Synthetic Downside Insurance for Venture Capital
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Javier Avalos, co-founder and CEO of Caplight, on building synthetic derivatives of private stock
The VC asset class is one where you really have to juice your home runs because there are so few of them.
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This is why downside insurance fits venture better than upside selling. In VC, a small number of positions drive most of the fund outcome, so a manager cannot afford to cap the upside on a winner just to earn option income today. That makes a protective put much closer to insurance on a concentrated portfolio than a trading strategy on a diversified book.
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Secondary markets already let VCs and employees sell stock, but those sales are slow, brokered, and can take months to close. Synthetic contracts are different because they let an investor hedge the economic value quickly without transferring the underlying shares or adding new names to the cap table.
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The practical comparison is covered calls versus puts. A covered call pays cash now, but gives away gains above a strike, which is dangerous if the company turns into the fund returner. A put costs premium up front, but keeps all upside while putting a floor under a position if the company breaks badly.
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This logic is strongest in venture because returns are unusually concentrated. Private market research also shows that more liquidity and hedging tools can lower the pressure to force full exits, let funds return some cash to LPs earlier, and help investors manage exposure without abandoning their best companies.
The next step is a private market that looks more like public markets in risk management, but not in ownership turnover. As hedging tools mature, VCs should keep using direct ownership for access and company building, while using derivatives selectively to protect marked up winners and avoid losing a fund on one late stage blowup.