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Request for LPs - Prioritize Deal Eval in Secondary SPVs

First some quick definitions: a secondary market transaction in venture capital is a financial arrangement where existing shareholders of a private, venture-backed company sell their shares to other investors, rather than the company issuing new shares. This type of transaction provides liquidity to early investors, founders, or employees without the need for the company to go public or be acquired. This is distinct from a “primary” raise, which refers to a funding round where a company issues new shares directly to investors in exchange for capital.

The secondary market has become much more dynamic than I’ve ever seen it with share prices far more volatile. This is due to a few factors including: 

• Rapid appreciation of stock prices for top-performing companies quickly influences valuations in private market counterparts e.g. Palantir is up 5x+ in the last 12 months; that impacts its private market defense comps 

• Accelerated pace of regulatory changes affects sectors differently, causing swift shifts in investor sentiment, particularly in areas like crypto and defense tech with this new US administration 

• Accelerated pace of new technologies like AI that are drastically changing business economics and resulting in a whole formation of companies growing faster than we’ve ever seen prior e.g. Cursor is the fastest company ever to hit $100m ARR; Anthropic hit a $60B valuation within ~4 years of its founding 

• A much new governing body in the US that has led to a sentiment shift driving up prices of risk assets 

• Private rounds for the best companies happening more frequently - it seems like many of the best late stage companies are raising new rounds or being repriced via tender’s or other every 6-12 months rather than 12-24 months 

Case Studies in Rapid Value Changes

For example, while we've seen SpaceX’s price per share show sensitivity to both SpaceX’s general business successes and broader market sentiment around space technology, after Trump won the presidency, SpaceX price per share went up 50%+ within a matter of weeks. Part of this was due to the perception that the new administration will remove much of the regulatory red tape that slowed SpaceX down as well as Elon’s increasing influence in govt., which should in turn support SpaceX. 

The fintech sector, specifically crypto companies, have also demonstrated this pattern, with companies like Kraken and Ripple seeing secondary price movements tied closely to both public market fintech valuations and regulatory developments around payments. Both have exploded in price in a matter of weeks and months since Trump was elected as the next president. 

Additionally the pace of change in sectors due to AI are driving up prices impacting private comps and sentiment (e.g. NVIDIA is up 10x in 24 months). Take Lightmatter, which specializes in the development of photonic computing technology, which involves using light instead of traditional electronic signals for computing operations. It was only a few months back you were able to buy those shares at <$20/share; the Company announced a new round at $80 a share, and the price jumped over >2x overnight. And we can go on and on… 

Call to Action for LPs

This leads me to the crux of the article. LPs in SPVs, please move quickly when evaluating secondaries because there’s dozens of individual events that can drastically move the market clearing price. 

With primary financings, while there is time sensitivity, it’s not nearly as extreme as prices in primary rounds are set based on round terms and not floating in most cases (some primary rounds have rolling caps based on speed of commitment, but that’s rare). 

Yes, syndicate leads can try and negotiate a firm agreement ahead of time with the seller that gives them say a 30 day option to acquire shares, but it is tough to get sellers to agree to that and ends up just being a friction point that can kill a deal altogether. 

But there is some good news. 

Secondaries represent some of the most interesting opportunities in the market if you know what to look for… I don’t want to tip our cap too much, but Riverside has largely done a great job of finding these businesses up now multiples on a number of companies including Kraken, Lightmatter, Anthropic and others. And it’s worth mentioning that these were on Deal Sheet with reduced carry to those members.

Let’s look at some companies that Riverside has purchased in the last ~12 months. Here is how quickly some of them have moved in price. 

• Kraken has moved from $7.5/share in December 2023 → $24/share today

• Lightmatter has moved from $13/share in December 2023 → $65/share today 

• Anthropic has moved from $22/share in December 2023 → $77/share today

• SpaceX has moved from $87/share in December 2023 → $235/share today

And I can go on. Unlike publics which tend to trend in directions without 20%+ overnight moves, many private moves happen extremely fast as they are usually anchored to financing events that happen once or twice a year or huge events like an election or company specific events. 

Just take a look at Lightmatter’s chart below. Almost overnight it's share price doubled, and within a span of 12 weeks it 4xed. 

Conclusion & Risk Considerations

In conclusion, the message to LPs is given the fast moving nature of today's secondary market, we think it is in all parties best interest to evaluate these opportunities faster than you would with a primary financing so that SPV leads can get the best price.

When attractive opportunities arise, delays of even a few days can mean missing out entirely or paying substantially higher prices (like 2-3x higher prices in extreme cases). While thorough diligence remains crucial and we are definitely not saying otherwise given the additional risks with secondaries, we believe LPs should streamline their evaluation processes to match the market's pace. Waiting too long may mean leaving meaningful returns on the table :/

To underscore, secondaries remain one of the riskiest parts of the market - we have spoken about this extensively in the below articles, so while you may evaluate sooner because of this article, it does not mean evaluate less (if anything diligence more). See below on our prior commentary on secondary transactions: 

If you enjoyed this article, feel free to view our prior articles on adjacent topics 

• 🔍🚨Buyer Beware: Navigating the Secondary Market

• Breaking Down the Secondary Transaction in Venture Capital

• Startup Stock Options: When Companies Block Employee Sales

Last Money in is Powered by Sydecar

Sydecar empowers syndicate leads to manage their investments more effectively. Organize, manage, and engage your investor network effortlessly with Sydecar’s management and communication tools. Their platform also automates banking, compliance, contracts, tax, and reporting, freeing up syndicate leads to focus on securing deals and strengthening investor relations. Elevate your syndicate operations with Sydecar.

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✍️ Written by Zachary and Alex