Secondary Markets Are Deeper Than Ever
Shriram Bhashyam | February 19, 2015
We got into this business in mid-2013 because
secondary markets were broken. The sellers wanted liquidity, the buyers wanted
access, but deal flow had receded and the market was fractured. Today, the
landscape is much different. Volume has picked up and there are more investment
opportunities in proven companies than ever before.
The secondary market really took shape in the late
2000s, with momentum building from about 2009 until mid-2012, when activity
started dying down. Not coincidentally, this lines up with the IPO of Facebook
(May 2012). During the Secondaries 1.0 era, SecondMarket and SharesPost led the
Transaction Volume for
SecondMarket During the Secondaries 1.0 Era (millions)
data for SharesPost is not readily available.
** Estimate. All other figures are self-reported.
However, the transactions on those platforms were
concentrated in just a few names: Zynga, LinkedIn, Groupon, Twitter, and of
course, Facebook. For example, in 2009, Facebook accounted for 31% of completed transactions on SecondMarket. Concentration did not improve
over the next few years. In the four months leading up to the Facebook IPO,
Facebook represented 70%
of the volume on SharesPost.
Exact (publicly available) data on this is hard to
pin down, but the number of proven late- or growth-stage opportunities was
likely fewer in the Secondaries 1.0 era than today. The closest proxy we’ve identified
is the number of Unicorns (ventured-backed companies with valuations of $1
billion of more) over time. In 2013 there were 28 US-based Unicorns, where as in 2014 there were 49. In fact, 40 US
companies raised at unicorn valuations in 2014, which was more than all such
fundraises for 2012 and 2013 combined.
Following the Facebook IPO, secondary markets
receded. Simply put, companies did not like the lack of control over process or
information flow in Secondaries 1.0. As a result, they started discouraging
liquidity and making transfer restrictions tighter.
We are at the dawn of Secondaries 2.0. There are
many solutions out there, including EquityZen, but a survey of the landscape is
beyond the scope of this post. While data on transactions is scant, the number
of companies suitable for investment has greatly increased. It’s a great time
to look at growth-stage and pre-IPO investments.
The opportunity to invest in proven venture-backed
private companies via secondary markets is vast. If we consider a universe of US venture-backed companies with valuations of $500 million or more, according to
EquityZen’s own research, there are 83 such companies comprising an aggregate
valuation of $211.5 billion. Of that, it’s fair to consider $74 billion
transactable for the private investor, which reflects the equity sitting in the
employee, founder, and early investor/advisor pools.
And while we concede that the rise in Unicorn
valuations (there are about 70 now according to the WSJ) is in part due to
cyclicality and investor exuberance, that’s not the whole story. Companies are
staying private longer (the median tech company was 11 years old at its IPO 2014 versus 5 years old in 2000) for a variety of reasons, many of which are structural. To boot, the
traditional public institutional buy-side, whether hedge funds (e.g., Tiger
Global) or mutual funds (e.g., Wellington), has made a home
in late- and growth-stage investing, allowing companies to access capital
without the burdens of public market scrutiny.
Because companies staying private longer, traditional
public market investors are losing value to the private markets. Amazon went public in 1997 at a $440 million
market cap, and today Uber is private at a $40 billion valuation. Investors are taking note. Growth-stage
and pre-IPO investing is an important channel for qualified investors to reclaim the
growth they’ve been missing, and the opportunities are vast and growing.
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