The demise of the IPO market has left many venture-backed companies in their own version of existential purgatory. The scarcity of realized exits is particularly hard on company founders, who often regard their illiquid equity as more albatross than eagle. This lack of liquidity, in turn, leads to an environment where capital raising is increasingly difficult, as many venture firms are reluctant to make new investments when unable to navigate an exit for their existing portfolio companies.
Someone will almost always try to see if two great tastes might also taste great together; so the subsequent coupling of a firm providing liquidity with a firm providing capital was perhaps inevitable (see article). Sure enough, earlier this month, SecondMarket (which runs an online marketplace where investors and managers can sell shares of private companies) reached an agreement to acquire InsideVenture (which helps late-stage private companies find institutional investors). Both firms have venture investors themselves (FirstMark and NEA, respectively). Last June, a company called SharesPost launched a similar service to sell private company shares. And according to Dow Jones, through June, there were 18 secondary funds that raised $13.9 billion in capital – an annual category record set in the first six months of the year.
The emergence of a robust secondary market is, in my mind, one of the most important new developments to arise from the rubble of the fiscal crises. Without viable exits, private investment will stagnate. There is clearly a lot that needs to happen before secondaries become a recognized solution to the liquidity problems facing both investors and companies. But these may be the important first steps.