Early Stage Venture Capital: Secondary Markets, Valuation Bubbles & Revenue Illusions

A roundtable discussion with US based early stage venture capital experts examining the current state of early-stage capital investing, liquidity strategies, M&A trends, and startup revenue quality. | Published June 11, 2025 by This Week in Startups

Note: Mi6 has shared this summary with the panelists for feedback, clarification and corrections. Readers are welcome to comment below.

This Week in Startups | VC Roundtable: Startup Valuations, Secondary Markets & YC Revenue Illusion.

Key Insights

• Secondary markets are becoming a primary source of liquidity for VCs, with estimates suggesting they'll reach $122 billion in 2024, surpassing 2021 levels and accounting for 74% of exit value.

• Fund managers are developing formal secondary strategies to return capital to LPs amid a prolonged IPO drought, including selling 'slices' of individual positions or 'strips' across entire portfolios.

• M&A activity is showing signs of revival with companies like Meta, OpenAI, and Databricks making strategic acquisitions, despite regulatory challenges that forced deals like Adobe-Figma to collapse.

• Emerging fund managers face a brutal fundraising environment, with capital raised by first-to-third fund managers dropping from $64 billion in 2021 to just $4.7 billion through May 2024.

• Revenue quality in AI startups is increasingly scrutinized, with concerns about inflated ARR numbers and questionable customer acquisition strategies, particularly within Y Combinator companies.

• Seed-stage valuations have reached unsustainable levels with some Y Combinator companies valued at 200x revenue, creating challenges for traditional seed fund economics.

• Large funds ($5-10B) are underwriting deals for 2-3x returns with minimal capital loss, while seed funds still require 50-100x potential on winners to offset portfolio failures.

1:28

01:28 - 02:37 | Meet the Early Stage Venture Capital Experts

“On the show today we have Paige Doherty, founding partner at Behind Genius Ventures which writes quarter million dollar checks... Meghan Reynolds, a partner at Altimeter Capital where she is the head of capital formation... and of course we have Jason Calacanis, founder of the Launch Fund and the Launch Accelerator.”

Host Alex Wilhelm introduces the panel of venture capital experts joining the roundtable discussion.

Paige Doherty is a founding partner at Behind Genius Ventures, which writes $250K checks and has made 52 investments to date.

Meghan Reynolds is a partner at Altimeter Capital, where she leads capital formation for their technology investment firm that invests from Series A through public companies.

Jason Calacanis, founder of Launch Fund and Launch Accelerator, rounds out the panel of experts discussing the current state of venture capital.

This introductory segment sets up the expertise on the panel, spanning early-stage seed investing (Paige), growth-to-public markets investing (Meghan), and the full spectrum of startup funding with Jason's perspective as both an accelerator operator and fund manager.

Takeaways

• The panel represents diverse perspectives across the venture capital spectrum, from seed to public markets.

• Behind Genius Ventures focuses on early-stage investments with $250K checks across 52 portfolio companies.

• Altimeter Capital invests across the startup lifecycle from Series A through public companies.

• Jason Calacanis brings both accelerator and fund management experience to the discussion.

2:37

02:37 - 14:38 | The Rise of Secondary Markets

“Industry ventures data shows that global secondary activity is rising and should set an all-time high this year... about $122 billion worth of VC secondary this year up from about $105 billion in 2021.”

The discussion begins with examining the growing importance of secondary markets as a liquidity source for venture capital investments.

Secondary markets are projected to reach $122 billion in 2024, exceeding the previous high of $105 billion in 2021. Panelists noted that approximately 74% of exit value now comes from secondaries rather than traditional IPOs or acquisitions.

The panel explores different secondary transaction structures, including "slices" (selling a portion of a specific investment) and "strips" (selling a percentage across an entire portfolio).

Meghan explains that funds are increasingly using secondary sales strategically to return capital to LPs amid the IPO drought, while Jason shares how his fund has successfully trimmed positions in unicorns before their valuations declined.

Takeaways

• Secondary markets are becoming the primary source of liquidity for venture capital, with 74% of exit value coming from secondaries.

