It should be a great time for venture secondaries in Europe.
Amid a cooldown in funding, some companies have marked down their valuations by as much as 85% from their peak. That ought to mean great deals can be had by buying shares from early investors, founders and employees who want to cash out.
But investors say that secondary activity is still sluggish as startup founders remain hesitant to reprice their shares, and investors stay reluctant to invest in anything but the best companies. Only a few, very big investors are getting more interested in the market.
“There’s a bifurcation in activity levels between top-performing assets and the middle/bottom of the pack,” says Dany Bidar, principal at Octopus Ventures.
“The most in-demand assets are even trading at a premium for the first time this year,” he says, while “the rest of the pack are struggling to even trade at +70% discounts in some instances.”
The dreaded downround
Secondaries usually trade at a discount on the last valuation, as sellers pay a premium to get liquidity early. Europe has seen growth in these transactions as the startup scene has matured and companies stay private for longer. In turn, several specialist secondaries funds have launched in recent years.
But at present founders are extremely wary of any transactions that make their company look wobbly. Secondary investor TempoCap’s founder and managing partner Olav Ostin says founders are scared of downrounds — where investors might assign them a lower valuation than a previous round — even if that happens in a secondary transaction.
“We are seeing a lot of late-stage companies at the unicorn stage not wanting to share any financials with anyone to avoid a secondary market taking place and an embarrassing valuation being shared in the market,” he says. With the exception of Swedish fintech Klarna, most billion-dollar-plus companies in Europe have been coy about changes in investor or internal valuations.
And just like founders don’t want to put a price on anything, investors are having difficulty even knowing what price is right. Claudio Alvarez, partner at investment firm GP Bullhound, says that prices of private tech companies likely need to fall even further to tempt buyers because many of them still look overvalued against the listed companies that investors compare them to — and many are still not profitable.
“Price discovery in this environment is really difficult,” he says.
Growth investors munch munch
Even if startups and VCs are having trouble agreeing on prices in the secondary market, one class of investors is interested, investors say: those at the growth stage. These players have large pools of capital that need deploying, but a dearth of big funding rounds is making that hard.
Stefan Dziarski, co-head of Permira Growth Opportunities, which has backed companies like Mirakl and Klarna, says that his firm has used secondaries to increase its ownership in existing investments or as an entry point to a company that is not looking to do a primary round.
His team is investing out of a $4bn vehicle that takes minority stakes in companies, and with just $1bn of that deployed so far, he has a lot of work ahead of him.
One example is Permira’s May investment in Israeli online fraud detection platform BioCatch.
“We have known the company for a long time, and we actually entered the cap table through a secondary transaction and became the third-largest shareholder,” he says — by buying shares from some former employees and some early-stage investors.
“In situations like this, where we have a relationship, it's actually a good opportunity in the current environment.”
Octopus Ventures’ Bidar also says he's seen interest from private equity firms amid the lack of primary rounds.
“PE firms with a growth mandate are increasingly looking to the secondaries market as a way to get access to top tech companies at growth stage whilst taking advantage of the pricing dislocation,” he says. “I can’t name specific names, but I am aware of at least four growth teams of larger PE firms who are actively pursuing this strategy.”
Another example of big growth investors interested in secondaries: last month’s €150m round raised by Belgian open-source company Odoo from US heavyweight General Atlantic. The round — one of the largest rounds ever raised by a Belgian company — was a secondary, two market participants tell Sifted. Odoo and GA declined to comment.
Creative solutions... and a pickup ahead
Bidar says that secondaries activity should pick up “as the reset in public valuations” filters down into VC, “especially if the IPO markets remain shut”.
“We believe an upcoming wave of primary downrounds for the cohort of companies which last raised at the height of the bubble in 2021/early 2022 will also spur activity in the secondaries market in the next 12 months.”
And even while buyers and sellers can’t seem to agree on prices, some investors are finding creative ways to reassure startups and make deals happen. TempoCap’s Ostin says that his firm recently bought a portfolio from another investor and negotiated with other investors in those underlying companies to waive their right of first refusal — a clause that VCs often include in term sheets so they can buy shares from existing shareholders before they're sold externally — so prices didn’t need to be negotiated for the stakes in individual companies, but rather the whole portfolio.
“Companies don’t want to price at the moment on their companies, so if you can find a way of doing the transaction that is working for everybody, I think it’s a big benefit.”