What do we mean when we say start-ups and secondaries?
By secondaries, we mean secondary transactions.
Then, we need to answer the question that follows.
In the context of a start-up, what is a secondary transaction?
Explaining Secondary Transactions
Consider a tech business seeking funding without going to the public markets. They obviously turn to venture capitalists through various funding rounds to raise enough funds to drive expansion.
As a result of having more time to mature, grow, and build value away from the instability of public markets, start-ups can achieve significantly greater valuations for their shares.
On the other hand, early investors, employees, and founders must now wait much longer to recoup the cash worth of their efforts (whether cash or time spent establishing the company).
Given these requirements, the venture capital secondary market has increased in popularity as investors seek flexible access to their cash.
Secondary-specific funds have emerged, purchasing exclusive equity positions, limited partnership interests, and shares directly from founders and investors at significant discounts to their paper worth.
Consider it a pre-IPO channel for generating capital, not necessarily for the company, but to meet the demands of the numerous investors in the start-up.
A secondary offers equity from existing shareholder “sellers”.
This is distinct from a primary, in which the company issues ‘new’ shares. Existing shares are sold in return for liquidity by existing shareholders rather than new ones issued by the company raising capital.
Do well to follow this series, as we will be discussing more details about start-ups and secondaries in the next part of this article.
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References:
- https://www.seedrs.com/insights/blog/investing/what-is-a-secondary-the-basics accessed 19 October 2023
- https://www.growthmentor.com/glossary/secondary-sale/ accessed 19 October 2023
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