• Funds are developing explicit secondary strategies to return capital to LPs in the absence of IPOs and acquisitions.

• Secondary sales can occur through 'slices' (partial sales of individual companies) or 'strips' (selling a percentage of an entire portfolio).

• Early secondary sales can be advantageous for diversification and risk management, as evidenced by Jason's experience with Uber.

14:28

14:38 - 25:35 | Has M&A Actually Bounced Back?

“When I see Salesforce make a big purchase, when I see the new potential king of M&A Sam Altman make two purchases in one month... Data Bricks has been inquisitive... Uber's been buying little tuck-ins here and there... these are 1 to 6 billion on average.”

The panel examines whether M&A activity is truly recovering after a significant slowdown. Data from NVCA and Crunchbase suggest a relatively strong Q1 compared to recent years, though still below 2021 levels.

The discussion highlights several notable recent acquisitions, including deals from OpenAI, Databricks, Uber, and DoorDash, typically in the $1-8 billion range.

Jason argues that despite political rhetoric, actual behavior from tech companies indicates increasing optimism and willingness to pursue acquisitions.

The panel also discusses Meta's 49% purchase of Scale AI as a potential regulatory workaround strategy, with Jason suggesting that Zuckerberg should have pursued a full acquisition given the changing regulatory environment. Meghan notes that large tech companies have enormous cash balances that will inevitably find deployment outlets.

Takeaways

• M&A activity shows signs of recovery with companies like Salesforce, OpenAI, Databricks, Uber, and DoorDash making strategic acquisitions.

• Most recent tech acquisitions fall in the $1-8 billion range, providing meaningful but not transformative liquidity events.

• Meta's 49% stake in Scale AI may represent a new strategic approach to avoid regulatory scrutiny, though Jason questions this strategy.

• Large tech companies have streamlined operations and accumulated massive cash reserves that will likely fuel future acquisition activity.

• The potential change in administration may create a more favorable regulatory environment for tech M&A.

25:35

25:35 - 32:49 | Secondary Market Advice for Founders

“For founders if there's a market for your shares, control it, embrace it. Do not try to fight it because it will happen with or without you... we're going to do it twice a year, we're going to put a price on it, as CEO I'm going to do the price discovery.”

Jason offers tactical advice for founders on managing secondary transactions in their companies. He emphasizes the importance of founders maintaining control over the secondary process rather than allowing it to happen chaotically.

His recommendation is to establish formal windows for secondary transactions (e.g., twice yearly) where the CEO determines pricing and prioritizes long-term investors and employees.

The panel discusses establishing eligibility criteria based on tenure, suggesting that employees who have been with the company for four years and investors who have held shares for three years should be prioritized for liquidity. This approach rewards loyalty while discouraging short-term flipping.

Paige notes that Qualified Small Business Stock (QSBS) holding requirements of five years also naturally incentivize longer holding periods for investors seeking tax benefits.

Takeaways

• Founders should proactively manage secondary transactions rather than trying to prevent them, establishing formal processes and windows.

• Setting eligibility criteria based on tenure (e.g., 4 years for employees, 3 years for investors) rewards loyalty and discourages short-term flipping.

• The Qualified Small Business Stock (QSBS) exemption, which eliminates capital gains tax on up to $10M for investments held over 5 years, creates natural incentives for longer holding periods.

• Founders should maintain control over pricing and allocation of secondary opportunities to prevent disruptive external price discovery.

32:49

32:49 - 38:28 | The Emerging Manager Fundraising Crisis

“Emerging funds raised $64 billion in 2021, that fell to $17 billion in 2024, and through May 8th of this year it was $4.7 billion. I think that is a collapse.”

The discussion turns to the severe challenges facing emerging fund managers (defined as firms raising their first three funds). Data presented shows a dramatic collapse in capital raised by emerging managers, from $64 billion in 2021 to just $4.7 billion through May 2024. Paige, as an emerging manager herself, shares her experience of successfully closing a second fund despite this challenging environment.

Meghan compares breaking into venture capital to "going to Hollywood" due to the extreme competition and low success rates. She explains that the primary funding base for emerging managers—endowments, foundations, and family offices—has been hit hardest by liquidity shortfalls.

