Market research indicates that large tech companies are staying private longer. But what is the impetus for this timeline shift, and what does that mean for investors? If this trend continues, we believe that the secondary market will continue to see growth and that pre-IPO investing may be a smart portfolio strategy for some investors who are looking to build wealth and diversify their assets.
Why are Companies Staying Private Longer?
While it may seem counterintuitive, there are plenty of reasons why today’s unicorns are putting off IPOs:
- Larger private capital investments
- Less market scrutiny
- More flexibility
- Private liquidity options
- The high costs of going public (underwriter fees can range from 4-7% of gross proceeds)
- Retention of founder control
In addition to these reasons, when a company does decide to go public, they are more mature and are able to go public at higher market capitalization. With these reasons in mind, companies who choose to delay their IPO are effectively shifting value creation from public to private shareholders.
IPO Lock-Up Period: What is it, and Why Does it Matter?
The Evolution of the IPO
As venture capital-backed companies have remained private longer, the number of “unicorns,” or businesses with a $1 billion (or more) valuation, has increased significantly.
Cumulatively, the companies listed above have a valuation of approximately $850 billion. And compared to today’s standards, some of the world’s highest valued public tech companies entered the public market with relatively small valuations. Microsoft, Amazon, Oracle, and Cisco all debuted on the public market with valuations under $1 billion, and of those, only Microsoft surpassed $500 million.
In 2000, the median time it took a tech company to IPO was three years. Jump to today, and the median has more than tripled to 10 years. Because of this shift, investors are looking into alternative ways to achieve liquidity, one alternative being transactions through the secondary market.
What is a Secondary Offering?
Secondary offerings in private companies become available when an employee or shareholder wants to liquify their shares prior to an exit event such as an IPO or an acquisition. While the secondary market was once thought of as niche, it’s seen significant growth since 2000.
In addition to offering investors the chance to diversify their investment portfolio, secondary investments can also provide liquidity and rebalancing flexibility. Also, secondary funds may potentially offer more attractive IRR’s compared to other asset classes.
The Valuation Increased, Why Didn’t My Price Per Share?
How MicroVentures Sources Secondary Shares
Often times late-stage secondary opportunities are closed off to investors outside of institutional VC’s. Most often we source shares from private investors or employees who are looking for liquidation. Then, our team completes due diligence and completes the transaction. Generally, we look for opportunities that meet the following criteria:
- Are likely to exit in the next 1-2 years
- Have a defensible business model
- Achieved traction in global markets
- Have achieved robust user adoption
- Are well-funded
The Benefits of the Secondary Market
The growth of the secondary market can provide benefits to both sellers of private shares as well as buyers. It creates liquidity for sellers (who may have waited quite a long time in the hopes of an IPO) and provides access to opportunities for non-institutional buyers where there may have been none before. As the market continues to grow, this may create more opportunities and options for investors looking to buy secondaries.
If you’re interested in learning more about our secondary offerings, you can register as an investor today to see our current late-stage offerings. If you’re looking to find liquidity for your private stock, shoot us an email at firstname.lastname@example.org and we’d be happy to work with you.
Investments in late-stage companies are highly speculative and involve significant risks due to, among other things, inconsistent cash flows of the company, the nature of its proposed investments, and potential conflicts of interest. These investments are not suitable for anyone who does not have a high tolerance for risk and/or has high liquidity needs. You should invest only if you are able to bear the risk of losing your entire investment. There are no assurances that investors will receive any return of capital or profit.