Venture capital has a time problem that I don't think we have fully priced
I started researching this with what I thought was a fairly simple thesis.
Venture backed companies used to exit after perhaps four to six years. Today it felt more like eight to ten.
If that was right, there was a fairly fundamental problem with venture economics.
The first thing I found was that my starting assumption was wrong.
Or at least too simplistic.
PitchBook and NVCA data shows that the median US venture backed company acquired in 2025 had been VC backed for just over five years. That compares with around four years a decade earlier.
Longer, certainly. But nowhere near the eight to ten years I had assumed.
I think the more interesting issue is what that statistic leaves out.
It only measures companies that have exited.
It tells us nothing about the increasingly large population that hasn't.
The exceptional funding years of 2020 and 2021 created a huge stock of private companies. Many remain private today. Their investors have marks on paper, but LPs (Limited Partners, the investors in venture funds) cannot spend TVPI (Total Value to Paid-In, the total value of realised and unrealised investments relative to capital contributed).
They need DPI (Distributions to Paid-In, the cash actually returned to investors relative to capital contributed).
The exit market is improving. That matters and it would be wrong to ignore it. But the liquidity backlog has not disappeared.
That is where I think venture has developed a time problem.
The maths changes surprisingly quickly
Take a 3x investment return.
Returned after five years, it generates a 24.6% IRR (Internal Rate of Return).
Returned after ten years, the IRR falls to 11.6%.
Nothing about the eventual cash return changed. Only time.
If an investor wants to maintain a 25% annual return, the required multiple increases dramatically.
Holding period and Multiple required for 25% IRR
5 years for a 3.1x
7 years for a 4.8x
10 years for a 9.3x
12 years for a 14.6x
Obviously a venture fund is more complicated than this.
Capital is called over time. Different investments realise at different points. Some fail completely and a small number generate most of the return.
But that makes the underlying issue harder rather than easier.
You cannot respond to longer holding periods by simply telling VCs to pick more winners.
They are already trying to do that.
And investors have an opportunity cost.
To 30 June 2026, the S&P 500 price index had returned 11.8% a year over five years and 13.6% over ten.
The FTSE All Share total return was 10.9% over five years and 8.7% over ten.
An institutional LP does not simply choose between an index fund and venture capital. They allocate across asset classes and properly compare private market performance using PME (Public Market Equivalent, a method of comparing private investment performance with an equivalent investment in public markets).
But the principle remains.
If I am giving up liquidity for ten years or more and accepting significant uncertainty over valuations, I should expect a return premium for doing so.
If duration increases, something in the venture model has to adjust.
I initially thought the obvious answer was entry valuation.
Pay less going in.
The market does not appear to be adjusting that neatly.
The British Business Bank reported that AI companies captured 44% of all UK smaller business equity investment in 2025, despite accounting for 26% of deals.
The ten largest fundraisings took 23% of all investment.
Overall smaller business equity investment actually fell 4%.
I think that tells us where part of the adjustment is happening.
Capital is becoming more concentrated.
More money is going into a smaller number of businesses that investors believe can still generate extraordinary outcomes.
For everyone else, raising capital becomes harder.
Employees have the same problem
This is where I think the consequences become more interesting.
Startups have always used equity partly because they cannot compete with larger companies on cash salaries.
The employee accepts less cash today in return for potential upside later.
But the word "later" matters.
Assume an employee receives options that ultimately produce £100,000.
At a 15% discount rate, £100,000 received in six years has a present value of roughly £43,000.
Receive exactly the same amount in twelve years and the present value falls below £19,000.
That is a 57% reduction caused by time.
Of course, the company could become much more valuable during those additional six years. If it does, the employee may be considerably better off.
But there are also risks running in the opposite direction.
More funding rounds can mean more dilution. More preference capital can sit ahead of ordinary shareholders.
The employee may leave years before an exit.
Options issued around an earlier valuation can end up underwater.
At some point the employee may have to decide whether to put their own cash into an illiquid investment in a company they no longer work for.
That changes the incentive equation.
Which makes a recent UK tax change particularly interesting.
From 6 April 2026, the maximum exercise period for qualifying EMI (Enterprise Management Incentives) options increased from ten years to fifteen.
The company wide EMI option limit doubled from £3m to £6m.
The gross asset eligibility threshold increased from £30m to £120m and the employee limit increased from 250 to 500.
Eligible existing options can also be amended to take advantage of the longer exercise period.
The Government does not explicitly say it made these changes because startup exits are taking longer.
So I would not claim that.
But I struggle to believe moving an employee incentive scheme from a ten year window to fifteen years is irrelevant to this debate.
The VC is on the same clock
There is another side to this that I had not properly considered before doing the research.
The VC telling the founder to preserve cash and incentivise employees with equity is effectively being paid in something with very similar characteristics.
Carry.
Carried interest is the share of a fund's investment profits allocated to the investment team, usually once the fund's return conditions have been met.
It is contingent and illiquid. It can vest years before any cash arrives.
Take an investment professional who will eventually receive £200,000 of carry.
At a 12% discount rate, receiving it in year six has a present value of approximately £101,000.
Receive exactly the same £200,000 in year eleven and it is worth about £57,000 today.
The five year delay has reduced the present value by roughly 43%.
That creates a symmetry I find difficult to ignore.
If longer exit horizons reduce the effectiveness of employee options as an incentive, they also reduce the effectiveness of carry as an incentive for the people running venture funds.
Both sides are exposed to the same clock.
The UK tax rules create another interesting tension.
From April 2026, qualifying carried interest moved into the income tax framework. The 72.5% multiplier means a qualifying additional rate taxpayer faces an effective rate of around 34.1%.
Qualification also depends on investment holding periods, with full qualification broadly achieved once average holdings reach 40 months.
So the tax system rewards fund managers for holding investments for long enough.
Time value then penalises them if realisations take much longer.
I suspect this will eventually become a retention issue inside investment firms as well as portfolio companies.
The market is already adapting
The clearest evidence may be what investors are actually doing.
Carta estimates that venture secondary transactions reached $61.1 billion in the twelve months to June 2025.
That was greater than the value of venture backed IPOs (Initial Public Offerings) over the same period.
UBS estimates that VC and growth GP-led (General Partner-led) secondary transactions exceeded $12 billion during 2025, increasing more than 40% in one year.
Employee tender offers are becoming more common.
GP-led liquidity is developing.
Funds are finding ways to return cash without waiting for a conventional company exit.
This starts to look increasingly familiar to anyone who has worked around private equity.
Venture is quietly developing the liquidity infrastructure required for companies that stay private for much longer.
I don't think that means venture capital is broken.
It probably means the original model needs to evolve.
For founders, that means thinking about employee liquidity earlier and asking whether venture capital is actually the right source of finance for every business.
For fund managers, entry valuation is only part of the answer. Ownership, follow on discipline, concentration and actual cash distributions matter increasingly.
Employees need to think about options for what they really are. They are a long dated, concentrated and illiquid investment in one company.
And LPs probably need to ask a very simple question more often.
What return am I actually being paid for the time I am giving up?
