The Discipline of Liquidity
In an era of extended holding periods and oversubscribed rounds, secondaries aren’t a hedge, they’re a fiduciary tool.
“Dinner was always a big thing. There had to be a pasta course, then a meat or a fish. Paulie was in charge of the garlic. He sliced the garlic so thin with a razor blade that it would liquefy in the pan with a little oil. It was a very good system.” - Henry Hill, Goodfellas (1990)
Last night, as I surveyed the crowded banquet hall of the San Francisco Italian Athletic Club, where wisdom flows as freely as the wine, watching generations of the city's old guard, nearly 300 strong, fill every seat at their sold-out Stag Dinner, I witnessed a masterclass in institutional adaptation. The evening began with The Lord's Prayer, which, as a Jewish attendee, called to mind our own Shema, a moment that bridged different traditions through shared reverence.
Between courses of simple yet delicious salad with red wine vinaigrette, traditional antipasto, and perfectly executed chicken atop polenta that handily outperformed any mashed potatoes I've encountered, conversations turned to the Pope's recent passing and the selection process for his successor. Overhead, a Warriors game played on projection screens, modern entertainment seamlessly integrated into a century-old tradition. This seamless coexistence of heritage and progress is exactly the adaptation venture capital must now embrace, because the old ways no longer work.
In the annals of our industry, few myths have proven as financially destructive as the notion that early investors must hold every position until the final exit. This stubborn adherence to dogma, this refusal to adapt to changed circumstances, has cost limited partners billions in unrealized returns and threatens the very model of seed investing.
When Hunter Walk recently wrote that "selling shares is now an essential part of (seed) venture capital," he articulated something we've not only believed for years but are now preparing to execute. His insights crystallized a transformation that's been underway in our industry for some time—a shift that many still refuse to acknowledge.
Today's landscape would be unrecognizable to the pioneers of our industry. Companies now languish in private markets for 12 to 15 years, longer than most seed funds exist, while founders and late-stage investors extract ever more favorable terms. Yet many still operate as if it's 1982, clinging to shares like selling even one might summon Don Valentine's ghost.
This isn't just outdated—it's financially irresponsible to ignore the new math.
At Sugar Capital, we view secondary sales not as concessions but as precision instruments, tools to be deployed with surgical care when mathematics and market conditions align. This isn't speculative market timing; it's algebraic common sense. When a company in which you invested at a $10 million valuation reaches $1 billion, the asymmetry that justified your original investment has fundamentally changed. What was once a potential 100x has become, at best, a potential 5x from that point forward. The risk/reward equation has been utterly transformed.
Conviction is not measured by how long you hold a position—it's how well you manage it along the way.
History teaches us that liquidity, properly harnessed, is power. The merchant banks of Renaissance Florence, the Medicis, the Strozzis, understood this principle five centuries ago. They knew when to convert paper wealth to tangible assets. Today's secondary markets aren't some newfangled innovation; they're the modern expression of ancient financial wisdom.
The numbers tell the story with brutal clarity. A fund that converts 25% of its position in a breakout winner at a $2 billion valuation can return significant capital to limited partners in year five instead of year twelve. The difference in IRR is not incremental, it's exponential. Yet some managers still wear their refusal to sell as a badge of honor, as if impractical idealism trumps fiduciary responsibility.
This is not, to be absolutely clear, an argument for short-term thinking or reactive trading. We're not suggesting selling at the first markup, abandoning conviction, or attempting to time peaks. We're advocating for something more nuanced: intelligent portfolio management in a world where private capital structures have fundamentally changed.
Consider the historical parallel: In the 1970s, the rise of institutional investment transformed public markets forever. The old rules no longer applied. Companies and investment managers that adapted thrived; those that didn't withered. We stand at a similar inflection point in private markets today. The influx of growth capital from Tiger Global, Coatue, and SoftBank has permanently altered the game. Firms that recognize this shift and adapt their liquidity strategies accordingly will produce superior risk-adjusted returns. Those that don't will deliver suboptimal outcomes, justified only by appeals to outdated orthodoxy.
We've seen this pattern at Sugar Capital across multiple investments now entering later stage, oversubscribed rounds. When sophisticated crossover investors offer clean, founder-approved secondary windows, we view these not as signs of weakness but as mathematical opportunities. Rather than clinging to every share with white knuckles, we make calculated decisions that balance conviction with reality.
The secondary market has matured into an institutional mechanism—not a back-alley bazaar.
When a founder-approved liquidity window opens in an oversubscribed round, the disciplined investor recognizes it not as an exit but as a calibration, a rebalancing that strengthens the fund while allowing the remaining position to continue its upward journey.
For limited partners, the advantages are quantifiable and undeniable. Distribution to Paid-In (DPI) isn't merely an accounting nicety, it's the lifeblood of the venture ecosystem. Real capital returned in year five rather than year twelve doesn't just improve IRR calculations, it fundamentally transforms the relationship between managers and their backers. It creates the virtuous cycle upon which our entire industry depends.
I've heard the objections. "The greatest returns come from holding forever." Ask any LP whether they'd prefer 2x their money in hand today or the promise of 3x in seven years, and observe their response. "You're selling your winners too early." No, we're capturing asymmetry at its mathematical peak while maintaining substantial exposure. "The founders will see it as a vote of no confidence." Quite the contrary – disciplined liquidity management often strengthens founder relationships by aligning incentives and demonstrating sophisticated financial stewardship.
We at Sugar Capital still invest with the same conviction and long-term vision that built the great venture franchises. But we refuse to practice our craft as if private market structures haven't fundamentally changed. We won't sacrifice actual returns on the altar of theoretical ones.
As I left the Italian Athletic Club last night, still savoring the surprisingly superior polenta while glimpsing the Warriors' final quarter on the overhead screen, I reflected on how that institution has thrived for generations. The 300 men gathered there understood what the Medicis knew centuries ago: survival means preserving what matters while adapting what doesn't.
Like the Stag Dinner itself, the best funds honor what's timeless and evolve what's not.
As Hunter Walk recently observed, "when the physics of the model shift, you often need to [shift] with it." The most sophisticated LPs already understand this, measuring managers not by paper promises but by tangible results.
Disciplined liquidity isn't a trend. It's the new cornerstone of responsible venture capital.