Consequences of the IPO Window Closing to the VC Secondary Market

Actions have consequences (first-order effects) and consequences have their own consequences (second-order effects). Let’s then explore a second-order effect of the Fed’s interest rate hikes threat which ended up in the closing of the IPO window for VC-backed startups; namely the increase of opportunities in the VC secondary market.

In Silicon Valley, the capital-labor balance has for long shifted towards labor (sorry Piketty). The competition for talent is real and brutal and it is usually the key make-or-break factor for startups. Tech-employees now have the upper hand to choose from where and when they work.

Working for a startup is obviously riskier than working for tech giants – Apple, Google, etc – but the upside can turn huge, since tech employees are often compensated in stock. I have already witnessed some tech people become multi-millionaires the day after an IPO.

IPOs are the most relevant event for tech employees to find liquidity. With the path to IPO significantly reduced these days, many startup employees are having to reconsider important personal financial decisions as a result of this. And that creates a sense of anxiety and more uncertainty among them.

Because of this, in order to retain their best talent, many startups are expanding the pathways for employees to sell stock throughout their tenure. For instance, startups are now implementing policies that allow employees to sell 25% of their vested stock once they hit their two-year anniversary. This rewards employees for their hard work while keeping them invested in the company for the long-term.

As a result, the US secondary VC market, which is already the second largest in the world ahead of China, is further expanding opportunities to join tomorrow’s tech giants.

Conclusion

Since the law of supply and demand is universal, Fabrica Fund II investors should enjoy this new flux of secondary liquidity at very favorable conditions.