Insights

Investor rotation in private markets – is it healthy?

There’s a common narrative in Web3 around “token dumps” and “paper-handed” investors, painting early exits as harmful. The reality is far more nuanced.

In traditional markets, fund rotation on the cap table is a natural and essential feature of a company’s growth. Web3 businesses are no different; the timelines are just faster, and the capital is often locked in tokens.

Let’s break down how a project typically evolves and why secondary markets are crucial for healthy rotation at each stage.

Seed/pre-seed stage

This is where angel investors, incubators, and small venture funds write the first checks. But beyond capital, they bring something far more valuable at this stage: access.

Projects here may or may not have an MVP and are almost always chasing product-market fit. There’s an idea, but no guarantee it will work. The value of these early investors lies in their network; they open doors, connecting teams to partners, marketing agencies, and institutional clients who can accelerate traction.

If the project shows real traction, it’s a signal that it needs more fuel, fast. High-growth projects are almost always fundraising, and part of the early investors’ job is to make introductions to the next round of capital. This is where the pressure for rotation begins.

In traditional markets, fund rotation on the cap table is a natural and essential feature of a company's growth. Web3 businesses are no different.

Incoming Series A investors see the massive potential. They can either dilute the early backers, or, if they believe the upside is extraordinary, they’ll insist on something more direct. They don’t want “passengers” on the cap table, profiting from a new phase of growth they aren’t funding. They want to capture that future upside for themselves.

This creates a natural, often insistent, push for rotation. Early investors may not even want to sell their entire stake, but the new lead investor will frequently make buying them out a condition of the deal. This is where secondaries become essential, providing a clean mechanism for this transition.

Series A/B

With product-market fit established, the game shifts to scaling. This means aggressive hiring, expanding into new markets, and deploying significant capital for marketing and compliance. It’s incredibly capital-intensive, and a few $50k angel checks no longer cut it.

At this point, the project raises a Series A or B round, in the millions to tens of millions, and deploys it rapidly to outpace competitors, secure licenses, and dominate its niche. This stage demands a different kind of capital partner.

Growth-stage investors bring bigger checks and different risk expectations. While early angels chase 100x returns on small bets, these funds target a solid 5-10x and expect structure, operational oversight, and regular reporting. Here, too, secondary sales help smooth the transition, allowing early contributors to sell a portion of their stake to incoming funds.

Series C/D

Later, at Series C or D, the company is large, often profitable, and valued in the hundreds of millions, if not billions. The focus shifts from growth to dominance: acquiring competitors, entering new markets, or vertically integrating.

These strategic moves require hundreds of millions in capital. In traditional markets, this is private equity territory, think SoftBank or DST Global. These firms manage massive pools of capital and operate on an entirely different scale.

Web3 projects are now entering this phase. But unlike traditional companies, much of their capitalization is in locked tokens and illiquid paper, not easily transferable equity.

Public markets don’t solve this. Float is limited, and buying on an exchange doesn’t give funds access to meaningful positions or strategic rights. That’s why secondary deals are essential at this stage. They are the only way for late-stage capital to enter at size without distorting tokenomics. They allow early backers a clean exit and let new strategic capital step in under terms that match the project’s maturity.

Why rotation is a feature, not a bug

As you can see, investor rotation is a core feature of any healthy growth journey. As companies evolve, they outgrow the networks and risk profiles that got them off the ground.

New investors buy out earlier ones not because something is wrong, but because they are better equipped for the next set of challenges and want to capture that phase of growth for themselves.

The skillset needed to open doors at the incubator stage is not the same one needed to negotiate a merger or file for an IPO. Secondaries make this vital rotation possible, giving early investors a clean exit and new partners a path to meaningful ownership without distorting the cap table.

New investors buy out earlier ones not because something is wrong, but because they are better equipped for the next set of challenges.

The Web3 market paradox

This reality is rarely discussed in Web3, where fast cycles and skewed perceptions of success dominate. Many feel the game ends with a token launch. In reality, it’s just the beginning.

Technology evolves. A project built two years ago might already be outdated. To stay relevant, teams must keep building, move into new verticals, or merge with others. This requires the same evolving expertise and capital as any traditional tech leader.

The challenge is that in Web3, capital is locked in tokens. The primary answer to unlocking it lies in secondary market deals. Yet, a paradox persists: when these transactions happen, the public often views them with suspicion, mislabeling them as “fishy sell-outs.”

The truth is the opposite. This rotation is proof of a project’s maturation and value. When larger, sophisticated investors acquire stakes, it’s a powerful validation of its success and trajectory.

We’re already seeing this shift. Take Coinbase’s $2.9B acquisition of Deribit, a clear signal that late-stage capital is moving in, and secondary deals are the primary rails for that movement.

So what now?

The era of viewing Web3 secondary markets as a niche or suspect activity is over. They have become a fundamental part of how serious projects grow, enabling investor rotation, unlocking aligned capital, and supporting teams far beyond the early stages.

This isn’t a side effect of market maturity. It’s the mechanism that gets you there. What has long been standard in traditional markets is now essential in Web3, because sustainable growth demands it.