Some definitions first: A primary transaction happens when securities are issued and sold directly by a company, while a secondary transaction is when the initial purchaser of a security sells that security to another investor.
The public primary transactions for equities are IPOs. Subsequent buy-and-sell transactions happen in secondary marketplaces such as NYSE and Nasdaq, which jointly trade a massive daily volume of over $300B (in secondary transactions).
There are also primary (when investors purchase newly issued equity from companies) and secondary transactions in private markets.
However, there are important differences between trading equities in public and private secondary markets, more specifically in the US VC market:
Public secondary exchanges are transparent, meaning that prices per share are visible to every market participant. Moreover, public companies must disclose some standardized information about their finances and operations. In summary, the public equity secondary market is characterized by its transparency, disclosure, accessibility-liquidity and centralized exchanges.
On the other hand, private secondary markets are more opaque, less accessible, and less liquid. Historically, they have lacked the centralized infrastructure of an exchange, making it difficult for sellers to know who is interested in buying and for buyers to know who is interested in selling. Trades occur less frequently, and the lack of a centralized marketplace and public financial & operational disclosures make price discovery more difficult.
VC secondaries can be broken down into two major groups: structured liquidity programs (tender offers and auctions) and direct secondary sales, the latter being the most common one. To retain as much control as they can and to “safeguard” their cap tables, startups often have a right of first refusal (RoFR) in place, which gives them the option to buy back the equity instead of an outside investor.
Despite the aforementioned difficulties, the US VC secondary market has been experiencing significant growth, surpassing $60B in 2021. The main driver for its development is that startups are staying private for longer, since deep-pocket investors have realized the (structural) wealth generation shift from public to private markets. Thus, as the timeline to a public exit stretches out, US VC secondary transactions have gained traction and emerged as a preferential way for startups to offer liquidity to early investors and employees while remaining private.
Secondary transactions in the US VC have given rise to their own full-fledged market, with its own nuances regarding transparency, disclosure and accessibility-liquidity.
Fabrica Ventures playground is the US VC secondary market; it is where we developed a close-knit relationship network and a systematic investment approach in order to generate superior results for our investors.
Happy New Year from Fabrica Ventures team!