Navigating Today’s Venture Capital Landscape: A Fiduciary Perspective
I’ve never seen a venture capital market quite like this. Macro conditions have shifted decisively. The U.S. economy is growing only modestly, inflation is cooling, and markets now expect the Fed to cut rates later in 2025. Stock indices are at records and long-term bond yields have crept down into the mid-4% range (10-year ~4.4%). At the same time, tariffs inject ongoing uncertainty – though some Fed officials, like Governor Waller, believe tariff effects are largely “one-time” and can be looked through. In short, we’re in a late-cycle, high-rate environment, but one that is showing cracks: growth is slowing, labor markets are loosening, and policy may soon ease. For institutional investors, this backdrop means risk assets are still expensive and sentiment is cautious. Importantly, venture and growth strategies – which are rarely levered – will feel Fed moves mainly through valuation resets rather than direct interest shocks.
Against this backdrop, the venture capital market is behaving paradoxically. On one hand, deal activity is surging: U.S. startup financings in H1 2025 jumped 75.6% year-over-year to $162.8 billion – the strongest first half since 2021. Mega-rounds are driving the headline numbers: in fact, OpenAI’s $40 billion round (and Meta’s $14.3B AI investment) dominated Q1 deal value. Overall, AI-focused deals accounted for 64.1% of total VC dollars in H1 2025. These figures might sound euphoric, but they mask an underlying demand-supply imbalance. PitchBook’s midyear report shows the capital demand-supply ratio for late-stage and growth-stage companies remains well above pre‑2020 norms. Despite the surge in headline numbers (18.5% QoQ to $91.5B in Q1 2025), the vast majority of later-stage companies still cannot raise funds, and the pipeline backlog is enormous: over 18,000 late-stage/growth startups are seeking capital (more than 30% of all VC-backed firms), including at least 1,000 that haven’t raised a round since 2021. In other words, we have a few big winners soaking up capital, while many solid companies languish without funding.
On the LP side, the picture is equally complex. Institutional investors are sitting on near-record dry powder (Bain estimates ~$3.9 trillion unspent globally, with $1.2T just in buyout funds) yet are under intense pressure on two fronts. First, distribution/income from existing private portfolios has been weak. Tariff worries and persistent exit droughts have cut off the “recycling” of capital. U.S. PE fund cash flows from 2018-vintage funds should have been ~0.8x, but are actually only ~0.6x. Similarly, VC-backed companies are staying private longer (median age ~10.7 years today vs 6.9 years in 2014), so institutional investors, endowments and others aren’t seeing the payoffs. Second, allocators still need to meet policy targets for VC/Growth even as these distributions have dried up. Institutional Investor notes that LPs now juggle a dual mandate – “constructing portfolios for long-term returns and staying well-positioned for short-term liquidity needs”. The volatility of 2022-25 has only amplified this tension: private returns have lagged the public market for three consecutive years. In sum, institutions face a paradox of excess capital and scarce liquidity.
Liquidity constraints are shaping allocator behavior. Many endowments are reluctant to sell fund stakes at a steep discount: secondaries pricing has rebounded to near-peak levels (buyout fund stakes trading ~94% of NAV), but any sale still locks in losses and triggers complex GP consents. Instead, a growing strategy is portfolio financing: taking loans against a basket of fund interests. LP-financing specialists point out that NAV-backed credit is attractive because it retains 100% of the equity upside (minus financing cost). For example, 17Capital and others are offering floating-rate loans (3–5 year tenor) around SOFR+300bps with 40–60% LTV. In practice, if yields have stabilized and underlying company valuations recover, an endowment can pay modest interest and emerge ahead. As one fund-of-funds investor noted, “if you have a bunch of cash tied up in long-term, illiquid investments, it can be handy to have a line of credit available…to make other investments which are more tactical”.
Capital formation in venture is bifurcated. On the one hand, GPs with established track records (especially in tech/AI) are still raising capital. But overall VC fundraising is down roughly one-third from a year ago. Only $26.6B was raised by U.S. VC funds in H1 2025, and the median fund took a record 15.3 months to close. Emerging managers, in particular, struggle to get the last LP check, forcing them to accept smaller initial closes or shelve new funds entirely. Even top firms are more selective: we see many GPs sticking to raise-in-tranches or focus on tighter follow-on pools. In short, dry powder is ample but GP liquidity is clogged.
Valuation resets are a critical theme across assets. Public markets have broadly shrugged off 2022-23 lows; the S&P 500 and Nasdaq both hit new highs in mid-2025. But that rebound is fragile. Meanwhile, private-market valuations have been undergoing a slow reset. PitchBook data show that median valuations saw modest upticks in 2024 after bottoming, but the pace of growth between rounds remains muted. Trailing revenue multiples in growth sectors (SaaS, fintech) still sit below long-term averages, and even AI startups have seen multiple compression. In practical terms, many rounds are now flat or down, and time between financings has stretched. The good news: venture valuations generally look reasonable by historical standards. As one institutional note observes, “majority of deals [are] pricing at historical averages (with AI as exception)”. In other words, valuations have pulled back from the frothy 2021 peaks, which may actually make exits (eventual sales or IPOs) more feasible in an improving market.
The implications for institutional allocators are manifold:
Underwriting managers: investment teams must double down on due diligence. It’s no longer enough to rely on past performance or “brand name” alone. Instead, focus on how managers adapt to this cycle: Are they exercising valuation discipline, or still chasing the next unicorn at any cost? Do they have deep domain expertise (particularly in AI or cybersecurity, which still see strong interest) and networks to source proprietary deals? Critically, we stress-test their models. In this environment, analytical tools to decompose risk/return are invaluable: scenario analysis of how a portfolio fares in recession or rising rates, attribution of returns to skill vs. market beta, and lineup stability. As one allocator put it, managers who “performed well in one environment may struggle when conditions shift,” so we look for leaders who can explain the how behind their track records. Manager alignment is also paramount: firms that invite LP-friendly NAV adjustments, provide transparent reporting, and avoid onerous terms earn trust.
