Report: Secondary Startup Market Booms as Investors Sell

secondary startup, funding, investments

Investment firms are reportedly raising billions to purchase stakes in venture capital (VC)-backed tech startups.

“The main exit for VCs is primarily IPOs and M&A [mergers and acquisitions], and neither of those are happening,” Tom Callahan, chief executive of Nasdaq Private Market, told the Financial Times (FT) Wednesday (Jan. 17).

“It creates this immense pressure . . . [and] incredible opportunities for investors coming in and buying companies at deep discounts.”

The report said the startup secondary market — where investors and employees buy and sell shares in private companies, often to the tune of tens of billions of dollars — is becoming more and more important as startup funding slows.

For example, secondary market specialist Lexington Partners recently announced a nearly $23 billion fund to purchase stakes from “large-scale investors.”

The group’s initial fundraising goal was $15 billion, the report said, but Lexington aimed higher after seeing strong demand, and said it was “in the early stages of a generational secondary buying opportunity” that could go on for years.

A company spokesperson told the FT the fund will mainly focus on buying shares from private equity funds but also expects to invest as much as $5 billion into venture capital secondaries.

“We are seeing crazy amounts of LPs [limited partner investors] that are distressed and need to lighten their venture load,” the head of one VC firm told the news outlet.

According to the FT, the secondary market has seen massive growth in the last decade, and has helped startup employees whose stock has floundered without an IPO. Both SpaceX and OpenAI have arranged secondary-market stock sales in the last year, the report said.

Last year saw venture capital fundraising in the U.S. fall to its lowest level in six years: $67 billion, which was down 50% compared to the year before.

Meanwhile, PYMNTS CEO Karen Webster last week examined the changing investing environment in a conversation with Mahdi Raza, co-founder and co-managing partner of Exponent Founders Capital.

“A good valuation does not make a good investment,” Raza said. 

He also noted that the profile of founders has changed as well, with Exponent now encountering more experienced executives running startups.

“The founders now are customer-centric, product-centric and are saying ‘this is going to be my life’s work and journey for the next 20 years,” Raza said.