A Chat on the State of the US VC Secondary Market

LP: We have seen big discounts (over the last round) on the secondary late-stage VC market. What’s happening?

Fabrica Ventures: Indeed, we can find 50%+ discounts on the price of genuinely great late-stage VC startups; startups that are reshaping markets and that, in some cases, are already market leaders. Most of them got over $500M in equity funding, and it is amazing to witness the products they were able to develop and the market traction they achieved.

The root cause for the present discounts is the interest rate increase. Because of it, the valuation of most Nasdaq companies dropped by half, resulting in the closing of the IPO window – evidently, well funded startups will wait for the reversal of the business cycle to IPO.

Thus, the VC secondary market is just reflecting the effect of two waves in the same phase: an increase in the supply due to the IPO window closing and reduced multiples.

LP: But why would someone sell with such high discounts?

Fabrica Ventures: You should remember that many employees from these late-stage startups got their shares (options) for pennies. So, even by selling at a 50%+ discount they are realizing stellar profits. And you know how life progresses, needs are always changing, perhaps it is time to buy a house, etc, etc

LP: And how has the shares transfer approval been by the startups?

Fabrica Ventures: Much tougher than one year ago. Because of the discounts, before being admitted to the cap table, the startups are scrutinizing new investors in thorough detail. In a recent case, our lawyers had to write a comfort letter to the startup’s board stating we did not have any LP from Russia. Of course, it helps a lot to be a Delaware fund, with the management company located in Palo Alto, and with a track-record of 30 late-stage transactions.

LP: Something that always bugged me, why VC funds that are already in the cap table do not buy the shares being sold by the startups’ employees?

Fabrica Ventures: These alpha VC funds (as we like to call them) are multi-billion-dollar funds, so small transactions of a few hundred thousand dollars won’t make a difference for them. In addition, by regulation, VC funds with over $150M in AuM have restrictions dealing with secondaries. Because Fabrica Ventures AuM is below this threshold we are treated as an Exempt Report Advisor, which facilitates the secondary dealmaking process.

LP: I am personally thrilled by the timing of fund II.

Fabrica Ventures: We are also very optimistic.