In the last 18 months, rising interest rates caused a downturn in the private market for startup funding. Investor confidence decreased and many highly-valued private companies saw a rapid decline in valuation. Meanwhile, VC funds and other asset managers are increasingly interested in secondary markets, where they can buy stakes in private companies at discounted prices. Back in 2021 and early 2022, many fund managers couldn't get the ownership they desired or even participate in highly sought-after startups’ primary rounds due to high demand and valuations at the time. Today, however, fewer initial rounds and IPOs combined with more down rounds and industry-wide devaluations have made secondary prices more appealing.
At the same time, founders, employees, and investors are facing increasing pressure to sell their shares, pushing down secondary prices further. As of May 31, 2023, startup stocks sold at a median 61% discount versus their last funding round valuations. Nearly 90% of the companies whose shares traded in May 2023 had not raised capital in at least a year, and a third hadn’t raised new funding in two years or more. Caplight's secondary exchange saw an increase in bids for secondary shares, resulting in a decreased spread between buyers and sellers.
In this challenging environment, startups may occasionally face the difficult reality of down rounds or even secondary transactions at discounted prices. However, it is important to remember that the best companies will be able to weather the storm and emerge stronger than ever. These setbacks are temporary hurdles, providing opportunities for introspection and strategic realignment. By embracing the challenges head-on, startups can refine their business models, optimize their operations, and demonstrate resilience to investors and stakeholders. In doing so, they can attract renewed interest and support, ultimately positioning themselves for long-term success.
