businessman, investor handshake with global network connection and stock chart … [+]
In the volatile world of startups, where success and failure are often in a precarious balance, the ability to adapt and make strategic decisions is crucial. As the landscape evolves, businesses face various challenges that require innovative solutions. One of the challenges that has gained prominence in 2023 is the debate around startups selling secondary shares – especially after experiencing valuation declines. Startups, more than any other business, rely on capital to fuel their growth and further development. Traditionally, primary shares are the primary means of fundraising, providing an injection of cash that can be used to drive expansion, hire talent and invest in research and development. However, as the market becomes more volatile, several startups have turned to selling secondary shares as a potential source of liquidity for early team members and investors.
Chart showing the main differences between selling startup shares in the primary and secondary market.
Secondary Stocks: A Lifeline for Early Team Members and Investors
One of the main benefits of startups selling secondary shares is immediate access to liquidity for the team and initial investors. In an industry where financial stability may be limited, the ability to sell shares on the secondary market can ease the financial burden faced by employees and early investors. This liquidity can be particularly valuable during times of economic uncertainty or as a means of compensation for team members who have been with the company for a significant period of time. Additionally, secondary stocks can help beginning investors exit their investment with potentially attractive returns. For angel investors, seed and pre-seed VC funds, and other stakeholders who have taken calculated risks to support the startup’s growth, the opportunity to sell shares can be an opportunity interesting to capitalize on their initial investments, particularly in an environment like the one we know. right away.
Secondaries are gaining ground: Open AI, Neuralink, Anduril, Antropik
Sam Altman, CEO of OpenAI, speaks during a keynote announcing the integration of ChatGPT for Bing at … [+]
The secondary market for unicorn companies has seen significant activity following the valuation declines that have taken place throughout most of 2023. A prominent example of this trend is OpenAI, which recently attracted the attention of the unicorn company. Thrive Capital investment. Under a deal led by Thrive Capital, a tender offer is expected to be launched to repurchase OpenAI’s shares from employees, which would bring the company’s paper valuation to at least $80 billion, a substantial increase compared to a similar transaction carried out six months previously.
Thrive Capital’s involvement in OpenAI speaks to the strong market demand for shares of unicorn companies, particularly those operating in cutting-edge technology areas such as AI. Just six months ago, in April, OpenAI sold employee shares to Thrive and other investors at a valuation of $27 billion. However, the latest transaction is expected to increase the company’s value by at least a factor of 1, placing it among the most valuable venture capital-backed companies.
While the valuation bump experienced by OpenAI is notable, it is important to contextualize this example within the broader landscape of secondary market activity in 2023. The market has seen several venture capital funds actively participating in buying of secondary actions, with the aim of capitalizing on the potential. growth of these unicorn companies. The examples of Horizon Ventures, Accel and Sequoia Capital highlight the various venture capital funds actively participating in the secondary market and their willingness to invest significant capital in promising unicorn companies. The companies getting the most attention on secondary stock platforms are AI companies. They lead the dance. This includes Anthropic.ai, a rival to OpenAI and Neuralink, a cutting-edge neurotechnology company dedicated to developing high-bandwidth brain-machine interfaces that recently won FDA clearance for its first clinical trial on man, Anduril, a modern defense. technology startup offering a suite of autonomous systems for the US Department of Defense. There are also more negative examples, including secondary stocks circulating at a significant discount to its last ride – such as Flexport, a digital-focused freight forwarder and customs broker backed by many big names.
Flexport’s secondary prices were a source of negative signal this year, when secondary prices were circulating on several marketplaces at a ~50% discount to approx. $4 billion, down from its last round’s valuation of $8 billion. While early investors said they were liquidating their investments for personal needs, news later broke that Flexport’s revenue was down more than 70% in the first half of the year and the CEO and CFO
CFO
Growing popularity of platforms selling secondary products. Some become acquisition targets for funds
In this dynamic financial landscape, platforms like Carta, AngelList, Forge, Sandhill and EquityZen have emerged, paving the way for individual investors to access the hottest startups before they reach the mainstream. Carta, a gaming pioneer, connects investors with pre-IPO companies, allowing them to buy or sell shares in the private market. AngelList, on the other hand, takes a community approach. Providing a platform for both startups and investors, AngelList facilitates connections and fosters relationships. Forge leverages building relationships with institutional investors and startups through their expertise in private market equity trading, they enable investors to diversify their portfolios and capitalize on emerging opportunities. Sandhill, formerly known as Stonks, is an example of tapping into the retail investor market through a gamified investing experience. By offering fractional shares of private companies, Sandhill allows investors to participate in the growth potential of startups without the need to invest large sums of money – and often via engaging video streams on weekends, s ‘aimed at the busy retail investor with a day job. This unique approach encourages engagement and democratizes access to the world of startups. The popularity of these platforms doesn’t stop there: news just broke that Equation, a leading provider of software solutions for LPs (Limited Partners), is aiming to tap into the secondary market by acquiring Betterfront, a investment analysis company specializing in secondary transactions. The acquisition is seen as an important step toward transforming how investors access and analyze secondary opportunities, infusing automation and data-driven insights into this relatively traditional market. The thesis argues that Equation’s acquisition of Betterfront was driven by a desire to streamline and modernize the secondary market. By integrating Betterfront’s cutting-edge technology, Equation aims to equip LPs with more efficient, transparent and data-informed decision-making processes when it comes to secondary investments. This acquisition is part of the broader trend of digital transformation in the private equity industry. Thus, combining Equation’s expertise in software solutions with Betterfront’s robust data analytics platform could potentially usher in a new era of growth and accessibility for the secondary market, benefiting both investors and the greater number. ecosystem.
Bottom line: Secondary sectors are here to stay, unlocking liquidity, trajectory signals and new investor audiences for growth-stage companies.
Lack of liquidity appears to be a recurring theme across the board for venture capitalists: lack of M&A activity, falling valuations accompanied by down cycles in 2023, and waves of layoffs have pushed them to seek alternative solutions. The delay in the IPO market has also forced early team members and employees who relied on liquidity to shop around, often choosing secondary platforms as the most practical option. This will also result in an imminent inclusion of retail investors through platforms like Sandhill, as they want to participate in the value creation of the most important unicorn names, while funds will increasingly use signals from Carta, Forge, EquityZen and others as a sign of confidence or panic in the short and medium term.