Silicon Valley's Secondary Markets Achieve Record Levels -

Transactions within secondary markets for startups backed by venture capital are expected to achieve unprecedented heights this year, as companies like OpenAI, SpaceX, and Stripe initiate tender offers to enable employee payouts, while investors explore alternative avenues to divest their stakes, moving away from traditional initial public offerings (IPOs).

Tender offers allow employees, former employees, and selected investors to sell their shares directly to other investors, marking a shift from prior years, when major startups looking to reward employees typically pursued IPOs — the standard route to success within the tech sector.

As IPOs are becoming less frequent, the quantity of tender offers and other secondary market dealings has risen sharply. NewView Capital, a firm focused on secondary markets, predicts that startup transactions in these markets will reach $21 billion in 2024, more than twice the previous record set in 2023.

The financial technology company Carta facilitated 26 tender offers last quarter, marking the highest count since the pandemic surge. Additionally, enterprises such as Fanatics, Databricks, and Rippling have either completed or are in the process of negotiating similar arrangements.

Simultaneously, SoftBank Group Corp is in talks with OpenAI regarding the acquisition of $1.5 billion in employee shares through a tender offer — marking the AI firm’s second such deal this year.

Financial Needs

In secondary markets, the trading of existing shares of private companies occurs between buyers and sellers. This differs from the issuance of new shares, which is typically what venture capitalists buy in funding rounds or what employees receive as compensation. The appeal lies in the flexibility these transactions offer investors who wish to sell their stakes independently of IPOs or acquisitions, allowing them to control their timing for returns.

This year has witnessed significant growth in the overall secondary market: 2024 is projected to exceed $140 billion in transaction value, as stated by investment bank Jefferies, surpassing the prior peak of $132 billion set in 2021. A rapidly expanding segment of these transactions is centered on venture-backed startups, according to NewView. Buyers include family offices, venture capitalists eager to gain new shares, and specialized secondary firms.

For tender offers, some companies orchestrate deals to provide cash relief for employees while also assisting in talent retention efforts. Many startup employees may own stock that appears to indicate substantial wealth, yet it often does not translate to actual purchasing power.

“Net worth doesn’t meet your needs,” explains Greg Martin, the founder and operator of Archer Venture Capital, which specializes in secondary funds, along with his platform Rainmaker Securities that facilitates trading of secondary shares. With illiquid startup shares, “You can’t buy a house, you can’t pay for school tuition, you can’t manage family healthcare costs.”

Established startups often organize share sales on a regular basis, typically several times a year. For example, SpaceX and Stripe have executed multiple such transactions. This strategy can reduce pressure on employees pushing for an IPO.

SpaceX, recognized as the world’s most valuable startup, has conducted numerous tender offers. Photographer: Jordan Vonderhaar/Bloomberg

This approach starkly contrasts with earlier years when tender offers were relatively rare, with sellers often engaging in discreet and occasional transactions, occasionally facilitated through platforms that connect buyers and sellers.

“There used to be a specific stigma,” recalls Larry Aschebrook, the founder and managing partner of G Squared Investment Management LP. “Companies thought that if someone wanted to sell their stock, it signified failure.” This perspective has largely dissipated, Aschebrook observes, primarily due to the prolonged anticipation of significant startup IPOs. This transformation has radically altered his secondary-focused investment business from “a struggle” to “the best it’s ever been.”

Employees are not the only ones liquidating their stakes. Numerous venture capitalists are also selling shares in the secondary markets. Over the past two years, venture capitalists have seen markedly fewer profitable transactions — such as acquisitions, IPOs, or buyouts — than they typically expect. Last quarter, such transactions barely exceeded $10 billion, according to PitchBook. In contrast, in 2021, each quarter had returns over $100 billion, prompting investors to seek alternatives to traditional primary markets.

Institutional investors are also entering the fray. Earlier this year, the Los Angeles County Employees Retirement Association announced a reduction in its allocation to venture capital and growth equity to a range of 5% to 25% of its growth category, down from a previous target of 15% to 30%. Meanwhile, it intends to increase the share of the group involved in secondary transactions to as much as 35% of its growth category, up from 30%.

Strategic Investments

Greg Martin views opportunities amidst these challenging conditions. In secondary markets, he tends to invest in shares of venture-backed firms likely to be acquired or go public within the next few years — ideally within three to four years. He shares that he is securing advantageous prices.

“A significant advantage of the secondary market is its relative inefficiency,” Martin explains. “When liquidity is required,” referring to cash, “price sensitivity diminishes.” Generally, startup shares continue to trade at a discount in secondary markets compared to their most recent official valuations. Some firms whose secondary shares are part of Martin’s portfolio include the sleep-enhancing firm Hatch Baby Inc., AI computing company Lambda Inc., and writing assistant Grammarly Inc.

Once perceived as a chaotic space, the secondary market has matured. For example, Carta opted to exit the secondary market earlier this year after facing backlash from founders over its efforts to encourage investors to part with their shares. Nevertheless, secondaries are becoming increasingly structured, driven in part by the growing popularity of tender offers.

While some venture capitalists may harbor pessimism about the extended timeline toward IPOs, those focused on secondary markets maintain a positive outlook. “It’s an exhilarating time,” remarks Aschebrook.

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