If you were to ask a group of venture capitalists at the end of 2023 whether the IPO market would open up again in 2024, the majority would have answered with a resounding “yes.” This was revealed by a TechCrunch survey conducted in December, which gathered opinions from over 40 VCs on the subject.
However, it’s now approaching the end of the first quarter of 2024 and there have been no major IPOs completed, with very few even in the works. The only significant IPO on the horizon is Reddit’s, which has progressed enough to set a price. Other than that, there is only speculation as to who else may go public, with very few public SEC documents to provide guidance. For example, there’s Shein, who reportedly filed a confidential S-1 last fall, and car rental marketplace Turo, who is still on the sidelines after filing its initial S-1 in 2022.
The uncertainty remains whether the market will indeed open up again later this year, even if Reddit’s IPO is a success. Recent conversations with secondary investors have indicated that while Reddit may generate some additional activity, it may not be the opening of the IPO floodgates that investors had hoped for. Moreover, some of the biggest names that were expected to go public this year, such as Databricks, Stripe, and Plaid, have either explicitly stated that they won’t be doing an IPO in 2024 or have held funding events that suggest they will not be going public anytime soon.
While many investors are keen for the IPO market to resume in 2024, the current market conditions are not conducive. Interest rates remain high, making financing expensive and pulling investors away from equity in favor of bonds. Additionally, valuations are still not fully recovered from their historic highs in 2021, causing late-stage venture investors to potentially break even or lose money if their portfolio companies were to go public now.
But all is not lost if IPOs do not return in 2024. Investors can, and increasingly have been turning to, the secondary market. Here, private companies can authorize their shareholders to sell a limited amount of stock to approved investors. It’s important to note that this is not a public sale, and stockholders cannot sell whenever and to whomever they want. However, this has become an increasingly preferred alternative in 2024.
The total value of secondary market transactions has risen from $35 billion in 2017 to $105 billion in 2021, with expectations to reach $138 billion by the end of 2023, according to data from Industry Ventures.
“Secondary markets allow companies to have the best of both worlds,” says Alan Vaksman, founding partner at Launchbay Capital. “Startups can satisfy their investors’ desire for liquidity by allowing them to sell part or all of their equity, without having to go through a premature exit event.”
This relieves the pressure for liquidity for some investors, as they are able to sell their stock and for the company to continue growing at its own pace. The secondary market makes this possible.
A prime example of this is Stripe’s recent secondary sale. In February, the fintech giant announced an agreement with its investors to provide liquidity to its employees, valuing the company at $65 billion. While this is a decrease from its peak valuation of $95 billion in 2021, it’s a significant increase from its last primary funding round in 2020, which valued the company at $50 billion.
This secondary sale demonstrates that investors are still willing to build Stripe’s valuation back up to its previous high and that employees have the option to cash in some of their stock before an IPO event. Therefore, why would Stripe want to go public in 2024 before its valuation has fully recovered?
The secondary market used to mainly cater to employees, but more recently, VC funds and limited partners (LPs) have also started to utilize it. According to Nate Leung, a partner at Sapphire Ventures, firms have the option to offload some shares to free up cash, while still retaining a portion of their stake. Alternatively, they can use the secondary market to purchase stock and increase their stake in promising startups.
Sapphire Ventures deployed around $500 million into the secondary market in 2023 and expects to invest the same amount or more in 2024. Similarly, Shasta Ventures reportedly hired Jeffries to conduct a “strip sale,” according to Bloomberg. This involves finding secondary buyers for a selection of its portfolio companies. The exact startups have not been disclosed, but Shasta’s portfolio includes successful companies like Canva, which the firm invested in during its 2013 seed round and is now estimated to be worth $40 billion, according to secondary data platform Caplight.
The IPO market won’t remain frozen forever, but with the secondary market becoming more established, it doesn’t necessarily need to thaw before the market is fully ready. As Leung notes, “The secondary market is playing a huge role in terms of companies waiting to go public. They can achieve a lot of their original goals, such as providing liquidity for employees and investors, and satisfying LPs, by selling or structuring secondary deals. This reduces the pressure on GPs to push for IPOs, which in turn reduces demand for the public market.”
