If you asked many VCs at the end of 2023 whether the IPO market would eventually reopen in 2024, most would have said yes. That's what we know from TechCrunch, of which he surveyed over 40 people in December and they said so.
But with two weeks left in the first quarter, there are still no large IPOs completed and very few in the pipeline. Reddit is the only large IPO with a fixed price. Otherwise, there are few SEC public documents, leading to only speculation about who will go public. Examples include Shein, which reportedly filed a secret S-1 last fall, and rental car market Turo, which is still on the sidelines after filing its first S-1 in 2022.
Even if Reddit's service is a hit, it's unclear whether the market will reopen later this year. Secondary investors recently told TechCrunch that while Reddit could spark additional activity, it's unlikely to open the IPO floodgates that investors had hoped for. Additionally, some of the major companies that were expected to go public this year (Databricks, Stripe, Plaid) have either directly said they won't IPO in 2024 or held fundraising events suggesting they won't go public anytime soon.
Many investors hope that IPOs will resume in 2024, but market conditions are not ideal. Interest rates remain high, making money expensive and investors flowing from stocks to bonds. Valuations remain depressed from their 2021 highs, and late-stage venture investors believe their startups would make little or even no money if they went public now.
But the prospects for liquidity in 2024 are not all doom and gloom if IPOs do not return. Investors can turn to, and are increasingly using, secondary markets, where private companies can authorize shareholders to sell limited amounts of stock to approved investors. This is not a general sale. Shareholders cannot sell their shares to anyone at any time. But he is often the preferred replacement in 2024.
According to Industry Ventures data, secondary deal value is expected to increase from $35 billion in 2017 to $105 billion in 2021 and reach a total of $138 billion in 2023 when year-end tallies are known. has been done.
Secondary market: the best of both worlds
Launchbay Capital founding partner Alan Vaksman said secondary markets allow companies to get the best of both worlds. Startups can placate investors seeking liquidity by allowing them to sell all or part of their shares without holding a premature exit event.
“It releases pressure on liquidity for some investors,” Vaksman said. “You're creating liquidity for the people you want, you're not upsetting late-stage investors, and you're taking your time to grow. Now the secondary market allows you to do that.”
Stripe's recent secondary sales are a clear example of this. Stripe announced in February that it had reached an agreement with investors to provide liquidity to employees in a sale valued at $65 billion. While this is down from the $95 billion valuation the company received in 2021, it is a significant increase from the fintech's previous preliminary round last year, which valued it at $50 billion.
This secondary sale comes as investors are motivated to continue building up Stripe's valuation toward 2021 highs and that it is easy for employees to pick up a portion of their company's stock for cash ahead of an IPO event. It shows that there is. So why did Stripe want to go public in 2024 before valuation fully recovers?
The secondary market is always aimed at employees. What's even newer is that VC funds and LPs are starting to rely on them. Nate Leung, a partner at Sapphire Ventures, said companies could choose to offload some equity and free up cash while keeping some of their equity. But companies can also use them to buy stock and increase their stake in promising startups.
Leong said Sapphire expects to invest approximately $500 million in the secondary market in 2023 and the same amount, if not more, in secondary shares in 2024.
Shasta Ventures reportedly hired Jeffias for a “strip sale,” meaning it is looking for secondary buyers for some of its portfolio holdings, Bloomberg reported. ing. Although the report does not include startups looking to sell, the company's portfolio includes companies such as Canva, which Shasta backed in a 2013 seed round, and secondary data platform Caplight. It is currently worth an estimated $40 billion.
The IPO market will not remain frozen forever. But given the maturity of the secondary market, there is no need for the market to thaw before it is actually ready.
Leung said the secondary market “plays a huge role” for companies that are about to go public. “Selling or structuring a secondary transaction entirely allows us to achieve many of our original goals for both employee and investor liquidity, as well as LPs. [LPs] There is no pressure on GPs to push out their assets, so there is less demand on the public market. ”