Secondary Markets Are Deeper Than Ever

Shriram Bhashyam
Feb 19th, 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.

Secondaries 1.0

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 way.

Transaction Volume for SecondMarket During the Secondaries 1.0 Era (millions)
* Similar 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.

Secondaries 2.0

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.

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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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