The secondaries market is hot right now—for some startups, that is.
“There's about 1,200 unicorns in the world right now—and only 25 of them have actual liquidity in the secondary market,” says Tom Callahan, CEO of Nasdaq Private Market, the liquidity company that spun out from the Nasdaq stock exchange in 2021 and just recently launched a secondary trading platform where startup employees can sell shares.
It’s the usual suspects that are getting the most attention: SpaceX, OpenAI, Databricks, Anthropic, Groq, Perplexity, Stripe.
But what about all the rest of them? There are a few reasons no one is buying their shares on the secondary market. For one, private companies get to approve or deny these secondary trades—and some companies never allow it, Callahan explains. But the other thing at play is a lack of information: If you’re not an investor with a board seat, odds are you don’t have access to management or a sense of the company’s financials.
“If you're just trying to establish a new position in a company, you have no access to any of that information, so you're really blind,” Callahan says. This can be a risky bet for an investor if a company hasn’t had a formal liquidity event since venture boom times—as their valuation may not be clear. And it makes it harder for buyers and sellers to come to an agreement on a fair price.
For those couple dozen companies that are trading, Callahan says that interest has “never been higher” from investors. M&A deals have slowed down because of regulatory challenges from the Federal Trade Commission, and the IPO market is still pretty quiet. Meanwhile, VC firms have funds that are nearing the end of their life cycle and need exits so they can distribute money back to limited partners. There’s a whole lot of investors who would love to scoop up their shares in promising companies at a potential discount.
The problem is: These kinds of transactions are concentrated in a few companies. So there’s still some uncertainty about where valuations really stand across the private markets. Callahan expects that, as more unicorns do primary rounds and tenders, this will really shift.
“I think the stigma of the down round is kind of over, because so many companies have done them,” Callahan says.
That’s already happening to some extent with tender offers. While companies didn’t do them very much in 2022 or 2023, Callahan said there has been a “screaming rebound” this year. “We did more tenders by May of 2024 than we did in the full year of 2023,” he says.
It always takes the private markets a little while to catch up. But it looks like it’s finally happening.
See you tomorrow,
Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
Submit a deal for the Term Sheet newsletter here.
Nina Ajemian curated the deals section of today’s newsletter.
