Secondaries: as hot as hell

Everyone from the world of investments is discussing the latest Pitchbook’s statistics now. It shows decreases of 61.4% in deal count and 87.6% in total deal value from the heights of 2021. And while somebody gets upset about the reduced appetite for VC-backed exits in Europe, we, in fff.vc, look at this as a new challenge that can bring us even more.

My name is Akim Arhipov and I am the fff.vc founder who is actively spinning in the venture market. After years of making investments, leading syndicates, reviewing companies and interviewing founders, I have no doubt that every crisis is full of new opportunities. And even in the increased volatility in the public markets for tech companies, there is a ray of light, called the growth of the secondaries market.

Current market conditions are characterized by higher interest rates and a rotation away from high-growth stocks. No wonder why startup investors and limited partners, tired of uncertainty, seek to cash out some assets. They are at risk waiting for exits and need extra liquidity for new opportunities.

According to data from Industry Ventures, Global venture secondaries volume is estimated to reach $138 billion by 2023. Europe, though, has been slower than other regions to open up to these transactions. Some experts blame it on special continental jurisdictions that restrict share transfers, the other ones on the inclusion of terms for the right of first refusal. And they all are right. Due to asymmetry of information between angels, it’s hard to estimate fair value of the company since it's not public. The process lacks transparency, is legally complicated and time consuming. Average investment cycle is 10 years and is at its final stage in Baltics & Nordics. So most angels don’t know how to even start.

During customer research and some private conversations I found out that 10 out of 13 angel investors see exiting a company as a “black box”. Despite this fact, we, in fff.vc, are getting more and more offers for our community to enter companies in the secondaries market. And I must admit that we gladly accept them and even work on customer relationship management to run the private equity secondary transactions.

For angels with capital, now is a perfect time to invest. In Scandinavia, for example, there are enormous opportunities for entering companies on secondaries. Due to the situation on the market in certain niches, the discount is 60-80% of the previous rounds. Also previous investors follow the rounds, which means there is a sense of confidence in the market.

If you are interested in investing, there are two possibilities at the moment: either find nascent gems that you can invest in at the pre-seed stage at a low valuation, or you can enter an active company by buying shares with a good discount of up to 80%.

Talking about discounts, one more reason fff.vc is now offering its members the opportunity to purchase stock from the secondaries market is a fact that there are much better opportunities when the deal comes at a high discount. And there definitely is a big flow of such deals right now, because direct company secondaries currently account for the majority of Europe’s venture secondaries deals. They involve the sale of common stock with limited voting and information rights, rather than preferred stock offered in primary raises. So for buyers, the increased risk of being the last one paid if liquidation occurs means the deal is done at a discount. And because people who are in real need of liquidity might have to accept deeper discounts, this tendention is only gaining momentum.

By the way, structuring a deal may be seen as an unnecessarily complex addition to a transaction, but it really can effectively defeat the problems of information asymmetries or diverging economic outlooks on a business’ potential. And there are a big variety of different ways to structure secondary transactions, including some creative solutions that make it possible to find a common ground between sellers and buyers, like outright purchase or loan for shares.

But how to invest in the secondaries without losing when there are so many options that make уou doubt? Self service has no transparency in terms of timeline and process and it’s pretty hard to find buyers due to limited network. Investment banks are expensive and almost unavailable for angel investors or retail-investors. LPs and GPs have the same problem of selling their shares as other private equity investors and wealth managers don’t really have a dedicated flow, time or enough monetary motivation to concentrate on small secondaries. Don’t get too upset yet, we, in fff.vc got a great solution. Our transparent and seamless service Deal Hero will take care of every stage of the deal from a to z. No more filing by yourself, struggling with ambiguous processes or unclear timeline, and looking for the buyers, whose market is very fragmented. We will take care of the process, demand and security of each party, which definitely matters a lot. The better the terms associated with the security for sale, the higher the price it will receive in a secondary transaction.

So let’s use the chance and jump at the opportunity that may turn a big crisis into even bigger success! The main thing is not to become a hamster from that joke that buys when everything grows and sells when everything falls.

Awesome guide here: