VCs will get liquidity from secondary market, not IPO in 2024

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If you asked some VCs at the end of 2023 whether the IPO market would eventually reopen in 2024, most of them would have said yes. We know because TechCrunch surveyed more than 40 of them in December and this is what they said.

Yet, with two weeks left in Q1, there are still no major IPOs completed, and very few in the works. Reddit is the only IPO with such a big price. Otherwise, with very few public SEC documents, there is only speculation as to who might go public. For example, there's Sheen which reportedly filed a confidential S-1 last fall, or car rental marketplace Turo which is still waiting on the sidelines after filing its initial S-1 in 2022.

It's unclear whether the markets will reopen later this year despite Reddit's offering being a hit. Secondary investors recently told TechCrunch that while Reddit may spark some additional activity, it likely won't be the inaugural IPO that investors were hoping for. Also, some of the biggest names that were expected to go public this year — Databricks, Stripe and plaid — have either said outright that they won't IPO in 2024 or have held funding events, implying that they Not going out any time soon.

While many investors want While IPOs will reopen in 2024, market conditions are not ideal. Interest rates are still high, making money expensive and attracting investors from equities to bonds; With valuations still below their 2021 highs, late-stage venture investors expect to make little profit — or even lose money — if their startups go public now.

But if IPOs do not come back, the prospects for liquidity in 2024 are not entirely bleak. Investors are increasingly turning to secondary markets, where private companies can authorize their shareholders to sell limited amounts of stock to approved investors. This is not a public sale. Shareholders cannot sell out to anyone, ever. But in 2024, it has often become the preferred option.

Transactions on secondaries grew from $35 billion in 2017 to $105 billion in 2021 and are expected to total $138 billion in 2023, according to data from Industry Ventures.

Secondary Market: Best of Both Worlds

Alan Waxman, founding partner of LaunchBay Capital, said the secondary market allows companies to get the best of both worlds. Startups looking for liquidity are able to appease their investors by allowing them to sell all or part of their company's equity, without the condition of a premature exit.

“This alleviates liquidity pressures for some investors,” Waxman said. “You created liquidity for the people you wanted, you didn't disappoint your late-stage investors and you're taking your time to grow. The secondary market now allows this.”

Stripe's recent secondary sale is a clear example of this. In February, Stripe announced that it had reached a deal with its investors to provide liquidity to its employees in a sale that valued the company at $65 billion. While this is lower than the $95 billion valuation the company achieved in 2021, it is a big increase from their previous primary round that valued the fintech at $50 billion last year.

This secondary sale shows that investors are willing to keep Stripe's valuation near 2021 highs and that it is easier for employees to get cash for some of their stock ahead of the IPO event. So why would Stripe want to go public in 2024 before its valuation has fully recovered?

Secondary markets have always been targeted at employees. The new thing is that VC funds and LPs have started trusting them. Nate Leung, a partner at Sapphire Ventures, said companies may choose to sell some shares to free up some cash while keeping some of their stake. But companies can also use them to buy stock and increase their stakes in promising startups.

Leung said Sapphire deployed about $500 million in the secondary market in 2023, and expects to invest the same, if not more, in secondary stakes in 2024.

Bloomberg reported that Shasta Ventures had reportedly hired Zephyrs for a “strip sale”, meaning it was looking for secondary buyers for a selection of its portfolio holdings. The report doesn't include which startups it plans to sell, but its portfolio includes companies like Canva, which Shasta backed in a 2013 seed round and is now valued at $40 billion, according to secondary data platform CapLight. Is.

The IPO market will not remain stable forever. But given the maturity of the secondary market, there is no need to melt down before the market is really ready.

“The secondary market is playing a big role,” Leung said of companies waiting to go public. “You can achieve many of your core goals for both employee and investor liquidity and LPs by selling outright or structuring secondary deals. [LPs] They are not putting pressure on GPs to sell their assets, which reduces public market demand.