The panel also discusses how the AI gold rush has created significant opportunity costs for talented operators who might otherwise start funds, as they can often generate better returns joining high-growth AI companies.

Takeaways

• Capital raised by emerging managers (first three funds) has collapsed from $64 billion in 2021 to just $4.7 billion through May 2024.

• Endowments and foundations, the primary backers of emerging managers, face severe liquidity constraints that limit their ability to support new funds.

• The AI gold rush creates opportunity costs for talented operators who might otherwise become VCs, as joining high-growth AI companies offers potentially better returns.

• Institutional investors rarely write checks to emerging managers unless they have dedicated emerging manager programs, as typical check sizes are too small to move the needle.

• Successful fundraising for emerging managers now requires deeper relationships and longer sales cycles than during the boom years.

38:28

38:28 - 52:07 | Seed Funds: The Math Is Not Mathing

“If they're at 100K in ARR and valued at 30 million, they're trading at 200 times revenue. Bizarre to even put that valuation on it... When they go back to market after they've doubled their revenue, are they going to go back at 100 times revenue again?”

The panel analyzes the challenging economics of seed fund investing in the current market, particularly around Y Combinator companies.

They discuss enterprise generative AI startup benchmarks from Andreessen Horowitz showing top-quartile companies reaching $5.3M ARR in their first year.

Jason expresses skepticism about YC companies valued at 30x higher than comparable non-YC startups with similar metrics. A central debate emerges around whether Y Combinator valuations (often 200x revenue) are justified by the accelerator's brand, network, and selection process.

Paige argues that YC companies benefit from velocity, brand association, and a strong founder network that justifies some premium, while Jason contends his strategy is to find companies in the "2nd, 3rd, and 4th percentile" that didn't get into YC but are of similar quality, allowing him to make three investments for the price of one YC company.

Takeaways

• Top enterprise generative AI startups are reaching $5.3M ARR in their first year, raising the bar for early-stage metrics.

• Y Combinator companies often command valuations around 200x revenue, which Jason argues is unsustainable and breaks traditional seed fund economics.

• YC provides value through brand, velocity, network effects, and a rigorous selection process that may justify some valuation premium.

• Strategic seed investors can find better value by targeting high-quality companies that didn't get into YC but are of similar quality, potentially getting "three bets for the price of one YC company."

• Seed valuations are influenced by larger funds' strategies, as mega-funds ($5-10B) use seed investments primarily to secure options for future billion-dollar checks.

52:07

52:07 - 56:31 | Early Investors as "Collateral Damage"

“A mega VC with 5 to 10 billion annual funds is really searching for only one thing: a company they can pile over a billion dollars into with a potential to 5x, 10x on that 1 billion. The seed fund is inconsequential money used to increase the odds of the main objective. You are collateral damage.”

The discussion examines Bill Gurley's provocative statement that seed funds are "collateral damage" in the strategies of mega-funds. Gurley argues that $5-10B funds only care about finding companies where they can deploy $1B+ with 5-10x return potential, and seed investments are merely options for future large checks. This dynamic creates misaligned incentives between early and late-stage investors.

Meghan provides important nuance, explaining that unlike traditional venture funds, these mega growth funds aren't actually seeking 5-10x returns but rather zero capital loss with 2-3x outcomes across a more consistent portfolio.

Jason argues that early-stage investors like himself and Paige have fundamentally different incentives than later-stage investors, as they need to protect against dilution and focus on capital efficiency while mega-funds want to deploy maximum capital in the shortest timeframe.

Takeaways

• Mega-funds ($5-10B) use seed investments primarily as options to secure rights to future billion-dollar investments, creating misaligned incentives with early investors.

• Unlike traditional venture, large growth funds target consistent 2-3x returns with minimal losses rather than home-run outcomes.

• Early investors have incentives aligned with founders around capital efficiency and limited dilution, while later investors optimize for rapid capital deployment.

• Seed funds that survive must focus on entry price, ownership targets, and portfolio construction that allows for multiple winners.

