Valuations are sinking. Exits are down. And VCs, who may be anxiously eyeing the value of their portfolios, are looking for options to give their investors, or limited partners, liquidity. According to one investor focusing on buying up secondary stakes, firms are having more and more conversations to make those deals happen.
“The quality and the quantity of conversations has really exploded,” Ravi Viswanathan, the founder and managing partner of NewView Capital, told me last week. NewView specializes in buying up stakes of companies from other VC firms or from companies themselves, in addition to funding new rounds and follow-on investments. And from Viswanathan’s vantage point, 2023 so far has seen an influx of interest in selling shares.
It’s not easy to track such deals—ApeVue, an independent company that pulls data from brokers who trade secondary shares for institutions, says their data is anonymous. PitchBook also doesn't have much data. Viswanathan, meanwhile, says he isn’t seeing actual stakes just yet, but that these sales take time, so we’ll likely see a pickup of actual deals in the second half of 2023. But one notable example: Tiger Global, the hedge fund that embodied the frenzied VC market in 2021, is reportedly looking to offload hundreds of millions in stakes in its private company portfolio as returns have taken a big hit.
According to Viswanathan, we’re going to see more such reports in the coming quarters. “There's going to be a lot of firms that just aren't going to be able to go back to market and raise the funds they want to without liquidity, so I think that's going to be an accelerating trend.” But he argues it’s positive for firms to manage their portfolios, which also frees up their time.
And, Viswanathan adds, buying stakes can take a while—sometimes several months or, in some cases, up to a year for all parties to agree on a deal. NewView also doesn’t always buy 100% stakes from firms, and sometimes the VC retains a large portion of the stake. (NewView Capital launched in 2018 having acquired VC firm NEA’s stakes in numerous portfolio companies. Viswanathan was previously a general partner at NEA.)
In general, Viswanathan estimates secondaries are running around a 30% to 50% discount to the company’s previous valuation. But he says that general partners still haven’t lowered their prices enough in today’s market: There’s still a bid/ask spread for valuations, and “with the GPs, I think we're probably a few quarters away” from that closing.
That may change as LPs get increasingly antsy for an exit. They have their own pressures: Limited partners who aren’t getting distributions will likely have portfolios overweight in venture capital investments, and they won’t have money to invest in new funds. That's an impetus for why these conversations are happening, Viswanathan says: VC firms wanting to go back out and raise in the near future. When I asked him if he smells desperation among GPs, he said that “generally speaking, I replace the word ‘desperation’ with 'pressure for liquidity.’” He notes that the distance to a firm’s next fundraise is a key factor, as well as their DPI track record—or the total capital a firm has returned so far to investors relative to how much they've invested (distributed to paid-in capital). “If your next fund is going to be fund five or six or seven, [and] you haven't really given a lot of liquidity in fund one or two, those firms...are facing a tremendous amount of pressure.”
Indeed, the liquidity issue, he adds, is “more severe than the last two downturns” because of how much capital was raised and how many companies were invested in during this past bull run. Not all companies and VC firms will survive: “Mortality rates of companies and firms are going to increase in the next three to five years, pretty significantly," he predicts.
It’s clear VC firms are feeling the squeeze as LPs keep a tight grip on their wallets. But we’ll have to see just how many firms are willing—or, more importantly, able—to hand cash back to investors early.
What is unclear, though, is what that signals to founders and the rest of the market. I’m curious to hear from founders whose investors have sold their stakes and how they felt about it. If you have any feedback, I’d love to hear it. My contact info, as always, is below.
A16z’s Jeff Jordan moves on: The longtime investor whose bets have included Instacart, Airbnb, and Pinterest, wrote in a blog post on Friday that he’s stepping back from investing with Andreessen Horowitz. He’ll remain on his current boards but won’t be making new investments. He didn’t offer details as to his next move.
See you tomorrow,
Anne Sraders
Twitter: @AnneSraders
Email: anne.sraders@fortune.com
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