What is a secondary? The basics

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Investing in startups is risky and long term. There’s no arguing with that. We’ve been doing this for nearly a decade now, but nothing good in life ever came easy!

We’ll keep the history brief.

Historically, technology companies would raise a little capital at an early stage to get the company off the ground. They’d then work quickly to list on public markets in order to raise further capital for future growth.

With the rise of deep-pocketed Venture Capitalists, like Andreessen Horowitz, Sequoia Capital, and Atomico, new tech startups have the opportunity to raise more financing without looking to the public markets.

The average time to exit (from initial funding to public listing) has increased from three years in 2000 to eight years in 2020, according to data from ThomsonOne1. 2.5x – a significant change.

For context, Apple listed on the public markets in 1980 at a valuation of $100m (around $349 m adjusted for inflation). At the time they had 1,000 employees and $118m in revenue ($410 m adjusted), 4 years after its first angel investment. Stripe joined its first accelerator in 2010 and remains private today, rumoured to be the next big fintech IPO2. Whilst private, Stripe has achieved a valuation of $95 bn, grown its headcount to more than 7,000, and reached revenues of $7.4 bn in 2020 (when valued at $36 bn).

The scales have changed. Apple had raised 4 rounds and less than $4 m in capital from a handful of angels, VCs and Asset Managers before its IPO. They used the public listing to raise a further $100m. Stripe has raised $2.23 bn through 15 funding rounds whilst remaining private, with 86 angels and institutions listed as investors on Pitchbook.

Companies no longer need to turn to the public markets to raise billions in capital to fuel growth.

Whilst this change is good for private companies, it’s not so good for the everyday investor. Unless you’re lucky enough to know the next Jeff Bezos, or able to invest at least £25,000 into a single company, you’re unlikely to be able to invest in the next Apple or Amazon. This leaves everyday investors on the sidelines as the traditional incumbent early investors, such as VCs and their LPs, make the big money.

The extended timeline has positives and negatives for early investors. Companies have more time to mature, grow and create value away from the volatility of public markets. Shares can reach much higher valuations than if this timeline remained at 4 years. However, early investors, employees, and founders now have to wait far longer to realise the cash value of their investments (whether those be cash investments, or time spent building the company).

With those needs considered, the venture capital secondary market has grown in popularity as these investors want flexible access to their cash. Secondaries specific funds have appeared, buying exclusive equity stakes, limited partnership interests, and acquiring shares directly from founders and investors, often at considerable discounts to their paper value.

Setter Capital reported that global private equity secondary market volume reached a record $143.3 bn in 2021, more than doubling the total volume of $61.8 bn in 2020. Whilst these figures are dominated by Private Equity leveraged buyout secondaries, venture capital fund secondary transactions jumped 154% from 2020 to 20213.

This shift accounts for the needs of the VCs and shareholders, but it doesn’t enable you as an individual investor to gain exposure to the growth of these tech companies. 

That’s where Seedrs Secondaries come in. We’re able to help shareholders exit in the same way that secondary VC funds can, with one simple transaction, thanks to the Seedrs Nominee. 

We also allow you, Seedrs investors, to invest in these companies pre-IPO. For the first time, everyday investors are now able to invest in high-growth tech companies from as little as £10.

You no longer have to miss out on these exciting investment opportunities. 

This year we’ve listed and closed Impossible Foods, the largest and fastest growing plant-based company worldwide. As well as Freetrade, the fastest growing investment platform in the UK, ramping up its European expansion. We’ve got exciting opportunities coming in the next few weeks, so keep your eyes peeled!

Whilst secondaries in these pre-IPO giants are a relatively new feature, secondaries are part of our DNA at Seedrs. Our Secondary Market, Europe’s largest, has been enabling our portfolio shareholders to exit since 2016. With over 600 businesses listed, the market has transacted nearly £20 m since its inception, including £7.6 m in Revolut shares.

We’re sure you have more questions so check out our Secondaries FAQ to get your answers.

What is a secondary round and how does it differ from a primary round?

A secondary offers equity from existing shareholder “sellers”. This differs from a primary where ‘new’ shares are issued by the business. Existing shares are being sold by existing shareholders in exchange for liquidity, rather than new shares being issued by the company raising capital.

What types of secondaries are listed on Seedrs?

There are two types of secondaries listed on Seedrs. Company-led secondaries and Shareholder Secondaries. 

A Company-led Secondary is a liquidity opportunity managed by the original share issuing company. These secondaries may take place because a founder wants to sell some equity, the company wants to reward employees, or to clean up its Cap Table. Our friends at Cheeky Panda ran a successful secondary campaign on Seedrs last year, you can read about it here

A Shareholder Secondary is a Secondary Share Sale where the Company in which shares are being sold is not directly managing the transaction. We recently ran Shareholder Secondaries in Freetrade and Impossible Foods Inc. Sellers in these transactions are typically early investors or (ex-)employees with vested shares looking to access liquidity before a full exit event. The transaction is initiated by a shareholder, and the company is likely to only be involved at the end of the process to approve the trade. This can differ depending on transfer restrictions.

What are the risks associated with secondaries?

Secondary investments carry the same risks as primary investments. The type of investment is illiquid and private companies can take years before reaching a point of exit. That’s if an exit happens at all. If the company goes out of business, it’s possible all investment could be lost.

A key difference, however, is that the Secondary transactions typically occur in later-stage, established businesses. These businesses are often well-funded, well-respected brands. They’ve have gained considerable traction and are backed by some of the best investors in the world. In principle, this does not make Secondary investments any less risky than Primary investments. Investors will still need to conduct their own due diligence and ensure they are comfortable with the risks associated with investing in a private company.

Key words:

Venture Capitalists (VCs): a private equity investor that provides capital to companies with high growth potential in exchange for an equity stake. 

Liquidity: The ease with which an asset, or security, can be converted into cash.

Initial Public Offering (IPO): the process of offering shares of a private company to the public in a new stock issuance. When a company IPOs, they are able to raise capital from public investors. 

Equity: the value of the shares issued by a company.

Shareholder: an owner of shares in a company.

Secondary: A secondary transfers equity from existing shareholder(s) who are “sellers”. 

Unless otherwise specified, all data is from Pitchbook. 

[1] – Greenspring Associates – The Rise of the Venture Secondary Market
[2] – The Business of Business – Mega-unicorn Stripe is mulling an IPO
[3] – Institutional Investor – Secondary Markets Just Had Their Biggest Year Ever

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