Blue Chip Startups Secondaries are Hot – Good and Bad
In the past year, we’ve seen public company stocks plummet, so the opportunity for late-stage private companies to IPO has disappeared. It left early investors with limited liquidity to deploy back into the asset class. In an attempt to inject liquidity into the ecosystem, or distribute returns to their LPs instead of only markups on paper, VCs have tried to sell shares of private companies (including big names like Softbank, and Tiger Global). Also, angels and employees needing to liquidate their shares are doing the same. Meanwhile, syndicate managers and retail investors alike see an opportunity to purchase reasonably priced, or discounted, shares of exciting late-stage companies. It’s referred to as a secondary transaction, a secondary is any sale of startup equity where the seller is anyone other than the company itself.?
That’s why the secondary market for private companies has come back strong now after being quiet in 2022. For this reason, the STONK backed by a16z well known for hosting demo days has pivoted completely into a marketplace for secondaries. These pre-IPO deals might give an investment option with limited risk and shorter payback periods for a reasonable return, especially top blue-chip startups with significant moats but not available on public markets yet. Previously these have been nearly impossible to access for non-institutional investors. SpaceX - a name no need to explain, we saw over $11 million was raised in a single SPV (gathering checks of minimum size as small as $1000), currently, it’s the world's 2nd most valuable private technology company just behind ByteDance. Some other hot deals we were/are seeing…
OpenAI
Everyone knows OpenAI now if they didn’t before this year. According to the very latest news from the Wall Street Journal this Tuesday (Sep.26), OpenAI is reportedly raising funds at a valuation of $80 billion to $90 billion (employees could sell shares). In April, OpenAI picked up just over $300 million in funding from backers such as Sequoia Capital, Andreessen Horowitz, Thrive, and K2 Global at a valuation of $29 billion. That was separate from a big investment from Microsoft announced earlier this year, which closed in January, the size of the check was said to be around $10 billion. If you bought its secondaries before this week (we had access at a valuation of around $34 billion) the return on paper is almost 3X in weeks.
Anthropic
Also according to the very latest news, Amazon said on Monday (Sep.25) that it’s investing up to $4 billion into the rival of OpenAI - Anthropic in exchange for partial ownership and Anthropic’s greater use of Amazon Web Services (AWS). No valuation information is available, but it’s speculated at around $4 - 5 billion if referred to its secondary’s price in the past few months. This company will be an interesting one to watch.
Neuralink
Neuralink, one of Elon’s ventures, is a cutting-edge neurotechnology company dedicated to developing high-bandwidth brain-machine interfaces. Neuralink has achieved a significant milestone: the U.S. Food and Drug Administration (FDA) clearance for its first-in-human clinical trial. Therefore its secondaries get hot recently.
Anduril Industries (our favorite)
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Trae Stephen, the venture capitalist of Founders Fund, and Palmer Luckey, the inventor of Oculus VR started this modern defense tech startup offering a family of autonomous systems for the US Department of Defense. Within four years, Anduril eclipsed $100 million in revenue. Their investors include Andreessen Horowitz and other deep-pocket VCs. Anduril operates in an enormous and growing market. In 2020, the US spent $778 billion on defense. Within the contracted portions of the DoD budget, there are hundreds of billions of dollars for Anduril to go after in the US alone. They aren’t only doing business with the US.
After signing its nearly billion-dollar deal with SOCOM (Special Operations Command). Anduril Industries raised a Series E round just 18 months after their Series D. This $1.5 billion round brought the post-money valuation to $8.5 billion. As one of the largest fundraises in 2022, only SpaceX and Epic Games raised more money during the same 12-month period. Anduril is one of the few companies in the defense space positioned to realize the vision of autonomous warfare for the US military. They are a defense contractor but operate with the speed of a startup, and a software platform with a Trojan horse of selling hardware. A more detailed analysis can be found here.
Flexport
A bad example is Flexport - a digital-first freight forwarder and customs broker, backed by many big names, which had $5B in revenue in 2022. In this year, its secondaries were circulating on several marketplaces with around a 50% discount (~$4B) from its latest round’s valuation ($8B). Earlier investors said they were just liquidating their investments for personal financial needs. Until very recently, news came out that Flexport’s revenue fell nearly 70% in the first half of the year to $700 million and the company burned through cash, and the worst was that the CEO, CFO, and CHRO were fired suddenly. The secondary market seems like a good place for hidden signals. Now its secondary auction has winning bids as low as $2.2.?
Other secondaries like Airtable, ByteDance, Cohere, Canva, Deel, Discord, Epic Games, Hugging Face, Reddit, Scale AI, XAI, etc. are among upcoming or currently available deals. With startups taking longer to go public or exit, and the public market isn’t returning to bull any time soon, even VCs are emerging to buy good deals from secondaries in bulk.?
But, be careful about variables such as the inflated valuations in 2021 still on the price tag, abnormal benefits in the pandemic period discontinued like Flexport, and company growth going down but not known to outsiders (so choose blue-chip startups only), What do you see or think about secondaries? Any private companies are on your dream list?
Cheers,