Secondary Startup Transactions Will Reach Record Levels in 2024

Investing.com -- Secondary transactions involving venture capital-backed startups are expected to reach record levels in 2024. Companies like OpenAI, SpaceX, and Stripe Inc. are holding auction bids to pay their employees, while investors are seeking new ways to sell shares outside of initial public offerings (IPOs).

Auction bids allow employees, former employees, and certain investors to sell their shares directly to other investors. This is seen as a deviation from the traditional method of going public to achieve financial success in the tech sector.

NewView Capital, a firm specializing in secondary markets, anticipates that transactions in these markets will reach $21 billion in 2024. This reflects a significant increase from the previous record set in 2023. Financial technology firm Carta conducted 26 auction bids last quarter, the highest number since the pandemic surge. Other companies like Fanatics Inc., Databricks Inc., and Rippling have also recently completed or are negotiating similar deals. Additionally, SoftBank Group Corp. is in talks for an auction bid to purchase $1.5 billion in shares from OpenAI employees.

Older and larger startups typically conduct regular share sales, usually several times a year. For instance, SpaceX and Stripe have held multiple such deals to alleviate the public offering pressure from employees.

This practice differs from previous years when auction bids were rare, and private company share sales were generally done quietly and temporarily. Larry Aschebrook, founder and managing partner of G Squared Investment Management LP, states that the negative sentiment towards selling private company shares has largely dissipated due to the long wait for some major startup IPOs.

However, not only employees are selling shares. Many venture capitalists are also selling shares in secondary markets. In the past 24 months, venture capitalists have performed less profitable transactions, such as acquisitions, IPOs, or buyouts, than usual. In the last quarter, these transactions barely exceeded $10 billion, marking a sharp contrast to 2021 when at least $100 billion in returns were seen each quarter. This situation has led investors to seek returns outside of primary markets.