The late-stage startup market is sorting out how to value startups that had raised capital during the previous venture boom — Tiger Global Management recently resorted to selling individual stakes in its portfolio companies after failing to sell a basket of its stakes.
Frankly, it wasn’t shocking to hear that happening in this climate — when you can buy stakes in startups for cheap, why not pick and choose?
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More interestingly, it appears certain venture investors are snapping up secondary shares in startups. According to a report by Insider, some VCs are even turning to secondary markets to buy shares in the hottest AI startups.
This uptick in secondary market activity is not new. PitchBook wrote last December that while “volume of shares being offered by sellers continues to greatly outweigh interest from buyers […] institutional buyers are slowly coming back to scoop up secondary stakes.”
And according to data from secondary exchange Caplight, bids for secondary shares perked up after tech stocks plummeted in early 2023. In turn, that led to a smaller bid-ask spread between buyers and sellers of secondary shares.
All we had to do was wait for late-stage startup shareholders to capitulate to new valuation realities and tech valuations to perk up slightly. The combination of seller pessimism and modest buyer optimism has seemingly done the trick.
Secondary market trackers are lighting up a traditionally dark deal environment
How far have prices fallen, though?
In its report on VCs’ secondary market activity, Bloomberg cited data from Forge, a secondary exchange for startup shares. A few facts stick out from that data:
- At the end of May 2023, private companies on Forge Markets were trading at a 60.9% discount to primary round valuations.
- That discount rate seems stable: It has declined by less than 3% since the SVB crisis earlier this year.
- Nearly 90% of the companies that were traded in May 2023 had not raised capital in at least a year, and a third hadn’t raised in two years or more.
Now, we have two ways to parse that information:
- After a painful few years, startups’ secondary-market valuations are stabilizing, indicating potential for growth as the market rebuilds confidence in tech stocks.
- Or, after a year or two of growth, startups are worth slightly more than a third of their value a year or two ago.
The latter interpretation is a blistering rebuke of the valuations startups enjoyed when the market peaked. A two-thirds reduction in valuation is painful enough, but when we consider that more than four quarters of growth is factored into these valuations, it’s clear that the prices of the boom times were kookier than you’d think when seeing a 61% discount.
That’s just one set of data. Other information paints a similar picture, and after poking around, the Forge data appears quite believable.
Better parity in secondary share prices between buyers and sellers is a good indicator that many late-stage startups could raise the cash they need. But would these startups be willing to raise more money at similar prices? I’m not sure.
It’s becoming clearer how much pain startups will need to endure to raise more capital, but it’s anybody’s guess if they’re willing to accept that fact.
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