The Liquidity Trap: Why Venture Capital Success Creates Risk

Venture capital faces a structural paradox: the better the industry gets at building long-term companies, the less liquid it becomes for investors. Because companies now stay private for an average of 14 years, traditional exit routes like IPOs and M&A cannot return enough capital to the system. This conversation with Hans Swildens shows that the liquidity problem is not a temporary glitch but a permanent feature of a maturing asset class. Investors who understand that secondary markets are moving from a niche outlet for distressed assets to a structural necessity will gain an advantage. The real opportunity lies in managing the tension between fast-growing AI companies and the massive backlog of older assets that require expert underwriting to separate winners from the obsolete.

The Hidden Cost of the 14-Year Private Cycle

The venture capital ecosystem has a major plumbing issue. With $1 trillion to $3 trillion in capital tied up in older funds, current IPO and M&A activity is not enough to return capital to limited partners (LPs).

Swildens notes that distributions have dropped from a historical average of 20% annually to 5-10% over the last five years. This creates a compounding effect: capital remains trapped and cannot be redeployed, forcing LPs to use secondary markets just to fund their next commitments.

> "One of the things I find remarkable about the venture industry today is as it becomes more successful in an interesting way, it actually becomes less liquid. In today, the average company that is venture backed that goes public, takes 14 years. I mean, that is an eternity."
>
> -- Hans Swildens

This delay means the secondary market is no longer just for distressed sellers. It is now a standard tool for portfolio rebalancing and risk management. As long as the time to exit stays at or above 14 years, the secondary market will likely grow to exceed the primary market in volume, similar to other mature asset classes.

AI as a Disruptive Filter

The current AI wave is doing more than creating value; it is acting as a filter for the 30,000 plus companies funded before the current boom. Swildens sees a split: some companies have re-architected their tech stacks to be AI-first, leading to faster customer adoption and better profitability. Others are seeing their business models replaced by AI coding tools.

This creates a high-stakes environment for investors. Conventional wisdom might suggest avoiding older companies, but Swildens argues the real opportunity lies in finding the small group of legacy firms that have successfully pivoted. These companies often trade at a discount because the market mislabels them as old, ignoring their integration of new, high-margin AI workflows.

> "You are seeing hyper growth. I would say it is very interesting from an investment perspective because some other businesses that have not been able to energize themselves and re-architect their tech systems are falling behind when others are actually taking advantage of this new wave."
>
> -- Hans Swildens

The Competitive Advantage of Persistence

The decision by Swildens to merge Industry Ventures into Goldman Sachs in 2026 shows a shift toward institutionalization. In the early 2000s, the secondary market was an episodic play on dot-com distress. Today, it requires a player-coach mentality, or the ability to act as a founder, operator, and investor at the same time.

The implication is that the barrier to entry is rising. Success requires the patience to work on complex problems for decades. While many seek the next hot sector, the lasting advantage belongs to those who treat the secondary market as a structural, repeatable discipline rather than a series of one-off trades.

Key Action Items

• Audit for Liquidity Constraints: If you are an LP, assess your portfolio exposure to companies older than 7-10 years. Expect these to remain illiquid for longer than anticipated. (Immediate)
• Re-evaluate Legacy Holdings: Do not automatically write off pre-AI companies. Conduct a technical audit to see if they have successfully pivoted to AI-first architectures. This is where the most undervalued opportunities reside. (Next 3-6 months)
• Shift to Secondary-First Planning: For founders and early investors, stop viewing the secondary market as a last resort. Integrate secondary tenders into your long-term capital strategy to provide employee and shareholder liquidity without the pressure of a premature IPO. (12-18 months)
• Prioritize Institutional Partnerships: As the market institutionalizes, standalone boutique strategies face increasing competition. Look for platforms that pair specialized, on-the-ground venture expertise with the global sourcing engine of a major firm. (12-18 months)
• Focus on Portfolio Construction over Hot Names: With 30,000 private companies and extreme concentration in the top 25, diversify away from the crowded names. Build a robust institutional model that accounts for loss rates, which remain higher in venture than in other equity markets. (Ongoing)