Could VC secondaries thaw the funding freeze?

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Hello reader,

Seeking venture capital investment is a grueling process for any startup founder.

I know it would be challenging to put myself out there and ask for money over and over, only to be rejected most of the time. VC general partners looking for a greater war chest to invest from their firm’s limited partners (LPs) must grapple with something similar, though perhaps not on a life-or-death scale.

That struggle has become even more apparent in the last few years as VC funding has dried up, so I was surprised to read in today’s featured piece that there is a largely unused tool that could unlock more funding.

VC secondaries may be a more complex way to find funding, but it sure beats having nothing to invest.

Today we look at:

• The role VC secondaries could play in tackling tech winter
• 65 Equity Partners invests US$74.1 million in advanced manufacturing service provider Hi-P
• Other newsy highlights such as Singapore’s AI czar saying we all need a say in how the tech is regulated and crypto trading firm Auros’ new US$50 million VC fund

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VC secondaries to the rescue?

Image credit: Timmy Loen

There are no two ways about it – VC funding has dwindled in recent years.

VC secondaries are an underused tool that could create access to more cash for investment amid the funding winter.

• Private equity playbook: There is historical precedent for secondaries, namely the private equity (PE) version. Funding was hard to come by after the 2008 global financial crisis, so PE general partners came up with a plan: Carve out their portfolio’s best performers into a new, “continuation” fund while selling the rest. These sales returned some money to limited partners and gave general partners the chance to hunt for new LPs with a sexier fund and pitch.
• Nuts and bolts: VC secondaries have three main structures. Limited partner stakes means an investor buys out the stake that an LP has in a particular VC fund. NAV financing involves a general partner using their portfolio’s value as collateral to borrow from lenders then inject more money into their portfolio companies. Finally, companies shares trading is exactly what it sounds like: Shares in VC-backed companies are exchanged, though setting accurate and fair valuations can be tricky.
• Not taken off: The VC secondaries market is still tiny, with a total addressable market of around US$130 billion in 2023, according to investment firm Industry Ventures. Part of the issue is that VCs tend to have all their eggs in the baskets of one or two companies, so they’re unwilling to part with their stakes in fund returners. Buyer demand is also, thanks to the risk associated with tech firms. The lack of information on VC-backed companies is also a factor, even though there are likely some gems on offer at low prices.

Read more: VC secondaries: an underused tool in funding crunch

Hi-P says “hi” to new funding

Tired of chasing investors? Let them come to you

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