Rett Wallace | July 1, 2025
The Private Market Trap Edition
On markets, liquidity, and the dismantling of the traditional American wealth-creation engine
Rett Wallace (RW) is a longtime friend of WITI. He wrote one of our most popular MMDs of all time, and now brings a thoughtful view of the current state of private markets. -Colin (CJN)
Rett here. There's $13 trillion trapped in venture capital and private equity funds right now, and it's wrecking America’s system to create new companies.
Money is checking into the Private Capital Motel but it can't check out. About 70,000 U.S. private companies have received some form of private investment, representing $6.7 trillion of cash from investors. These companies are currently valued at $13.3 trillion. But that value is increasingly trapped, with no way for investors and companies to get liquidity.
Why is this interesting?
We're watching the dismantling of the traditional American wealth-creation engine. The system that built the modern United States was elegantly simple: founders and employees trade good ideas and hard work for stock that appreciates and attracts financial investment, then eventually founders, investors, and employees exchange that stock for money through public markets. But without liquid stock exchanges, it doesn't work.
Some brutal math: The liquidity crisis is so dire that some of the most successful U.S. private companies (Stripe, OpenAI, SpaceX, Databricks) have essentially built their own mini stock exchanges to get cash to employees and investors. For everyone else, it's the "Private Capital Motel: Money checks in but doesn't check out."
Some historical context: Starting in 1999, regulatory changes drastically impaired the IPO mechanism. The number of publicly listed companies has been cut in half to about 4,000 since 1996. Meanwhile, fund managers found it easier to invest in private companies as it got harder for those companies to go public. The lines crossed: companies big enough to go public don't need to anymore.
Here are the components of the doom loop:
Lack of exits pushes VC returns to near zero
Poor returns mean investors won't commit new money
Fundraising for venture and growth funds dropped 40% in 2024 from 2019
Less capital flows to new startups
Stock-based compensation becomes worthless, killing startup incentives
Funding is now concentrated in a few megafunds writing massive checks to either old unicorns or AI startups. Of $77 billion in new VC funding in 2024, almost $30 billion went to just 10 funds. In Q1 2025, 70% of first financings went to AI companies. Small companies doing anything else are systematically starved of capital.
Stock-based compensation, the rocket fuel of the entrepreneurial ecosystem, is now more of a pay cut than an incentive. Why take less cash and equity at a risky startup when you can get salary and options at a big tech company? The country that invented venture capital is accidentally destroying the incentive structure that made it work.
How will the U.S. birth new SpaceXs and OpenAIs with decreased capital to fund them and crippled incentives for employees to staff them? At stake is $13 trillion of capital waiting to be redeployed into innovation and America's leadership in both capital markets and entrepreneurial innovation. (RW)