In 2021, founders got love-bombed.
Now, they're being crushed by the harsh reality of valuation markdowns on the secondary market and a flipped negotiation table where investors have more leverage than at any time in the past decade.
A practice that was previously common at the height of the 2021 bubble—founders selling shares as secondaries to get some liquidity—has all but ceased.
"When times are really good, like in 2021, it was a lot easier for a founder to say, 'We're going to raise $150 million—and by the way, [$30 million] of that is going to go toward liquidity for me and my co-founder,' " Phil Haslett, founder of EquityZen, said. Negotiations on company boards now look very different.
There's been a definite culture shift in line with the pullback of VC funding and a pivot to more investor-friendly term sheets, said Yev Gelfand, partner at Alumni Ventures. "If I or most other VC investors saw a founder prematurely selling off a material portion of their equity, we'd run the other way," Gelfand said.
A buyer's market
It's a good time to be a buyer. Heavy-hitters like Brookfield Asset Management and Sequoia Heritage are teaming up on a $16 billion secondaries fund to bet on VC-backed companies, the Financial Times reported last week.
"What we've heard from some investors [is] that buying private secondaries in 2023 is like buying real estate in 2009," said Tom Callahan, CEO of Nasdaq Private Market, a secondary trading marketplace.
Meanwhile, strategic acquisitions are becoming increasingly attractive for late-stage companies that can't go public or raise VC rounds. Corporate VCs, which have majorly retreated from leading primary funding rounds, according to PitchBook data, are becoming more active secondary buyers as a way to check under the hood ahead of a potential acquisition.
On the seller's side, traditional VCs are under pressure from their LPs to return some liquidity and are taking to the secondary market to sell shares in record numbers. Everyone is watching the movements of Tiger Global, but it goes beyond just Tiger: "Some of the mega-funds are looking to redirect and rebalance their portfolios," said Andrea Schulz, national technology industry leader and technology audit partner at Grant Thornton.
Tough love: valuation markdowns
But there are many hurdles in secondary trading. There are many more sellers than there are buyers. Some founders just aren't ready to accept the valuation discounts bidders are throwing around—some are even blocking their early investors from selling shares at the high discounts that buyers are demanding.
Secondary trading and data platform Zanbato's Equal-Weighted Index, which tracks secondary market performance, shows overall markdowns of 70% since year-end 2021. Some sectors have declined even further: Crypto is down 75%, and fintech has fallen more than 80% during the period.
Even with severe discounts, sellers are still finding it difficult to find buyers with appetite, according to Maelle Gavet, CEO of startup accelerator Techstars.
In 2021, the secondary market went into hyperdrive because VCs couldn't get a seat at the table for primary funding rounds. "It's almost like you didn't really need to do due diligence because if that company was hot, you were almost guaranteed to have an upside just by getting access to it," Gavet said.
The opposite is now the case: Early investors are fleeing their holdings, but buyers are in shorter supply.