Australian startups are gearing up for a hot secondary summer
All signs are pointing to heightened activity in the once dormant secondary market for shares in Australian startups. And investors think it's a good thing.
Despite lingering post-correction sentiment, there is a growing belief among VCs and founders that we are about to witness a boom in secondary share sales of Australian startup businesses.
Ian Beatty is managing partner at Australia’s only secondary VC fund Second Quarter, which buys up shares in the secondary market from employees and other investors. He says demand has tripled since his outfit raised its first $50 million fund in 2021 (it closed its second fund of close to $100 million late last year).
“We had a big level of demand with our first fund in the 2020-2021 period, now with our second fund we’re in a very different market and demand for liquidity has never been higher,” says Beatty.
"There's a big increase in the number of secondaries coming our way, as well as the aggregate value of secondary shares."
Startup shares are for the most part an illiquid asset class, but they can be traded before a startup is acquired or IPOs if a company agrees to it — these are secondary shares or “secondaries”.
The current heat in Australian secondaries is being fanned by a few factors: a frozen IPO market, startups opting to stay private for longer, pressure for returns from some of the more established VC funds, and employees wanting to cash in on some of their “paper money” at a time of a rising cost of living.
Nick Crocker, a partner at Blackbird Ventures, says secondaries traditionally involved founders selling some of their shares once their business hits a $100 million valuation so that they can do things like put a deposit on a house, or pay down a mortgage.
They were “small, private, and really healthy for the company, and the ecosystem as a whole”.
But there are signs that secondaries are getting much bigger than that. Two of the most “mature” Australian startups with multi-billion dollar valuations, Canva and SafetyCulture, are putting large secondary rounds on the table.
“We are already starting to see secondary activity in the VC market for VC funds that have hit that 10 year event horizon and looking to deliver some liquidity for investors,” says Elaine Stead, chief investment officer at Tribe Global VC.
“And, even private companies that have performed well over the last 10 years and are looking to provide liquidity to investors and employees.”
Jackie Vullinghs, Partner at Airtree, says later-stage companies on a strong growth and profitability trajectory that have demand from investors may look to give employees liquidity through private secondary rounds while IPOs remain selective.
Earlier this month, Blackbird sold $150 million worth of Canva shares to San Francisco-headquartered ICONIQ Capital and Coatue Management. Canva also announced secondary offerings for employees.
A Canva spokesperson says that they plan to regularly facilitate secondary opportunities. “While we’re not able to share a specific date, we’re actively looking to kick off this process in the next six months," the spokesperson says.
Luke Anear, founder and CEO of SafetyCulture, says it makes sense to create liquidity every year for employees and investors, and he is planning a sale of up to $500 million in shares from investors and employees next year.