Pacing commitments: I’m currently advocating conservative deployment. With capital calls still on the horizon and distributions low, endowments, foundations and other institutional investors should calibrate commitments with realistic cash flows. This often means writing smaller checks or spacing out diligence. In fact, NEPC’s Sarah Samuels notes that LPs continue to commit to venture – but often “write smaller checks than previously” due to liquidity limits. I would advise clients to freeze pacing at current policy targets (rather than rush to allocate more dry powder), and keep an ample reserve for follow-on needs or opportunistic co-investments. In practice, some institutions are pulling back on new fund allocations until exit conditions improve, or revising their vintage-year strategies to avoid a single bad cohort.
Portfolio construction: Diversification is non-negotiable. The bifurcated VC market means concentration risk is high. I recommend spreading allocations across stages and strategies: combining early-stage vs. late-stage, thematic vs. sector-agnostic funds, and even balancing direct VC funds with growth equity managers. The Wellington report underscores that mixing venture, growth, and buyout strategies can “improve exposure and diversification”. That rings true – during dislocations, pure VC portfolios can get whipsawed by sentiment swings or sector bubbles (think biotech crash or crypto cycles). Institutional clients often complement traditional VC with adjacent approaches: for example, allocating a slice to liquid alternatives or index-based products (like the new Unicorn 30 Index) that track late-stage deals. These instruments, while still evolving, offer a way to mimic VC returns with daily liquidity, reducing lockup risk. (I view them not as replacements but as hedges.) Important to stress-test overall portfolio risk: how would a 50% drop in tech valuations affect the foundation’s book? These exercises sometimes lead to rebalance trades by trimming other equity holdings or locking in gains elsewhere.
Secondary market strategies: In this climate, secondaries are both a challenge and an opportunity. For institutions needing liquidity, a full fund sale can be painful, as LP-led deals still require GP consent and may fetch ~90% of NAV. I have helped clients explore NAV lending (loans collateralized by fund positions) as a middle ground. This route supplies cash quickly (often in weeks) at modest cost, as opposed to the 3–6 month auction process for selling funds. Of course, taking on debt must be weighed carefully under fiduciary rules. I only consider it when the cost of borrowing is clearly outweighed by the value of staying invested in a rallying or near-term rebound scenario. On the flip side, buying secondaries can be attractive for those with dry powder. Quality late-stage funds and GP-led continuation vehicles now present opportunities at reasonable prices, since many LPs have been forced to liquidate for cash. I would vet these rigorously – aligning with GPs who have skin in the game – but for strategic growth pools this can be an effective way to recycle capital.
Governance and oversight: Finally, as fiduciaries we must remain vigilant. Market cycles test LP/GP relationships and internal processes. I continue to engage with endowment and foundation clients on refining private-equity policies – from setting prudent J-curve expectations to defining lockup limits. It’s crucial that boards understand today’s narrative: venture is not a quick-win asset class, but rather a potential long-term driver of returns for those with patience and diligence. I encourage proactive communication: for instance, CFOs and investment committees should pre-authorize capital commitments up to policy tolerances so GPs aren’t chasing signatures during a market upswing. I also emphasize the importance of doing “operational due diligence” on fund managers (IT security, valuation policies, fund terms) more thoroughly in this opaque era.
Key Takeaways for Institutional Allocators:
Balance Patience with Discipline. This cycle rewards selectivity. Favor proven managers who stick to fundamentals over those chasing hype.
Reserve Cash Prudently. Do not exhaust dry powder too quickly; maintain reserves for follow-ons or unforeseeable calls. Consider smaller commitments and plan liquidity coverage.
Stress-Test Portfolios. Use scenario analysis to gauge the impact of continued valuation resets or a slowdown. Adjust asset mixes (e.g. between VC, growth equity, buyouts) to manage risk.
Leverage Liquidity Tools Judiciously. Explore NAV lending and other structured solutions if needed, but align these decisions with the institution’s risk tolerance and policy.
Maintain Long-Term Vision. Despite the noise, remember that venture capital is a game of long arcs. Even as we navigate this trough, allocators should keep an eye on secular growth areas (AI, biotech, climate) and be ready to fund high-conviction strategies when valuations and exit prospects improve.
The current market feels gnarly, as one LP consultant aptly put it. But it is precisely in such environments that a fiduciary advisor’s role is most valuable. My clients — stewards of educational and philanthropic capital — demand rigor over rhetoric. By grounding decisions in data (e.g. demand-supply metrics and fund flow reports) and by scenario-planning for adverse tailwinds (higher rates, trade wars, political change), I help them stay the course.
In practice, I often remind boards: “Yes, venture appears expensive in the public’s eyes, but we see a market that has quietly repriced to reasonable norms, especially outside the few AI darlings. This is not 2021. Exits may pick up if IPO windows reopen and M&A loosens, so patient capital now can be rewarded later.” I continue to stress diversification, alignment, and active oversight as the pillars of my guidance. With those pillars firm, endowments and foundations can navigate this cycle – turning today’s liquidity challenges into tomorrow’s opportunities.
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Sources:
PitchBook/NVCA venture reports and midyear outlook; Reuters news on Fed policy; Reuters data on VC fundraising and deals; ION Analytics on LP liquidity solutions; Institutional Investor and industry sources on LP/GP tensions and portfolio issues.