all Things Equity
Patricia Borlovan
Portfolio building 101: Understanding liquidity and secondary market transactions
Patricia Borlovan
Tech Investors Academy, powered by SeedBlink, is an English-only hybrid learning program designed for all investors registered on the SeedBlink platform who want to enhance their venture capital knowledge.
The fourth Tech Investors Academy learning module by SeedBlink focused on liquidity and secondary market transactions. We discussed the role of liquidity in private markets, why secondary transactions are great exit opportunities for investors, how to assess market trends and opportunities in a secondary transaction, how to evaluate investment timelines and align different expectations, and more that we invite you to discover below.
This session was led by Eric Bartha, Head of Revenue at SeedBlink, and he was joined by:
Liquidity events traditionally refer to the sale of a company, either partially or entirely, or through an initial public offering (IPO). However, the path to an IPO has become longer and less certain, with many companies choosing to stay private rather than go public.
Notable examples include companies like Stripe, which raised significant funds with a portion dedicated to secondary transactions, and Revolut, which pursued a large secondary round. This trend shows that even large, successful companies opt to remain private, which has implications for investors' thinking about liquidity and returns.
Venture investments operate on a longer timeline than some might expect, with a standard VC fund's lifespan of around ten years.
However, it’s not uncommon for the most significant returns to be realized even later, sometimes 13 years or more after the initial investment. It contrasts with some investors' expectations, looking for returns within a much shorter timeframe.
For example, the approach of some VCs, like Sequoia, reflects a shift toward holding investments for even longer periods, challenging the traditional 10-year model. This is one of the reasons why the IPO model is becoming more of a long-term plan for investors, and secondary transactions have become more attractive for short-term gains.
“I think a lot of investors who are primarily active in public markets are noticing more and more that the majority of returns are made before an IPO these days. So, there is a major demand and build-up from public investors to gain exposure to private assets.
This is why secondary markets became a business in themselves. On the one hand, there are many early investors and employees who want to find a liquidity window, but there are also many investors in public markets who feel left out."
Mentioned Oden Vallien, CEO and co-founder of Accumeo
In recent years, much of the value creation in companies has occurred outside the stock exchanges, as many businesses, like Northvolt and H2 Green Steel, have opted to remain private due to strong access to private capital and interest from private investors.
Companies staying private is becoming a common trend as more delay goes public, making secondary markets attractive for investors who want to benefit from early-stage gains. These transactions allow stakeholders to achieve some gains without waiting for an IPO, while new investors gain access to potentially high-growth opportunities before a company enters the public market.
Spotify is an excellent example of how a company can build significant value while remaining private. Founded in 2006, it remained unlisted for 12 years before its IPO in 2018.
During this period, Spotify created substantial value between 2006 and 2018, offering opportunities for early investors to realize gains through secondary sales before the IPO
Mentioned Marcus Öberg, COO and co-founder of Accumeo
Historically, these opportunities have been less accessible to retail investors, especially in markets like Sweden, where the investment landscape has been relatively closed.
Going toward longer periods before IPOs means that by the time companies go public, much of their value has already been realized.
We see a contrast with earlier cases like Amazon, which went public just two years after its founding, allowing public investors to participate in more of its early-stage growth.
Today, the challenge for retail investors is finding ways to invest in these companies earlier in their lifecycle, before they have matured and gone public.
Mentioned Oden Vallien, CEO and co-founder of Accumeo
Investors generally find it easier to understand the value of consumer tech companies like Spotify because they can personally experience the product and recognize its impact. As a revolutionary product, Spotify demonstrated its growth potential, making it an attractive investment.
Spotify's case illustrates how trading in the secondary market before an IPO can yield quick returns. Investors who bought shares just a week before the IPO earned a 40% return on the first trading day.
On the other hand, companies like H2 Green Steel, which focus on less familiar industries such as eco-friendly steel production, may not be as immediately obvious to retail investors.
However, these companies address well-known global issues like CO2 emissions, making their business models increasingly attractive as media exposure and public awareness grow.
1. Portfolio diversification.
Diversification is one of the biggest factors to consider before selling shares on the secondary market. Many early investors or employees may find that their shares in a private company have grown to represent a significant portion of their net worth.
Concentrating capital in a single asset can be risky, so selling a portion of those shares can help diversify a portfolio, reducing risk without completely exiting the investment.
2. Seller profile.
The type of seller plays another significant role in secondary market transactions. Sellers often include early investors who have been with a company since its founding or employees who received shares as part of their compensation.
Additionally, institutional investors or funds might need to liquidate shares to return capital to their investors, which can result in quicker, sometimes less favorable sales.
3. Market focus.
Most trades in the secondary market are concentrated around large companies that are expected to go public soon.
However, there is also a market for mid-sized companies, though these transactions are rarer. Investors often look at whether the company they hold shares in will likely attract interest based on its growth potential, profitability, and proximity to an IPO.
4. Legal considerations.
Before selling, it’s important to understand the legal aspects of secondary transactions.
For example, companies often have a "right of first refusal" period, where existing shareholders can choose to buy the shares being sold. This process can extend the time it takes to complete the sale, so sellers need patience and to be aware of the potential delays.
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