In my podcast, I explore the many different aspects of the high-tech world from development to marketing, sales and entrepreneurship, all with the goal of gathering key insights for startups so listeners can gain value from this knowledge sharing. So what did I discover this week?
Secondary investments have become increasingly popular over the past few years as technology companies see a new opportunity to both provide liquidity to shareholders and get value back as an enterprise. A secondary investment, for those unfamiliar with the term, is an offering where investors buy shares (stock) from sources other than the issuer itself (employees, former employees or investors). Moran Chamsey, managing director of Amplefields Investments acknowledged that secondary investments for late-stage technology companies can be key to supporting growth and providing greater financial motivation for employees. With portfolio companies spanning cyber security to ad tech and everything in between, he is confident that secondary investments will become a pillar of financial roadmaps for startups in the years to come.
Why Use Secondary Investments?
In the world of technology, companies are constantly looking for new tools and processes that can help them grow. One of these tools is direct investment from interested parties, such as venture capital funds, angel investors and corporate investment arms. They are looking to make big profits, obviously, through their investments, but that may take time. “Startups are built as large enterprises and at scale, so now the exit point is later, so stakeholders want to see some success along the way, and that’s where secondaries come in,” explains Moran.
Most startup investments work like this: you have shares or stocks to buy. Investors buy preferred stock and their capital goes directly into the company to finance its operations. However, these shares are private because these companies are not public companies, which means that the investor himself holds the shares. Now, in the “regular” market, these stocks don’t matter much until a major financial event, such as an acquisition or initial public offering (IPO), occurs and the investor gets his share of the profits.
However, in the secondary market, investors get an opportunity to make their investment a monetary value for them. “You’re paying shareholders money by selling some of your own stock,” Moran adds, “and when you do that, you help the founders, the employees bring money home, and that helps their morale, and of course you help the company perform better and achieve their goals.” In essence, secondaries offer holders liquidity, or the ability to receive real cash at an earlier stage than might otherwise come from an acquisition or exit from a primary startup. This can be extremely helpful as startups grow and sometimes need these types of “carrots” to help all stakeholders feel better about their position in the startup.
The popularity is growing as the starting points slow down
“The market has created a need to give some sort of compensation to founders and employees along the way,” Moran goes on to reiterate, “so that’s why we’re seeing an increase in the popularity of secondaries.” The secondary market has always been around, but as Moran sees it, the reliance on the secondary market comes simply from the need for interested parties to see money sooner. This is a reality of the shift in mindset from startup exit to startup scalability.
With the greater adoption of secondary investments, Moran hopes that his team at Amplefields Investments can set about creating a system of standards that makes secondary investments more regulated for late-stage technology companies, especially in Israel. By creating attractive investment packages, he sees a way for companies to view secondary companies as a real financial vehicle for growth, rather than just a big, amorphous investment behemoth. Ultimately, by connecting aftermarkets more strongly with successful tech companies, the way can be paved for even more uses for aftermarkets down the line.
If you are interested in secondary markets for your startup, it is important to first review all necessary avenues with a financial advisor or consultant. For early-stage startups, this isn’t usually an appropriate step, but as your startup continues to grow, keep secondaries in mind!