies and make liquidity very difficult to come by, it’s a matter of whether one can actively turn paper markups into real DPI.

If you have questions, comments, or feedback, please reach out: andrewziperski [at] gmail [dot] com.

The views expressed herein are the author’s own and are not the views of General Catalyst Group Management, LLC or its affiliates.