• The misalignment between investor stages is structural and requires founders to understand the different motivations of their investors.

56:31

56:31 - 1:06:43 | Revenue Quality in Early-Stage Startups

“This is the Y Combinator strategy: sell to other Y Combinator companies. In some cases, startups are the best customer because startups will take a chance... but then the gamesmanship that happened was 'you buy my product, I buy yours' and people created these little round robins. I don't want to say it's unethical, but it's unethical.”

The panel examines growing concerns about revenue quality in AI startups, particularly those coming out of accelerator programs. Jason describes discovering that many Y Combinator companies were artificially inflating their revenue metrics by creating "round robins" where they purchase each other's products.

When his team began asking for customer usage data and acquisition sources during diligence, they uncovered concerning patterns of non-sustainable revenue.

The discussion highlights the need for better startup accounting education for early-stage founders. Paige notes that many technical founders lack accounting expertise and may incorrectly report metrics like GMV as ARR in marketplaces.

The panel also observes that as seed rounds increasingly require Series A-level metrics, there's more pressure to show revenue growth by any means, creating a problematic dynamic where quality is sacrificed for quantity.

Takeaways

• Some accelerator companies artificially inflate revenue through circular customer arrangements where startups buy each other's products.

• Proper due diligence should examine not just revenue numbers but customer sources, usage patterns, and quality of recurring revenue.

• Early-stage founders often lack accounting expertise and may incorrectly report metrics like marketplace GMV as recurring revenue.

• As seed rounds require increasingly advanced metrics ("seed is the new Series A"), pressure to show growth can lead to questionable revenue practices.

• Investors should evaluate both revenue quantity and quality, distinguishing between sustainable, high-quality growth and artificially inflated numbers.

1:06:43

1:06:43 | Quick Fire Question Round

“What is a contrarian place or market where you are currently looking for startups and founders today?”

The roundtable concludes with a rapid-fire question round for each panelist.

Jason Calacanis identifies AI-enabled services as his contrarian investment focus, noting that many investors dismiss service businesses as "not venture scale"—similar to how critics once viewed Uber, Airbnb, and Tesla. He specifically mentions hardware-as-a-service models like Density.io and companies combining AI with human services.

Paige Doherty highlights Intramotive, an exciting portfolio company building electrified autonomous trains with a team of 50 engineers in St. Louis. She shares her investment focus areas including applied AI, consumer wellness/longevity, and deep tech, influenced by her background in mechanical engineering and experience at Northrup Grumman.

Meghan Reynolds predicts the stock market will close above current levels by year-end, expressing optimism about the technology sector despite recent volatility.

Takeaways

• Jason sees contrarian opportunity in AI-enabled services and hardware-as-a-service models that many dismiss as "not venture scale."

• Paige is focusing on applied AI, consumer wellness/longevity, and deep tech investments, highlighting Intramotive (autonomous trains) as an exciting portfolio company.

• Meghan remains bullish on the stock market and tech sector for the remainder of the year despite recent volatility.

• The panelists demonstrate diverse investment theses that reflect their unique backgrounds and fund strategies.

Conclusion

This venture capital roundtable offers a comprehensive view of the dramatic shifts reshaping early-stage investing in 2024-2025. The rise of secondary markets as the dominant liquidity path, the collapse of emerging manager fundraising, inflated seed valuations, and questionable revenue quality in AI startups all point to an ecosystem struggling with growing pains amid technological transformation.

Perhaps most significant is the evolving relationship between different stages of capital, with early investors increasingly functioning as "collateral damage" in mega-funds' hunt for billion-dollar deployment opportunities. This dynamic forces seed investors to be more disciplined about entry prices, ownership targets, and portfolio construction while navigating a world where traditional exit timelines have extended dramatically.

For founders and investors alike, success in this environment requires adaptation: founders must proactively manage secondary processes, scrutinize revenue quality, and understand the divergent incentives of different investor classes.

Investors must develop explicit secondary strategies, maintain disciplined valuation approaches, and focus on truly differentiated companies that can generate the outsized returns necessary to sustain the early-stage venture model in an increasingly challenging landscape.