Back in June, we spotted a few signs that pointed to a hot summer for the secondary venture market. Secondary data platforms like Forge Global and Caplight started to see activity ramp up, and buyers and sellers were finding better consensus on share pricing for the first time since the market corrected in early 2022. It seemed like the market might be returning to normal.
Well, not so fast. After the summer surge, activity in the secondary market has ebbed and flowed, but there are signs that 2024 may see investors returning for good.
Secondary trade volume reached a new peak this year in October, according to data from Caplight. The secondary data startup also found that the amount of capital passing through those transactions also peaked in that month. Javier Avalos, the founder and CEO of Caplight, told TechCrunch+ that the data isn’t actually as positive as it seems at first glance.
“Investor appetite is cautiously optimistic [but] nowhere near early 2021 and 2022 levels,” Avalos said. “In the summer months of this year, there was a pretty heavy expectation that investor appetite was going to come back into VC secondaries, but the numbers look a lot worse if you strip out generative AI.”
Avalos added that while secondary trading activity has risen again as we head into the last month of the year, that momentum has so far been concentrated in just a few sectors, including AI, defense and space. Within that, much of the activity surrounds only a handful of companies, including SpaceX and OpenAI, which have seen strong interest throughout the funding compression, and companies like Databricks, which are prime IPO candidates for 2024.
One reason for these companies being hubs of activity, Avalos said, is they have more recent pricing data than many other late-stage companies. Avalos said companies that have raised a primary round since the market corrected in 2022 have seen a lot more success on the secondary market than companies that haven’t: It’s much easier to price a secondary round if the buyer and seller know how it’s been valued in the current market.
Avalos thinks this also plays into which sectors are being discounted more or less on average. For instance, data, AI and space startups are trading less than 10% below their last primary valuations — many companies within those categories have raised primary rounds this year. Compare that to fintech, which is trading at an average of 48% below its last valuation. Avalos largely attributes fintech’s decline to the fact that outside of Stripe, the majority of fintech unicorns haven’t raised since the valuation reset.
This means many companies may have to wait to see much demand for their secondary shares, as late-stage primary rounds don’t look like they’ll have a huge rebound in 2024 — at least early in the year. But not all will have to. If IPOs start to return in 2024 the way many are predicting, some sectors will start to see interest.
Avalos said the summer seemed to start ramping up partly because buyers like hedge funds and public asset managers came back in anticipation of the planned IPOs of Instacart, Klaviyo and Arm in September. When those IPOs didn’t spark the flood of other public listings they were expected to, the investors retreated again.
Without upcoming IPOs, the majority of secondary venture transactions involve investors looking to build their stakes in existing portfolio companies at a cheaper valuation and individual employees cashing out their stock options. Both of those are smaller segments of the market compared to pre-IPO activity.
“It is so difficult to spur a lot of secondary market activity when there are no IPOs; your buyer groups are limited,” Avalos said. “The buyer universe for pre-IPOs expands quite a bit when you have a functioning IPO market. The list of investors who become interested in secondaries expands to those that are interested in public markets.”
This is what gives Avalos hope for next year. Despite a relatively quiet fall, it seems that multiple companies, including Reddit and Shein, will go public next year. That will lure public market–focused investors back to venture secondaries. Hopefully for good.
“We are hearing that large pre-IPO hopefuls, those that have filed their registration either confidentially or have been working on them for a while, are turning in pretty solid financial updates,” he said. “That early [IPO] window could be open for a few of these companies to get out, which would get our entire [secondary] market excited.”